Yahoo Finance Could Netflix’s Movie Strategy Play out Successfully?
Could Netflix Steal the Show? A Fundamental Overview
Netflix acquiring rights to movies
Netflix (NFLX) is continuing its acquisition of worldwide rights to movies. Last week, the company announced that it had acquired the rights to the movie Wheelman, a “high-concept action thriller.” In addition to acquiring rights, Netflix is producing original content. Netflix has stated that it plans to spend $5 billion on original programming in 2016 and over $6 billion in 2017 on a cash basis. Netflix also intends to spend 5% of its content spend on original movies.
Although movie production is expensive, Netflix believes it’s worth it to spend $1 billion on producing original movies rather than the same amount on purchasing SVoD (subscription video on demand) rights from movie studios. Netflix believes that by producing original movies and releasing them simultaneously in theaters and on Netflix, it’s offering subscribers the latest movies with quality content.
According to a Business Insider report from April, citing research from AllFlicks, Netflix’s original content has an average rating of 3.9 out of 5. This is shown in the graph above. According to the report, Netflix originals perform 11.5% better.
Netflix’s film strategy
In its company’s fiscal 1Q16 earnings call, Netflix stated that it is enhancing its selection of movies by aggressively pursuing original movies and also acquiring worldwide rights to movies that have a “broader commercial appeal.”
Netflix already has an exclusive syndication arrangement with The Walt Disney Company (DIS) for the Pay 1 and Pay 2 windows for films released through the 2018 calendar year. The company is also engaging in “opportunistic licensing” of movies. Spotlight, the movie that won the Academy Award for Best Picture, will be available exclusively on Netflix in the United States.
The company also stated that instead of producing tentpole movies (large productions), it sees more value in producing a range of movies. In contrast, companies such as The Walt Disney Company, 21st Century Fox (FOXA), and Comcast (CMCSA) have large-scale movie productions.
21st Century Fox (FOXA) makes up 0.17% of the SPDR S&P 500 ETF (SPY). SPY has an exposure of 3.5% to the computer sector.
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