Market Insight

Investment and expansion on the agenda for the Netflix empire

February 05, 2014  | Subscribers Only


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Netflix will raise $400 million to fund new original content and a 'substantial' European expansion in new territories, the company revealed yesterday. The expansion is understood by IHS to be taking place in France, Belgium and Germany, though this is not confirmed by the company. In its annual report filing, Netflix also reported a sizeable 14% increase in revenues last year, to $4.4 billion.

The reasons for a focus on a European launch are also evident, as the growth in Netflix’s international markets continues apace. International revenue and content spend are getting larger every year: compared with 2012, Netflix’s international business more than doubled in signficance. This fast-growing but still loss-making segment now makes up 16% of its total revenues and 25% of its costs; the costs are mostly due to content licencing deals. 

OUR TAKE

On the anniversary of the premiere of headline original series House of Cards, and followed by news that it has commissioned series 3 of that show, Netflix’s 2013 Annual Report shows a confidence in both its original properties and its content deals with other producers – enough to begin a round of deficit funding new ventures.

Netflix currently keeps its viewing figures private, so that it remains a challenge to precisely assess how popular its own-produced programming really is. But this new announcement of increased funding is at least proof that Netflix itself is happy with its original programming viewership numbers, and with the wisdom of significant investment in high quality scripted shows with name talent.

Looking back on the series announcements of 2013, the strength of Netflix’s belief in its Originals is not hard to see; so to some extent, this new data on their spending is only evidence of business as usual. Announced last year, and due in 2014, are returning seasons of Netflix’s most viewed series (as of Q3 2013), Orange is the New Black; also of House of Cards, Hemlock Grove, Lilyhammer, the resuscitated The Killing, as well as new series Marco Polo, Sense8, Narcos and an untitled thriller from Sony. Indeed, considering Netflix’s price bracket – often on a par with US cable TV per-episode budgets - such a slate as 2014’s could eat up the best part of $400m.

The costs are those of a cable network, as is the slate. By comparison, IHS estimates US cable network Showtime will spend $268 million on original programming in 2014: to date this year it has commissioned eight original scripted series. Starz, another comparable network, will make five original series this year.

International expansion to the likely three new territories will also require significant additional investment. At year-end 2013, Netflix had reached nearly 11 million international subscribers, an increase of close to five million on 2012. The international business is still not self-sufficient for the service provider, with Netflix recording a contribution loss (revenues less direct costs, excluding shared costs) of roughly $25 per subscriber for 2013 - with content costs the bulk of the outlay.

Cost of revenues for Netflix's International Streaming business segment increased from $476 million in 2012 to $775 million in 2013 - a $299 million (+63% YoY) increase. The content licensing expenditure responsible for over 90% of the increase is primarily because of expansion in the Nordics (where Netflix launched at end 2012) and the Netherlands (launched Q3 2013).

Marketing costs for new launches are also considerable. In 2013, marketing costs for Netflix's international division represented over a fifth of the segment's direct costs, while in 2012, a year which saw the company launch in the UK, Ireland and the Nordics, marketing represented almost a third of direct costs. Given the size of the markets which Netflix is understood to be targeting for a late-2014 launch, IHS anticipates that marketing spend will rise significantly towards the end of the year as the streaming service attempts to drive awareness and uptake in its newest markets.

In the short-term, Netflix's expansion plans are good news for content owners - its launch into new markets will almost certainly spark reactions from local service providers, and a boom in expenditure for SVoD content licenses. However, the service's increasing comparability with networks such as Showtime also means that the success of original series may ultimately led to cutbacks in acquired programming. Nonetheless, with heavy competition among SVoD players emerging across many European markets in particular, this future may yet be many years away.

Organization
Netflix Showtime Sony Starz
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