Netflix's (NASDAQ: NFLX) Stranger Things is perhaps the most bankable franchise in streaming television right now.
The series has earned over 30 Emmy nominations and its season three debut has been streamed by over 60 million Netflix member households.
With that kind of success, it's natural to wonder: Just how important is Stranger Things and its cast of meddling kids to the long-term success of its parent, Netflix?
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Narrator: Hi and welcome to the Motley Fool's Bottom Line series. In this episode we're talking about Netflix's hit show, Stranger Things, how it makes the video streaming company money, and why original television shows like this are so important to Netflix.
If, for some reason, you're one of the few people who haven't seen an episode of Stranger Things, the show is set in the 1980s and follows a group of young friends as they uncover government conspiracies and fight off sci-fi monsters in their small Indiana town.
The series was created by twin brothers, Matt and Ross Duffer, who pitched the series to more than a dozen networks before it was picked up by Netflix.
The gamble Netflix took on the Duffer brothers and Stranger Things has paid off big time. In the first four weeks after the third season was released, Stranger Things was watched by more than 64 million Netflix member households.
According to the television ratings compiled by Nielsen, the third season of Stranger Things has been the most-watched Netflix original show over the past two years.
Stranger Things has not only been a hit among viewers, but it's also earned accolades from the television industry, and has received 30 Emmy Nominations, along with six wins, since its debut.
Of course, the success of Stranger Things hasn't come cheap. Netflix spent $6 million per episode for the show's first season, and that expense jumped to $8 million per episode in the second season. The financial figures for season three haven't been released, but given the show's increasing popularity, it's likely that the per-episode budget has gone up even further.
So, why is Netflix spending so much money on just one television show?
To answer that, it's important to understand that over the past few years the company has shifted its strategy away from licensing video content from other creators, to producing its own original television shows and films.
Right now, Stranger Things is one of the company's tentpole shows, which it uses to draw in new subscribers and keep current ones sticking around.
Over the past few years, Netflix has had several flagship series, including Orange Is the New Black and House of Cards.
Netflix spent $12 billion on original programming in 2018, up from $7.9 billion in 2017, and it's estimated that the company will spend up to $15 billion on original programming in 2019.
Spending billions of dollars to produce original shows and movies is an expensive endeavor, but it's part of Netflix's long-term strategy of creating a massive library of content that can satisfy its more than 158 million subscribers.
This strategy has become even more important to the company as a growing list of video streaming competitors have entered the market recently, including Disney (NYSE: DIS) and Apple (NASDAQ: AAPL), on top of the ongoing competition from Amazon (NASDAQ: AMZN).
Amassing a huge library of original content is important to Netflix, but so is having a bankable franchise that the company can use to make money in multiple ways.
Right now, Stranger Things is that franchise. And while it's hard to nail down exactly how many subscribers the show brings in for Netflix, the company is already using Stranger Things to generate revenue beyond video subscribers.
For example, Netflix sells Stranger Things merchandise, including comic books, LEGO sets, and Stranger Things-branded apparel through a partnership with Nike, all of which will likely generate millions of dollars in licensing fees for Netflix.
Not every new Netflix original series will have the same success that Stranger Things has had, which is why it's important that the company has already made a deal to produce a fourth season of the show, which debuts sometime in 2020.
The bottom line is that Netflix has probably already earned back the money it's invested into Stranger Things from new video subscriptions and merchandising deals. And while the company's not done benefiting from the show's success yet, Netflix is probably keeping an eye out for the next blockbuster show that could take its place.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, Nike, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short January 2020 $130 calls on Walt Disney. The Motley Fool has a disclosure policy.
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