Reeling them in: Netflix to spend $8bn on original content in 2018

23 Jan 2018

Netflix offices in Hollywood. Image: Netflix

The digital box office is booming, so Netflix will be spending big in the year ahead.

Streaming media giant Netflix landed 8.3m new streaming subscribers in the fourth quarter of 2017 – 2m in the US alone – and has pledged to spend up to $8bn creating original content in 2018.

The content strategy that spawned Stranger Things, The Crown, Siege of Jadotville and many others is working in Netflix’s favour. In many ways, it is refreshing the entertainment industry through jobs for actors, writers, set and costume designers, and a myriad of technical roles.

‘We want great content and we want the budget to make the hits we have really big, to drive our membership growth’

In Q4, Netflix added just under 2m US streaming subscribers and 6.36m international subscribers, beating Wall Street forecasts of 1.28m in the US and 5m international.

Netflix celebrates a beautiful Q4

“We had a beautiful Q4, completing a great year as internet TV expands globally,” Netflix said in a letter to shareholders.

“In 2017, we grew streaming revenue 36pc to over $11bn, added 24m new memberships (compared to 19m in 2016), achieved (for the first time) a full-year positive international contribution profit and more than doubled global operating income.”

Netflix said that average paid streaming memberships rose 25pc year over year. It added that the 8.3m additional streamers marked the highest growth in the company’s history.

“This exceeded our 6.3m forecast due primarily to stronger-than-expected acquisition fuelled by our original content slate and the ongoing global adoption of internet entertainment.”

But the original content strategy can be tricky, too, and Netflix admitted that it was landed with a $39m non-cash charge for unreleased content it decided not to move forward on.

Investments in original content are paying off for Netflix

Looking at Q1 2018, Netflix projects a global addition of 6.35m subscribers, with 1.45m in the US and 4.9m internationally.

“We believe our big investments in content are paying off. In 2017, average streaming hours per membership grew by 9pc year-over-year. With greater-than-expected member growth (resulting in more revenue), we now plan to spend $7.5-8bn on content on a P&L basis in 2018.

“Big hits like 13 Reasons Why, Stranger Things and Bright result from a combination of great content and great marketing. We’re taking marketing spend up a little faster than revenue for this year (from about $1.3bn to approximately $2bn) because our testing results indicate this is wise. We want great content and we want the budget to make the hits we have really big, to drive our membership growth.

“We’ll grow our technology and development investment to roughly $1.3bn in 2018,” Netflix told shareholders.”

Netflix said that its largest investment in original film to date has been Bright, a fantasy movie starring Will Smith, which played a key role in driving customer acquisitions.

“We are increasingly self-producing our original content. As part of this initiative, in Q4 we signed overall deals with Stranger Things producer Shawn Levy and Orange is the New Black and GLOW creator Jenji Kohan. Our goal is to work directly with the best talent to bring amazing stories to our members all over the world.”

Streaming landscape gets competitive

Netflix said it is also partnering with multichannel video programming distributors and internet service providers to make it easier for consumers to sign up. These include partnerships with Deutsche Telekom, Cox Communications and Verizon.

Netflix, a stalwart opponent of the FCC’s efforts to repeal the strong net neutrality rules established during the Obama era, said it will continue the fight.

“As expected, the FCC removed the US net neutrality rules. We believe that a strong internet should have enforceable net neutrality rules, so we and other internet firms are backing the Internet Association’s challenge to the FCC’s action,” it promised shareholders.

The streaming player also acknowledged that the marketplace is getting more competitive, with Amazon Studios increasing its original content budgets and Apple investing in its programming, which is likely to be bundled with Apple Music or iOS.

“Facebook and YouTube are expanding and competing in free, ad-supported video content. With their multibillion global audiences, free, ad-supported internet video is a big force in the market for entertainment time, as well as a great advertising vehicle for Netflix.

“Traditional media companies are also expanding into streaming. Disney is in the process of acquiring most of 21st Century Fox, and plans to launch a direct-to-consumer service in 2019 with a beloved brand and great franchises.

“The market for entertainment time is vast and can support many successful services. In addition, entertainment services are often complementary given their unique content offerings. We believe this is largely why both we and Hulu have been able to succeed and grow,” Netflix told shareholders.

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years