Netflix (NASDAQ:NFLX) already produced enough content in 2017 for people to rack up 50 billion viewing hours for the January-to-December period. But the company wants to release even more content in 2018.
To be exact, Netflix plans to release 700 TV, film, and stand-up comedy projects this year. That's according to comments made by Netflix CFO David Wells on Feb. 27 during the Morgan Stanley Technology, Media & Telecom Conference.
Content rules when it comes to subscribers, because they naturally gravitate toward the streamers with the best content. With Amazon (NASDAQ:AMZN), Apple, and (soon) Disney (NYSE:DIS) on its heels, Netflix is smart to ramp up its content game, as a way to keep its current subscribers interested while luring in new subscribers.
Netflix's $8 billion content budget expected to drive subs
In 2018, Netflix expects to spend between $7.5 billion and $8 billion on content, Wells said on the latest earnings call. That impressive budget will go toward funding 700 projects Wells later revealed at the Morgan Stanley conference in February.
Of those 700 projects, Wells revealed, 80 will be non-English-language original content geared toward international markets. This will help Netflix continue to expand in the less-saturated markets outside of its home country. In the last quarter, Netflix added 6.36 million international subscribers and 1.98 million U.S. subscribers.
Netflix is willing to allocate billions for its content budget each year because that's directly leading to more subscribers. "Let's continue to add content -- it's working, it's driving growth," Wells said to the audience at the conference.
Netflix stunned some investors back in 2016 when it spent $5 billion on content and estimated it would raise that to $6 billion in 2017. However, with the continued growth in subscribers, investors have become less stingy about the company's content budget. In fact, last quarter's figure of 8.33 million subscriber additions was a new record for Netflix.
The company ended 2017 with 117.6 million global subscribers, but Wells said there are still more non-Netflix subscribers in the world than there are subscribers. He noted that there are an estimated 700 million broadband users across the world (excluding China), implying that the company has a long runway when it comes to subscriber growth.
Netflix has also found that marketing spend is essential to promote the high-quality content that it's paying billions for each year. The company said in its note to investors last quarter that it's increasing the marketing budget from about $1.3 billion in 2017 to approximately $2 billion for 2018.
Netflix's content formula requires pricey talent
In addition to sizable content and marketing budgets, Netflix's golden formula also includes pricey talent. The company has discovered that hiring the best production talent makes its job easy. "Hire great people, give them the resources to make great content and get out of their way," Netflix chief content officer Ted Sarandos said about the company's content strategy on the last earnings call.
Most recently, Netflix signed a multiyear contract with creator Ryan Murphy, who was previously at Twenty-First Century Fox and is behind hit shows like Feud and American Horror Story. Murphy is getting paid a stunning $300 million for his five-year contract with Netflix, because he "has been a very successful and prolific producer of television that has been very commercially successful," Wells said.
Such a lucrative deal isn't the new norm. Wells said Murphy is an exception, because he has the track record to prove that he knows how to make content that appeals to large audiences. "We were pleased with the type of content he creates in terms of being popular globally, not just in the U.S. He creates a lot of customer joy, as we like to say," Wells explained.
Prior to Murphy, Netflix had signed a deal with Shonda Rhimes that's said to be worth $100 million. The former ABC Studios creator is known for global hits like Grey's Anatomy and Scandal. Wells said Netflix was willing to do a big deal with Rhimes for the same reason: She has the track record to prove that she knows how to create content that appeals to global audiences.
Netflix also has multiyear deals with Orange is the New Black creator and GLOW executive producer Jenji Kohan, and with Stranger Things executive producer Shawn Levy. There has also been some talent poaching. In September, Netflix hired Melissa Cobb, head of studio at Oriental DreamWorks (a joint venture of DreamWorks, a subsidiary of Comcast), to be in charge of its series and films for children and families.
While spending $8 billion on content or $300 million on a three-year contract might seem excessive now, it won't be a year from now, when Disney is set to pull its content from Netflix and launch its own competing streaming site. Netflix already has a number of competitors, but Disney may be its biggest one yet, with its blockbuster movie business, extensive intellectual property, and pending acquisition of Twenty-First Century Fox.
Netflix is taking some big steps to stay ahead of the increasing competition. That's a good thing, because as we learned when Amazon bought Whole Foods last June, sometimes it just takes one overnight move for an underdog to suddenly come out on top in a market.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, AAPL, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.