It's hard to imagine that only a few years ago Netflix (NFLX 4.17%) had barely shifted from competing with Blockbuster Video to producing original content. In fact, the first true, original series launched by the streaming leader, House of Cards, aired its first season in early 2013, less than five years ago.
The launch of that show began a huge drive by the company to become more than a distributor of other people's content. It also touched off a series of creative successes that produced an epic series of blockbuster originals including, but not limited to, Orange is the New Black, Stranger Things, Daredevil and its related series, and Unbreakable Kimmy Schmidt.
That lists only touches on the highlights, and it does not show the full depth and breadth of the Netflix offering. While the company does have high expenses, with over $20 billion in long-term debt and obligations, it has a bright future thanks to its content library and the many ways that benefits its other efforts.
Netflix has built its business on original programming. Image source: Netflix.
A growing force
Netflix began as a distributor of DVDs and slowly morphed into a company which streamed content it licensed from other companies. CEO Reed Hastings and his team smartly recognized that strategy would not work in the long term: if Netflix was successful, its licensing costs would go up, and its leverage would decrease.
Going into original content was a risk, but it was the only viable long-term path. If it owned content it could leverage it to attract subscribers, and use it as a draw to enter new markets. In order to create what has become Netflix as we know it now, the company had to offer a better creative environment than network and high-end cable television.
It did that by offering creative freedom and not canceling shows quickly. In fact, for the first couple of years it made originals, the streaming leader did not cancel anything. That has now changed, with expensive, underperforming series like The Get Down and Sense8 getting canceled -- but those series would likely never have even gotten a chance on network television.
Creating a pro-talent environment has helped Netflix land creative talent other networks or services could not hope for. For example, its revival of Arrested Development required a level of creative scheduling and flexibility that likely could not have been offered by a traditional broadcast or cable network.
Netflix may not be at the top of the list where creative folks want to work, but it's on a very short list with HBO and maybe one or two other outlets. This has helped the company build a library of original shows -- ranging from hits to niche content -- that make its recent breakup with Disney (DIS 1.54%) a less crushing blow. Some fans will miss the content from the Mouse House. But the company's deep catalog of originals means that the vast majority of Netflix's more-than 99 million subscribers at the close of Q2 will still have more than enough to watch to justify the service's $9.99 a month cost.
Netflix is building a wall
Every time Netflix adds an original series that people like, it gives new subscribers another reason to sign on. By owning its content, the company ensures that it will have a growing library of assets that keep making it more appealing over time.
That strategy has led to steady growth, with the streaming leader adding about 5 million subscribers in its most-recent quarter alone. It has also grown revenue by over 30% each of the past four quarters, and it's reasonable to think that growth will not slow anytime soon given the company's expansion around the world.
Netflix could have died with the DVD, and it could have been a relatively limited streaming service offering only licensed content. Instead, it took bold risks in content, making it such a desirable place to work that TV's most-successful producer, Shonda Rhimes, is bringing her production company from ABC to the streaming leader.
Each new successful show gives consumers more reasons to join Netflix and another reason to stay. That creates a higher and higher barrier against competition, where only a few players like Hulu, HBO, and perhaps Disney's planned streaming service have the content in place to compete.
