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Understanding Production Houses......Like Netflix

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Entertainment time is scarce, so consumers increasingly value quality content.

Netflix is a great example, as they moved from a DVD delivery model to making their own content.

But how can we read into a business that produces content? How is content the king in a world where it gets harder to sustain a competitive advantage?

Today, we cover:

  • Producing Vs. Licensing Content

  • Cost Structure

  • Competitive Advantages


Producing Vs. Licensing Content

Netflix started out by licensing content from other studios but shifted to originals in 2013.

Today, they have about $20 billion of content on their balance sheet.

Producing and Owning Content Allows Studios To:

  1. Have creative control - Design and market content based on consumer preferences data they collect

  2. Own global rights - Sell content in a variety of geographies without needing to purchase from studios

  3. Have local productions - Create content unique to different markets at lower costs

Licensing Allows Studios To:

  1. Own content without putting up equity in a long process

  2. Own rights only for a certain geography/time period

  3. Possibly overpay for content due to a studio markup for not producing it

Consumers value tailored content.

More often than not, this happens to be original content that other studios can’t replicate.

Content has to be sticky.


Cost Structure

There are 4 main line items that move the model for a production house:

  1. Content Amortization (Cost of production)

  2. Marketing

  3. Technology and Development

  4. G&A

We will focus on the content amortization and marketing.

Content amortization –

This is a tough one when compared to the box office where you have the cost of a ticket as revenue earned and your production cost.

A subscription service allows access to all content, so we look at viewing per piece of content.

At the same time, we try to understand churn rates. Again, it’s tough because that data isn’t transparent due to streaming services catering different markets.

This means it’s not entirely about how much you spend to make the content, but the type of viewing you can generate from it. This includes the acquisition of new customers.

Marketing –

This is similar to studios that take movies to the box office. Make original content to acquire new customers.

For Netflix, most marketing can be done the platform itself through personalization of content choices. Recommendations/Subtitling in multiple languages allows for personalization and a larger reach of content.


Competitive Advantages

The production houses like Netflix have recurring revenues, a growing proprietary content library, and consumer preference data.

All tools to build a competitive advantage. A few signs could be:

Licensing content to take to the box office - There’s a lot of high-margin revenue on the table, but platforms want to keep content exclusive for their recurring revenues

Higher budgets - Use billions to produce animations, movies and series to provide a variety of content. A huge barrier to entry, but requires patience to stabilize this budget.

Most importantly, the recurring theme seems to be quality content. Consumers have to be kept engaged to create viewership, drive recurring revenues higher and maintain a paying user base.

See you next week.