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Summary:

Netflix is employing a multi-pronged approach to growing its streaming library: Get long-tail content on the cheap, pay top dollar for popular programming that will draw new users, and make some bets on exclusive original programming to differentiate from other video services.

Reed Hastings

Through a couple of deals with Lionsgate, Netflix acquired rights to stream all seven seasons of AMC hit series Mad Men. The first four seasons of the hit AMC series will begin streaming this summer, with subsequent seasons beginning to appear on the streaming service after the full season has aired. All in all, it’s a big win for the subscription video service, which is increasingly encroaching on traditional cable TV networks.

The Mad Men deal comes as Netflix has secured a number of other pieces of content in the past few months. It struck an exclusive deal to license two seasons of the Kevin Spacey-David Fincher series House of Cards not long after it acquired rights from Disney, CBS and Fox to add older seasons of shows like Lost, Star Trek and Glee to its streaming library.

Already, we can see that Netflix is employing a multi-pronged approach to growing its library:

  • It continues to acquire large stores of long-tail catalog content cheaply, relying on its content recommendation engine and vast store of titles to keep subscribers interested in its service.
  • At the same time, it is investing in select popular content -– like Mad Men and Glee –- as a way to attract new, mainstream users to the service.
  • Given the increasing cost of licensing shows and movies that have a proven track record, Netflix is also placing bets on projects –- like House of Cards –- that aren’t yet proven, hoping that it will have a hit.

The way that Netflix has built its content library is reminiscent of early cable networks, which relied almost entirely on syndicated rerun TV shows and older films to appeal to viewers. In recent years, led by the development of original programming on the part of basic cable networks like FX, USA and AMC, we’re encountering what could be a golden era of cable TV –- and a sign of things to come for Netflix.

Netflix will likely continue to build a content mix that has some variation of deep long-tail content, newer popular hits and exclusive access to original programming. That last piece is vital, and will be the key to Netflix being able to control its own destiny, rather than relying on others for scripted programming. It will also help set it apart from other me-too streaming services that might appear.

Some have suggested that Netflix could add another type of content to the mix: shows with loyal fan bases that weren’t popular enough for broadcast TV. If a show like Chuck, which has spent years on the verge of being canceled, is let go by a major broadcast network, you could see Netflix working with its producers to continue its run online.

Netflix doesn’t necessarily need to aggregate large live broadcast audiences to make production worthwhile, as it can drive viewers to the content over time. In that way, the economics of producing these types of shows favor it over the broadcast networks. And because Netflix viewership comes mainly through the company’s recommendation engine rather than through some kind of outside marketing, it could help expose subscribers to shows they wouldn’t necessarily have watched.

  1. And so the outflow of money begins. Netflix makes so much money now because the pay very little (respectively) to acquire the content. Getting into production and individual acquisitions will get very costly and requires a different type of corporate culture in order to be profitable.

    Going down this road may start the process of alienation and isolation for them. The only magic they have right now is Millions of Subs. There is nothing standing in the way of Starz or any big disty of creating their own streaming service and taking the funds directly. Every STB manufacturer out there would jump at hosting an Starz channel to keep their hardware relevant.

    Good luck, Netflix! Remember it is your focus that made you rich.

    TK

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    1. Barrett Garese Thursday, April 7, 2011

      “There is nothing standing in the way of Starz or any big disty of creating their own streaming service and taking the funds directly.”

      I disagree. There are tens of millions of dollars standing in the way of STARZ doing so. The cost of building this and then relicensing the content that needs it would be prohibitive when the competition is already so far ahead. Licensing is (for all intents and purposes) pure profit, building out a service plus infrastructure, advertising and marketing it, and supporting it costs a serious initial outlay of cash and acquisition of talent that Starz isn’t prepared to handle.

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      1. “There are tens of millions of dollars standing in the way of STARZ doing so.”

        The internet democratizes distribution. The cost for a team to set up a streaming website would be less than $100k. All their content is already digitized. Licensing? Starz owns their content, they have to pay $0 for it.

        Advertising…Starz’s content is big name and, with an entry in an search engine, anyone who is looking for their content will be shuttled over to them. CE device manufacturers would fall over themselves to put a Starz channel front and center on their products. I don’t think they would have to spend too much in advertising in order to achieve critical mass. The press alone talking about this would be enough to get a good pool of customers interested and signed up.

        I don’t think there are tens of millions of dollars standing in the way. It’s only corporate inertia that’s holding them back.

        TK

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