Netflix’s Risky Idea Could Pay Off Big Time (NFLX)

As Los Gatos shifts more and more toward streaming, the move will serve the company well down the road.

Netflix NFLX

Netflix, Inc‘s (NASDAQ:NFLX) original content programming has rapidly increased over the past couple of years, and by the looks of it the video streaming service won’t be holding back on the production of new TV shows, particularly since the company has already seen the streaming revenue of original programming.

Despite the disappointing subscription growth in the previous quarter, Netflix gained 3.2 million subscribers globally in the 3rd quarter, exceeding the Street’s forecast of 2 million. This explains why the company was rather optimistic about original content in its third financial quarter letter to investors last week. Netflix credited its 36% revenue increase to the original “strong content slate” including “Stranger Things” and “Narcos” Season 2. Netflix was also particularly cheery of its upcoming original series “The Crown,” which is a narration of the life of Queen Elizabeth II debuting November 4 this year.

The third quarter performance indeed shows promising potential of original content and it is not surprising that Los Gatos has shifted its business model towards online streaming, a move that will certainly serve the company well down the road. Netflix made public its plans of releasing 1,000 hours of owned content in 2017 – that’s 600 hours more than it will have released by the end of 2016. This quite intrepid action seems to coincide with Netflix cutting off licensing deals for popular movies and TV shows. While the streaming giant is already set to roll out original productions, it will continue to offer a mix of owned, co-produced, and acquired content. The company is clearly looking ahead, envisioning a future with at least 50% original content offering, with primary goal of releasing films that appeal to each subscriber every month across various genres.

Upcoming Original Content

The upcoming Netflix original programming slated for 2017 requires additional funding. Just this Monday, the company announced that it is raising $800 million through a debt offering. But on Tuesday, the aggregate principal amount was increased to $1 billion. With the $2.37 billion the company already owed, that’s over $3 billion dollars of long-term debt. In the announcement, Netflix also disclosed that the new debt would be used for “general corporate purposes,” which may include content acquisitions, capital expenditures, investments, and working capital amongst others.

The significant portion of Netflix spending is related to content, with projected expenditure amounting to approximately $6 billion in profit-and-loss basis. Producing films doesn’t come cheap. In fact, Baz Luhrmann’s “The Get Down” extravagant series reportedly costs $10 million per episode, which is by far the most expensive show. Other original Netflix content includes supernatural series, “Stranger Things,” “Marvel’s Iron First,” the third and season finale “Bloodline,” “A Series of Unfortunate Events,” and the science guy talkshow “Bill Nye.” Chris Rock was also reported scoring a $40-million deal for two new Netflix stand-up specials.

Netflix’s new business approach is already paying off, and is projected to remain productive in the years to come. According to a study by AllFlicks, subscribers prefer Netflix original series than syndicated content. The average rating for originals is 3.85/5 stars, while other content has 3.47/5 stars, bringing the Netflix-owned content user-rating ratio at 11% higher than syndicated content.

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