The streaming service’s focus on a massive international expansion means Hollywood won’t be its prime target any more — for good and for ill
Netflix CEO Reed Hastings is ringing in the company’s new year — and it’s a big year.
Set to deliver a keynote Wednesday at the Consumer Electronics Show in Las Vegas, Hastings has a lot of opportunities to discuss. In 2016, Netflix’s content budget will surpass $5 billion for the first time.
To put that in context, HBO spent just shy of $2 billion on programming in 2014.
At first glance, Netflix’s war-chest being double the size of its top head-on competitor seems like a David-and-Goliath tale. But that familiar storyline goes sideways when you consider Netflix’s other big number of 2016. The company plans to spread its subscription streaming-video service to a total of 200 countries this year, essentially making it the first global internet TV provider.
An expansion of that magnitude means the $5 billion budget will spread more widely and more thinly. Netflix won’t have able to lay it on thick in Hollywood as much — and that could be good for some and bad for others.
“The $5 billion budget and global expansion go hand in glove,” Dan Cryan, analyst at researcher IHS, told TheWrap. “Netflix has always spent heavily on content as it moves into new markets… in order to have a service that people are going want to subscribe to.”
Television is fundamentally a local business, according to Cryan, who said consumers generally like to watch content in their own language about characters they recognize from their own lives. To hit its 200-country goal set last January, Netflix must expand to 115 new countries this year alone. It took five years for Netflix to widen into the first 85.
By rolling out in more countries this year than it ever has before, Netflix will need to license content appropriate for a greater diversity of local tastes.
On top of that, Netflix is aiming to secure licenses that are global themselves. In other words, as it makes deals for South Korean content, it seeks the rights to stream those show anytime anywhere, not just in South Korea.
Global licensing is always expensive, according to Glenn Hower, a research analyst at Parks Associates. But Netflix’s approach runs against the norms of global rights, which break everything up regionally, he said. Attempts to bust up the institutions of licensing probably comes at a premium, Hower said.
The consumer behaviors in many of 2016’s new markets differ from the places where Netflix is strongest now.
Hower pegs Netflix as touching about 50 percent of U.S. households that have broadband Internet. But his surveys in Western European countries, like Germany and France, indicate that Netflix’s penetration levels there are below 10 percent following its continental roll-out in 2014. These are countries that have a similar level of connectivity and tech infrastructure to suit the kind of long-form premium content that is Netflix’s specialty.
But new countries like India are heavily weighted to mobile online entertainment, and they have less technology infrastructure to underpin Netflix’s business. A streaming-video service that trumpets itself as the inventor of “binge” viewing is less enticing to viewers who gravitate to shorter snacks of video on mobile devices rather than long-form premium content.
Ultimately, Netflix’s will have to strike new balances in spending its $5 billion. The company must weigh its investments in Hollywood-style series, which have been the bread-and-butter of its originals push, against an escalating need for local content in a spiraling number of new countries.
With so much emphasis on expansion this year, it’s possible Netflix’s Hollywood-style content may take a backseat.
So who wins and who loses?
Netflix’s American network competitors may feel a reprieve. The company’s unrelenting production of buzzy, award-winning series quickly made it a major destination for top projects and talent and a lure for viewers away from traditional television. A laser focus abroad this year could ease that strain.
But it could hurt some Hollywood studios. Netflix may be a competitor making shows, but it’s also a giant customer buying them. If the company continues its trend of scaling back its licenses to be selective about picking top shows, a greater emphasis in its budget on foreign deals means less money flows to companies that found “free” money by licensing back catalog.