Netflix’s (NFLX - Free Report) recent announcement to invest around 85% of total spending in original content shows the company’s intent to maintain its top spot in the online video streaming market.
Netflix’s chief content officer Ted Sarandos disclosed at the MoffettNathanson Media & Communications Summit that the company is set to release 470 originals by 2018, which will take the total count for the year to nearly 1,000.
Netflix continues to dominate the streaming market based on its ever-expanding content portfolio, well supported by a whopping budget. The company is expected to spend $8 billion in 2018, which is anticipated to increase further to $12.2 billion in 2020.
The solid budget helps the company fight intensifying competition in the streaming market from the likes of Apple (AAPL - Free Report) , HBO, Amazon (AMZN - Free Report) Prime, Comcast and Walt Disney (DIS - Free Report) .
Notably, Netflix has returned an astounding 71.2% in the year-to-date period compared with the S&P 500’s gain of just 2%. In comparison, Amazon and Apple shares have returned 37% and 11.2%, respectively while Disney has lost 4.7%.
Content is Still the King
The attractiveness of Netflix’s diverse content portfolio is evident from the fact that subscriber addition remained unaffected despite a hike in subscription prices. The company added 7.41 million subscribers in the last quarter, which surpassed expectations of 6.35 million.
Moreover, Netflix’s growing popularity among teenagers is evident from the recently released Piper Jaffray’s 35th semi-annual Taking Stock with Teens survey.
Per the survey, Netflix’s dominance in video consumption is increasing and is currently the most preferred platform among teens. Reportedly, the respondents spent 39% of their time watching Netflix, up 2% from the survey of 2017 fall while competitors, namely Alphabet’s YouTube, Amazon and Hulu had 30%, 3% and 5% viewership, respectively.
Moreover, investment in original content is one of the major factors that helped the company in gaining a competitive edge.
Per data from MoffettNathanson, Netflix spent $6.3 billion on original and acquired content in 2017, higher than Amazon and Hulu, who spent $4.5 billion and $2.5 billion, respectively, while new entrants in the video streaming space like Apple and Facebook (FB - Free Report) spent $1 billion each. Moreover, it was also not much behind Disney, which spent $7.8 billion on non-sports programming.
The company’s $8 billion budget for content this year has also unnerved traditional TV and film content providers like Disney, 21st Century Fox (FOXA - Free Report) and HBO’s owner Time Warner .
Content War Intensifies
Netflix enjoys a first-mover advantage in the streaming market and its solid original programming portfolio is a major differentiator. The company has gained an as its entire focus is on building its content portfolio, while rivals like Amazon, Apple and Disney have to focus on diverse products.
However, competition in the promising online video streaming is heating up with all the players offering highly engaging content.
Amazon’s Prime business is performing exceptionally well, as evident from its more than 100 million members as of Apr 18. The company notes that the addition and retention of Prime members is mainly driven by Prime Video. JPMorgan expects the company to spend $5 billion this year on content.
Apple is gearing up to become a major producer of original content. The company is likely to launch a streaming service in 2018, which is expected to provide a significant boost to the Services business. Apple has also made key appointments to foray into original television programming. The company is also developing series starring Oscar winning actors.
Further, Disney’s acquisition of certain 21st Century Fox assets strengthens its over-the-top streaming service, which is likely to be launched in 2019. The termination of the distribution agreement with Netflix will enable it to offer rich content exclusively from Disney, Pixar, Marvel and Lucasfilm. The company has already launched ESPN+ that is offering sports tournaments (which Netflix does not currently). This further expands content, which is likely to attract more subscribers in the long haul.
Nonetheless, such enormous spending can dent Netflix’s profitability in the near term. However, we believe that the company’s expanding content portfolio will rapidly drive subscriber growth that will further boost the stock in the rest of 2018.
Currently, Netflix has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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