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Summary:

Many were surprised to learn this week that Netflix is wading into the expensive waters of original content. However, in an era of rising distribution costs, Netflix is simply doing what it needs to do to survive by offering original content.

original

This week Netflix surprised many by licensing House of Cards, an original TV series set to be directed by The Social Network‘s David Fincher.

Why were people surprised? Well, mainly because original content acquisition is a not something Netflix has done before, at least not at this scale. But anyone looking at the company’s strategies of the past as guideposts to future behavior should realize Netflix has only one true strategy: stay ahead of the competition at all costs. In fact, it’s exactly because the company seemed to take many by surprise that tells me its probably on the right path, mainly because it means once again, Netflix is leading the market.

But there are also some sound business reasons Netflix should get into original content, the main one being the rising cost of content licensing. In the early days of online licensing, Netflix was able to strike a number of cheap deals, with the most famous one being the Starz pact. But as Jeffrey Bewkes famously indicated in December, deals like that aren’t going to come around anymore.

In fact, being a straightforward content aggregator in an era when licensing costs are rising faster than a barrel of sweet crude will put any company in a precarious position, even the market leader. Netflix realizes this, and that’s why original content makes so much sense, since it provides another way in which to gain subscribers beyond simple acquiring online distribution rights to content widely available through other channels.

Does this mean Netflix is opting out of the content aggregation business? No, because bundles still matter, and big content libraries are the main selling proposition in the world of online video today. But by opting to provide original content — this one being a political thriller based on a BBC series, from a white-hot director — Netflix now is moving more firmly into audience aggregation.

So what type of new audience exactly are they aggregating? With House of Cards, Netflix may appeal to those who love original dramatic content, which as HBO and Showtime can tell, is a pretty significant (and demographically attractive) audience. And after all, if some see Netflix as a “dog’s breakfast,” it doesn’t hurt to add a little caviar to bring some new fans to the table.

But is expensive HBO style, high-production value dramatic series the only way to do original content? No, and as I discuss in my analysis at GigaOM Pro, Netflix will likely do many more deals,at different price points, with content types that are vastly different than House of Cards.

If House of Cards brings Netflix original drama fans, it might also look to strike deals that would bring reality TV fans, or those who love web series, or how about those who love DVD extras — because we know there are bundles of “extra”  or non-published archived content sitting gathering dust that many content owners wouldn’t mind monetizing.

However Netflix does it, they need to do it, because the war of the library-size is now over. It’s now about acquiring audience.

Source: flickr user quinn.anya

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  1. Vamshi Sriperumbudur Monday, March 21, 2011

    Originals might bring more audience but Netflix’s monetization models might need to expand beyond subscriptions to PPVs and such. DirecTV and Netflix have about the same #of subs (20M each) but former I am sure makes a lot more per subscriber per year than latter ($100/sub/yr?).

  2. Michael Wolf Friday, March 18, 2011

    @ Kathy – In general, there’s going to be a lot of pressure on margins due to increased licensing costs. To me, its simple math – can they acquire customers at a rate faster the rate at which their content licensing fees will be going up. Prevailing wisdom on Wall Street is no, that’s why their stock’s been hammered as of late.

    I do think using original content is a new audience acquisition strategy they haven’t used, and one that could, in the long run, help them acquire audience at a rate lower than large deals with studios and networks. I expect some more smaller original content deals to happen, but not a whole lot more mega-deals like House of Cards.

  3. I went to the TVDevo website and don’t get the warm fuzzies. No listing of what’s available (other than what languages channels are available in).

    Plus they do the slimy pricing pitch. Normally one-time fee of $79.95, but for today only, March 21, it’s only $27. Then when you try to navigate off the page, a pop-up comes on with a one-time offer of a $10-off coupon.

    If they are that hard-up for my $17 (or perhaps really my credit card information), I’m not interested.

    Anybody have any *objective* (positive or negative) insights into TVDevo?

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