Netflix's gamble pays off as subscriptions soar Dave Lee

North America technology reporter Published duration 18 January 2017

image copyright Getty Images image caption Netflix took a decision to invest in original content

Hundreds of movies disappeared from Netflix over 2016, the result of the streaming service’s decision to end several key content deals with top studios and distributors.

It was a brave move - particularly given that its main rivals, such as Hulu, jumped at the chance to take on some of those titles Netflix decided it no longer wanted.

The reason for the cull? Original content.

Netflix was being bold - its aspirations were no longer to be your on-demand DVD collection, but instead the place where you discovered and consumed new and exclusive shows.

So rather than pay money out to studios for the right to show existing content, it instead ploughed its cash into shows such as Stranger Things, The Crown , Luke Cage and the remake of Gilmore Girls

In 2016, those “Netflix Originals” - already a term you could argue has become synonymous with quality - came thick and fast.

The firm said it produced 600 hours of original programming last year - and intends to raise that to about 1,000 hours in 2017. Its budget to achieve that is $6bn (£4.9bn) - a billion more than last year.

BBC threat

On Wednesday we learned the company has been rewarded handsomely for putting its eggs in the original content basket. After hours trading on Wednesday saw the company’s stock rise by as much as 9% on the news it had added 7.05 million new subscribers in the last three months of 2016.

That’s far greater than the 5.2 million they had anticipated, and left them ending the year with 93.8 million subscribers in total - and an expectation of breaking the symbolic 100 million mark by the end of March.

image copyright Getty Images image caption The kids of Stranger Things become overnight superstars - and helped earn Netflix millions

In all, 2016 saw Netflix take in $8.83bn (£7.1bn) in revenue - with a profit of $186.7m (£151.6m).

All looking good, then - but there’s still work to do.

In a letter to shareholders, Netflix underlined, as it is obliged to do, the potential risks to its success going forward - chiefly globalisation and competition.

While international expansion has been rapid, with the majority of the new sign-ups are coming from outside of the US, it will require a lot of expenditure for Netflix to dominate with original content in the 189 other countries it serves.

It has put some of its budget into non-English language shows, such as “3%”, a Portuguese sci-fi series. Intriguingly, Netflix noted that many English viewers opted to watch the dubbed version, providing an unexpected added audience.

Still, when local TV players kick into action and give up so-called linear TV - episodes once a week, and so on - in favour of Netflix’s model there’s a chance the company’s head start could be clawed back.

The company notes that the BBC became the first “major linear network” to push into a “binge-first” strategy, and it expects American network HBO to follow suit pretty soon.

Neutrality

The company also took a somewhat unusual political step in its earnings, drawing attention to the ongoing debate over so-called net neutrality.

Net neutrality is the concept that all data traffic on the internet is treated equally - and that internet service providers (ISPs) cannot, for example, charge extra for data-heavy services like video streaming.

The cost could be passed on to either companies like Netflix or the consumer - but is currently not allowed. However, there are concerns the incoming Trump administration may abolish the current laws that ensure net neutrality.

Netflix said any weakening of net neutrality laws would not affect its business in any significant way, but stressed, as many advocates have done, that it would hinder competition across the board.

“Strong net neutrality is important to support innovation and smaller firms,” the company wrote.

"No one wants ISPs to decide what new and potentially disruptive services can operate over their networks, or to favour one service over another. We hope the new US administration and Congress will recognise that keeping the network neutral drives job growth and innovation.”

Sporting chance

Finally, Netflix reiterated its reluctance to get into the business of broadcasting live sport - something the company argued was the last real incentive for someone to have a traditional cable or satellite subscription.

My hunch there is that it’s biding its time.

image copyright Getty Images image caption Netflix boss Reid Hastings said his company was not interested in going after sports rights

Right now, sports rights - even for just one market - cost astronomical amounts of cash.

But if big cable firms continue to be weakened by the likes of Netflix, their spending power will decrease. At which point the new players could see the prospect of getting a far better deal than if they were to go after it today.

What Netflix has made clear is that it’s no longer content with signing up content to show only in select markets, it’s instead focusing on deals that can be shown in every country.

How much would global rights to the Premier League be worth, I wonder?