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Netflix originals continue to confound

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Ever since Netflix announced it would not be releasing viewership numbers for House of Cards or its other original series, the TV industry has been wrestling with how to tell whether the show is a “hit,” or not. Now, it’s Wall Street’s turn.

In yesterday’s interview-format earnings webcast, CNBC  reporter Julia Boorstin and BTIG Research analyst Rich Greenfield struggled mightily — but ultimately failed — to pin down Netflix CEO Reed Hastings and chief content officer Ted Sarandos on some objective metric by which to evaluate what the company is spending on originals. About as close as they got was a suggestion by Sarandos that investors look at how quickly Netflix decides to renew a series for additional seasons.

“[Y]ou should look at our renewal of a season — of a show to a second season as a very positive sign,” Sarandos said. “Because, if we are renewing shows that people aren’t watching in big numbers, then we are creating a huge opportunity cost in our content spend. In other words,we won’t have money to spend on things that people watch.”

Absent something more concrete, Wall Street seems to have decided that if the shows are really that popular there should be a bump above the historical trend line in new subscription signups. When no such bump turned up in Netflix’s second quarter results, investors hammered the stock.

Wedbush Securities analyst Michael Pachter was particularly harsh, stressing in an interview with Yahoo Finance’s Breakout that all that spending on original series is not creating long-term assets for Netflix because the company is merely licensing exclusive rights to the content for a limited time.

“They own nothing and they’ve acquired nothing,” Pachter said. “They have the rights to show the stuff for two years and that’s it. They don’t own Arrested Development. They don’t own House of Cards. They don’t own Orange is the New Black…Unlike HBO, which owns The Sopranos, when Netflix decides they want to show these shows again in three or four years, Netflix has to pay again, HBO doesn’t.”

Given that Hastings himself has encouraged the comparison with HBO, he probably had it coming from Pachter, who rates Netflix shares a “sell.” But I’m not sure Pachter’s criticism is entirely apt.

HBO’s subscriber base is not really growing at this point and probably won’t grow much in the future (HBO doesn’t even directly control subscription sales, which are handled by cable and satellite providers). To continue to increase shareholder value (and avoid cannibalization of its licensed movie business by the likes of Netflix), creating unfettered, long-term content assets was an obvious step for HBO. But that’s not the position Netflix finds itself in at this point.

Netflix still, presumably, has a lot of upside left for its subscriber base, which is still the main driver of shareholder value for the company. It’s not clear that having equity in the content it distributes, at this point, would help drive growth in that subscriber base more effectively than exclusive licensed content.

Unless and until Netflix gives the world some better way to gauge its success, however, others are likely to go on trying to fill the void as best they can.