Netflix, Inc. (NASDAQ:NFLX) is under severe pressure Wednesday, falling as much as 4.5% to a session low $93.76 on fears that movie streaming giant could ramp up its spending on original content. Netflix stock has enjoyed a rebound in the past few weeks, climbing some 5%. But the prospect of lower future profits has forced NFLX to give up those gains.
According to a Variety report, the Los Gatos, Calif.-based company wants original programming to account for 50% of its content over the next few years. The other half of its content library will continue to be licensed TV shows and movies. As evidenced by Wednesday’s punishment of Netflix shares, the markets hates this idea.
But what’s the worst that can happen?
Netflix is stuck between a rock and a hard place. Competition from the likes of Hulu and Amazon.com, Inc.‘s (NASDAQ:AMZN) Prime video platform have become bigger threats, unlike in years past. Meanwhile, over-the-top services from Time Warner Inc‘s (NYSE:TWX) HBOGo and Viacom, Inc.’s (NASDAQ:VIA, NASDAQ:VIAB) Showtime Anytime are also picking up steam. To maintain its edge, Netflix wants/needs to double-down on original programming.
Shows like House of Cards, Orange is the New Black and, more recently, Stranger Things, have become key differentiators of Netflix’s service compared to its competitors. Prices are the same, for the most part at around $9.99 to $11.99 per month. Not to mention, several of the shows tend to overlap between service providers. This means programming becomes the value proposition.
Netflix had forecast some $6 billion would be spent on original programming in fiscal 2016. As licensing costs ramp up from movie and television studios, why not keep some of the cost in-house? At the same time, Netflix can then use its own library to license out its original programming to regular cable channels such as Univision, which the company has already begun to do.
That will be the main driver of Netflix stock.
This means it’s possible that Netflix, if it chooses to syndicate its programming to more cable channels, can profit from the upfront investments it makes now in original programming. What’s more, not only will this strategy help Netflix re-establish pricing power among consumers, having its own programming can reduce the churn rate while growing its subscriber base.
Netflix, which grew second-quarter revenue at 28%, is taking on a gamble that may very well pay off in the years ahead. And NFLX shareholders will be rewarded for it.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
