Netflix Originals

Last week, Netflix announced they would be canceling both “Jessica Jones” and “The Punisher”. This completes the axing of Marvel’s “The Defendants”, including one of the crown jewels of Netflix “Daredevil” :(. The cancellation of these shows came as a surprise to many, myself included, given the viewership that they were garnering. Many are hypothesizing that this was for financial issues, leaving the crux of the issue with Netflix’s current business model.



Netflix initially began as a DVD rental service. In 2007, they began the streaming service that we associate with them today. In an effort to transform into an entertainment conglomerate, “Netflix Originals”, were born. TV shows and Movies exclusive to Netflix. They slowly began to roll out, with gems such as “Orange Is the New Black” and the movie “Roma” a few to name. In fact, recently, the aforementioned Netflix Original was nominated for Best Picture at the Oscars, and director, Alfonso Cuarón, took home best director. Well if Netflix is garnering critical acclaim at the greatest stage then what seems to be the issue? Anyone with a Netflix membership knows that navigating the home screen can be tough, as you are being force-fed millions of crappy Netflix originals. Yes, for all the gems Netflix has produced, there is an array of horrible viewing that is costing them revenue.
Image result for romaImage result for alfonso cuaron oscars



Image result for netflix moneyNow let’s actually get into the economics of it. These shows are expensive to make. Meaning that producing a mass amount of poorly rated shows and movies isn’t economically viable. This holds true for any business.  1 season of “Daredevil” cost Netflix $40 million. 2 seasons of “Mad Men” set Netflix back a cool $100 million. Netflix remains adamant that this is the best course of action, spending 85% of its reported $12-13 Billion content budget on original series. Netflix is banking on the fact that these originals are bringing in new viewership. Producing Originals means they are losing out on box office sales and television advertisements. This also means there isn’t nearly as direct of a correlation between viewership and economic revenue. To pay for 5 shows of “Mad Men”, they need 2.6 million new subscribers, which is 1 out of 115 Americans. As it stands, Netflix is doing just fine, as they gained 7.4 million new subscribers worldwide in the most recent quarter. At $10 per month, this vindicates their spending. However, reports estimate that Netflix will be spending $22.5 Billion on content by 2022. As Netflix begins to exhaust its potential customer base, their marginal profit will begin to diminish.



With the cancellation of numerous popular TV Shows, Netflix has shown that they are going to be more cutthroat when it comes to profitability. This is a necessity for their business model and the tightrope there are walking on when it comes to marginal profit.





https://www.forbes.com/sites/scottmendelson/2019/02/19/netflix-daredevil-punisher-jessica-jones-disney-hulu-iron-fist-luke-cage-captain-marvel/#36316f4a3b68
https://www.forbes.com/sites/danafeldman/2018/07/09/netflixs-content-budget-is-updated-to-13b-in-2018/#452e95612b8c
https://www.wired.com/story/netflix-cancellations-orange-is-the-new-black/
https://www.greatbusinessschools.org/netflix/


Comments

  1. Oz AnismanMarch 6, 2019 at 12:38 AM

    This comment has been removed by the author.

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  2. Oz AnismanMarch 6, 2019 at 12:40 AM

    Great post Kabir! As a user of Netflix I was also saddened by the cancellings. I read that Netflix will be increasing their payment plans by $1-2 which will certainly aid in their revenue when combined with the cancelling of some expensive shows. One topic I found interesting was Netflix's increasing competition. With Disney and WB streaming services coming soon, Netflix may be increasingly reliant on their originals to retain customers from their competitors. As a consumer this is slightly annoying as big movie companies creating their own streaming services means lots of exclusive content and watching everything requires multiple accounts. This also might explain why Netflix cancelled their Marvel shows as you mentioned since Disney has been removing their other content from Netflix in preparation of their launch of Disney+.

    https://www.cnn.com/2019/01/15/media/netflix-raising-prices/index.html
    https://globalnews.ca/news/4818817/netflix-competition-2019-disney/
    https://www.thrillist.com/entertainment/nation/disney-streaming-service-netflix-coming-soon

    ReplyDelete
  3. AnonymousMarch 6, 2019 at 8:32 PM

    I think this is a very interesting examination of something that can be tied in to many other industries. When a company gets as big as Netflix, it becomes increasingly more important to maximize profit margins since even a relatively small change at the individual level can become magnitudes larger and cost the companies hundreds of thousands of dollars. Having such a large company, however, also affords them the ability to, as you say, create these originals and take on the risk that they previously had to pay a lot of money to producers of all of their content. When they create their own content, it allows the profit margin between producer and "retailer" (in this case, streaming service) to essentially be $0, and allows their other content to act as a kind of insurance in case any given original fails.

    Sources:

    https://www.greatbusinessschools.org/netflix/
    https://www.forbes.com/sites/jillgoldsmith/2019/01/17/netflix-earnings-mixed-stock-down-as-market-ponders-price-hike/#32cc1c4b76cf

    ReplyDelete
  4. AnonymousApril 26, 2019 at 6:26 AM

    Very cool post Kabir. It's very interesting to see how Netflix manages its profits and what they do with their originals. Since they have a flat rate of $10 a month, they must really rely on new subscribers to increase their profits and continue to pay for new shows. At some point the market will be saturated and no one will continue to subscribe to them. I heard they are planning on raising prices a couple dollars which is a sure way of increasing profits so long that people don't unsubscribe. They may have to keep increasing if less and less people keep subscribing though in order to gain profits.

    ReplyDelete

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