How Original Programming Can Save This Company

Yahoo! has been trying to innovate recently in order to stay competitive with Google, but it has only disappointing quarterly earnings to show for it. Can a shift to long-form original programming -- Netflix's kingdom -- be the turning point Marissa Mayer and Yahoo!'s investors are looking for?

Apr 10, 2014 at 11:59PM

It's become all too common for Marissa Mayer's Yahoo! to shift strategies in order to remain competitive in the online marketplace. With the persistent dominance of Google (NASDAQ:GOOG) (NASDAQ:GOOGL) in video streaming and Internet services, many are left to wonder why Mayer is even trying to compete with Google at its own game. This time around, Mayer is hoping to take Yahoo! into Netflix (NASDAQ:NFLX) territory with long-form original content in a risky, yet possibly lucrative, move to reestablish the company's competitive edge. 

Video streaming already a bright spot
Original content has the potential to reap huge benefits for the company if it's done well. Yahoo! has already acquired the rights to the "Saturday Night Live" video library, and it has a partnership with Comedy Central for "The Daily Show" clips, popular programs that make advertisers comfortable going to Yahoo!. The company is also in talks for a $300 million purchase of the News Distribution Network, a video news streamer, which would put Yahoo! on a par with Facebook in terms of unique video users with 95 million average visitors -- still well short of Google's 157.6 million.

At the moment, video streaming has been a bright spot for an otherwise struggling company. Yahoo!'s video audience has increased by 14%, year over year , and has the potential to create durable revenue growth in the years to come. This looks like it will be the new advertisement strategy for Yahoo! as the company tries to recover from a dismal fourth-quarter report that sent the stock down 2%. However, original content is a different animal. Yahoo! plans to get 10 original series going, with prices ranging from $700,000 per series to a couple million dollars per episode. The idea would be to spread the risks out, as well as to land high-profile actors and producers from the world of TV .

Original content can bring huge success -- but some risk
Netflix has had tremendous success with this genre, which includes the hits "Orange is the New Black" and the Emmy award-winning U.S. version of "House of Cards." These contributed to a Street-beating fourth quarter and a 31.7 million subscriber base -- 3 million more than rival HBO. Netflix is looking to expand into set-top boxes for television for more direct viewing. This strategy should give Netflix a larger advantage in the online content market, as well as increase the pressure on normal television stations.

Despite the high profile successes, original content comes with risks. For every "House of Cards" that is produced, there are a few stinkers that lose money. This is the risk Yahoo! will be running when it enters the market in earnest. Given Yahoo!'s history and the investment that Mayer plans for this content, a high-profile failure will be seen as yet another example of a struggling company that can't do anything right. This doesn't mean every show for Yahoo! has to be a success, but if there is to be a failure, it had better be one of the $700,000 shows, where a loss can be matched by a successful blockbuster.

Does Yahoo! need this to work?
Mayer's tale thus far has been one of a CEO who wants to restore Yahoo! to prominence. This shift to original content can do that because it is a realization that going after Google is a suicide mission, given the company's dominance. Entering a still-developing market gives Yahoo! a more manageable goal in terms of winning investor and advertiser confidence, as well as shifting users to new Yahoo! products. It may not supplant Netflix as the king on online video streaming or original content, but it is a saner strategy than trying to go after Google's hold on short, viral videos.

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John McKenna has no position in any stocks mentioned. The Motley Fool recommends Google (C shares), Netflix, and Yahoo!. The Motley Fool owns shares of Google (C shares) and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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