AllFlicks, a site that gives U.S. and foreign Netflix ( NFLX ) subscribers an alternative means of browsing the streaming giant's library, reports Netflix provided 4,335 movies and 1,197 TV shows to its U.S. subscribers as of March 23, respectively down 33.2% and 25.6% from the number provided in January 2014.
A look at a list of the titles that arrived on and left Netflix in March , or are set to do so in April , drives home AllFlicks' observation. While new seasons of House of Cards or Orange is the New Black get more headlines - as might Netflix's one-off purchases for rights to movies such as Will Smith's Bright - the amount of churn being seen on Netflix's platform is substantial.
Spending is still growing ... as are subscribers
The churn hasn't prevented Netflix's streaming content obligations - boosted by international investments as well as rising content licensing prices - from continuing to grow at a healthy clip: They rose 15% in 2015 to $10.9B. In addition, the company ended 2015 with a slight net debt balance, after having ended 2014 with ~$700M in net cash/short-term investments.
At the same time, the churn also hasn't stopped Netflix from continuing to see healthy subscriber growth in a U.S. market that's nearing a 40% household penetration rate. For all the noise made by rivals, Netflix still towers over the U.S. subscription streaming landscape.
Source: Netflix's Q4 2015 shareholder letter
Clearly, there's a method to Netflix's madness. Reed Hastings' firm is nothing if not maniacally data-driven , and in a bidding environment where the company has no choice but to pick its battles, it has concluded its best bet is to invest in original content and a narrower library of third-party material that's more centered around hit movies and TV shows than it used to be.
An opportunity for Hulu and HBO?
While Netflix's decision-making appears sound (for now, anyway), it still involves tradeoffs. And those tradeoffs could still help rivals carve out niches among consumers interested in proverbial long tail video content. Hulu and HBO arguably each have an incentive to do so.
Amazon ( AMZN ) has the resources to aggressively go after long-tail consumers, but its strategic goal with Prime Video has always been to grow Prime subscriptions and keep existing Prime subs loyal. And Amazon's target demographic for U.S. Prime subscriptions is every American household that can afford one. Thus, it makes sense for them to pursue a Netflix-like strategy of appealing to the largest number of consumers possible … and that means a healthy dose of original content and hit movies/shows.
Hulu, on the other hand, is a service that lacks Netflix's scale - it had close to 9M Hulu Plus subscribers as of last April - and has already created a niche among TV aficionados drawn to its large TV-show library and support (in some cases) for next-day streaming of new episodes. Investing in long-tail movie content would give Hulu another way to differentiate its content relative to Netflix's on a smaller budget.
HBO ( TWX ), meanwhile, has been selling potential subscribers - whether for the standalone HBO Now service, or for the pay-per-view/HBO Go package - on its large and popular library of original programming. This acts as HBO's tentpole . What's interesting here is that HBO is arguably pitching its services as a complement to Netflix as much as an alternative. It's effectively telling consumers: "Whether or not you're subscribed to Netflix, you'll want to subscribe to HBO to get Game of Thrones, Vinyl, and other popular shows you can't get on Netflix." Investing in niche movie content not found on Netflix would be an extension of this strategy.
There's no guarantee Hulu or HBO will try to differentiate by investing more in long-tail material. Hulu has long been hamstrung by the interests of its old-media owners. And thanks to the deals it has struck for its pay-per-view channel, HBO's movie library has skewed towards newer films. But Netflix's calculated decision to pare back the size of its library to focus more on original content and hit movies/shows presents an opening.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 house.
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