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Why original content such as House of Cards will continue to be a differentiator

 February 2015

I, along with many others have been looking House of cardsforward to season 3 of House of Cards,  premiering today on Netflix. When season 1 was released two years ago, skepticism in the industry was everywhere. Netflix didn’t understand content production, it was a big mistake to release the entire season at one time and it would be too expensive to create exclusive content for just one platform. 

Now, two years later, we’ve seen one of the fastest strategic shifts in the TV industry where almost every industry expert is praising Netflix’s strategy and a number of other services are investing heavily in content production. It suddenly seems like a no-brainer that this is the right strategy for any OTT video company. We will for sure see both TV channels and operators commissioning exclusive content for the OTT offering, in an effort to compete in the market place and emulate Netflix’s success. However, it’s not that simple and I think we’ll just see some companies going down this path.

First of all, Netflix has scale, both geographically and subscriber wise. It is simply easier for them to spend the necessary budgets to create high quality content. They also have a huge problem securing quality content licensing on a global basis. Good content may be tied up by deals with local broadcasters in certain territories or potentially have different release windows in different regions. With their own content they don’t have this problem.

Secondly, Netflix has unparalleled understanding of consumer behavior. By understanding their consumers, they can identify the size of the potential audience for each new title. It is clear that the hit rate of Netflix content production is significantly better than what is normally expected, especially for a new industry player. I attribute this to their understanding of consumer behavior and content consumption.

Thirdly, even if they lose money from their own content production, they communicate an implicit threat to all their content suppliers. By showing that they can do good content themselves, they’re telling their content partners that they cannot raise license costs. There is always a competition for the content license fees, which helps with negotiations.

The locally relevant companies, such as operators and TV channels, will in all likelihood not create exclusive content in the near future, but will instead focus on live and local content as differentiators to Netflix. The ones that may choose exclusive content production as differentiating strategy will instead be regional or global players, such as multinational TV operators, global brands and VOD companies. We may also see the platforms themselves invest in content production, but I personally see this as less likely to happen after Microsoft’s and Sony’s pullback from previous strategies.

All in all, this will create further fragmentation of services, where exclusive content will provide new possibilities for service providers to compete. The global market for OTT services is expected to grow to almost $40BN by 2017. While Netflix will still have an impressive 25% global market share, there will be plenty of room for other service providers to reach enough subscribers to justify investments in specific content production for OTT services. Exclusive content production will remain a viable but risky and expensive differentiation strategy.

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