In the streaming business, original series are more important than ever. More than a decade since Netflix (NASDAQ:NFLX) first began streaming movies and TV shows online, there are several major streaming services vying for licensing rights and competing for subscribers. That drives up prices: Netflix paid $500,000 per episode of Friends for four years of streaming rights, and ended up passing on Seinfeld rights when that bidding war got out of hand. Original series offer some relief from this pricey reality — though they can cost more up front, they provide their streaming-service parents with reliable hours of content, no licensing headaches required.
More hours of original content, then, would be better — except, of course, that there are no guarantees that a given original series will end up being a subscriber draw in even a fraction of the way that Friends or Seinfeld are. Streaming services face a dilemma: should they bulk up their libraries with hours of low-cost original content, or pay top dollar for prestige programming?
Netflix, HBO, and the quality-versus-quantity question
Two streaming giants are emblematic of the two opposite approaches. HBO, which was recently acquired by AT&T (NYSE:T) in the AT&T-Time Warner deal, has relatively few original series and is known for its high-quality output. Netflix, meanwhile, has been building its base of original series up exponentially: it started with just three original series in 2013 and now hopes to have more than 700 by the end of this year.
Netflix's many original series include plenty of shows that, in the eyes of critics and viewers, are just plain bad. Witness Disjointed (Rotten Tomatoes Tomatometer score: 23%), Friends from College (23%) and Marvel's Iron Fist (19%). All of these are 2017 releases, products of Netflix's high-volume approach.
HBO's legendary lineup, of course, includes some of the most respected prestige television of all time. In addition to now-concluded series like The Sopranos, HBO has perhaps the biggest show on TV right now in Game of Thrones.
This isn't the whole story, of course: Netflix has hits like Stranger Things, and HBO is capable of missteps. But the popular perception that HBO has fewer, but better, shows is more or less fair. And Netflix users can hardly help but notice that their service is now pushing a seemingly endless supply of original series, many of them critically panned and virtually unpromoted outside of Netflix's own app. Other streaming services have made bad shows, but only Netflix gives subscribers the uneasy feeling that they might be doing so on purpose.
So when Netflix's disappointing Q2 earnings report showed the company had missed its subscriber growth goals, many critics pointed to Netflix's quantity-over-quality approach as a culprit. Netflix can still change its tack, but what will that look like — and how will investors be able to recognize it?
What original series mean to streaming service budgets
Streaming services are growing, content is getting more expensive, and original series are getting more important. All of this suggests that content budgets should grow, and indeed they have: Netflix plans to spend up to $8 billion on content this year, up from $6 billion in 2017. The company spends about 25% of its content budget on originals. HBO spent $2.5 billion on content in 2017, but is expected to spend more cash under new parent company AT&T.
But one issue, from an investor's perspective, is that money doesn't tell the whole story. HBO's smaller budget is spread across a small enough number of shows that the facts still fit the popular narrative: HBO spends big on prestige programming, as proven by Game of Thrones' $15 million-per-episode budget, among other things. But Netflix's huge budget is not spread evenly across its perhaps too-large stable of titles. Netflix does spend big on select prestige shows, most notably The Crown, the first season of which cost a historic $130 million. HBO's experience would suggest that this is good (for that matter, so would Netflix's own). But Netflix's many missteps draw attention away from its hits.
Netflix's growing budget for content overall and original series specifically is not, then, the only thing to watch. The key for Netflix is not necessarily to create more hits, of which is has a solid number. The key is to avoid flooding its own service with putrid programming. Investors who were once thrilled to hear Netflix promise more titles or more hours may now be a bit more wary of what the below-average half of 700 original series may look like.
Meanwhile, HBO seems incentivized to make opposite changes. Some observers believe that AT&T would like its streaming service to better rival services like Netflix and Amazon Prime, which boast larger — if more uneven, quality-wise — streaming catalogs. The increases to HBO's budget will help it close the gap a bit, putting Netflix in the position of having to decide between continuing to grow its gap in content-hours and fighting its growing reputation as a producer of high-volume, low-return original content. All of that seems to be good news for HBO, while it's more of a mixed bag for Netflix.
Where do Netflix and HBO go from here?
It seems clear that HBO is getting more bang for its buck in terms of original series quality, despite — or, perhaps more accurately, because of — its lack of cheap depth in its streaming catalog. But its also true that Netflix's larger library is part of what makes it the streaming public's default choice. A potentially larger slate of HBO originals would seem to be good news for investors, but Netflix would do well to move in the opposite direction. Netflix has a comfortable lead in content hours over HBO, among other rivals, so sacrificing quality to run up the score in that department seems unnecessary. Fewer proclamations about hours and titles from Netflix might give investors hope that high-budget hits like The Crown will no longer be buried in a landslide of cheap filler. Either way, investors will want to keep their eye not just on total spending on originals, but on how many titles HBO and Netflix plan to divide that spending between.