American Vandal was one of Netflix's (NASDAQ:NFLX) most popular shows. Fans were hoping to see it renewed for a third season. In fact, it was more than hope: renewal was an expectation. The award-winning American Vandal was deserving of another season by any traditional measure. Instead, Netflix canceled it. Why?
Sad as it is to hear, it seems simply that Netflix didn't want to pay for the show.
At first glance, that's a strange statement. Isn't this the same Netflix that is in the midst of dropping $8 billion on licensed and original content this year? Isn't this the company that is focused intently on original content, since it's cheaper in the long run than licensed content? As a hit original show, American Vandal appears at first glance to be a no-brainer for Netflix.
But to streaming services, not all original content is created equal.
Ownership and licensing in original series
Original series make sense for Netflix because the company pays less in licensing fees to air them. In the best (for Netflix) scenario, Netflix makes the content in-house. When Netflix Studios creates Netflix originals, there are no licensing fees.
But not all Netflix originals are made this way. Some Netflix originals are made by outside studios and licensed by Netflix for use as original series. That's natural -- Netflix doesn't have the studio muscle to make as much original content as it wants to have on its platform -- but it's less cost-effective than completely in-house productions.
In other words, Netflix actually has two priorities in its big push for cost-effective original content. The first is the one most people are familiar with: Netflix wants more of its content to be original (the goal is to eventually have a library that's 50% original content). But the second is about a more subtle distinction: Netflix wants more of its original series hits to be Netflix Studios projects.
American Vandal's creation -- and its future
Netflix's seemingly strange decision to kill American Vandal makes a lot more sense when the reality of licensed originals is examined. While American Vandal was a "Netflix original," it was also a licensed show: it was created for Netflix by CBS Corporation's CBS Television Studios with the help of private production companies Funny or Die and 3 Arts Entertainment.
That made it less cost-effective for Netflix than a wholly owned show would be. In that light, it makes sense that Netflix killed American Vandal. But the same streaming service/production studio dynamic is one of the reasons to believe that American Vandal is not dead for good.
There has already been speculation that the show could return to streaming or television in a new home. One likely option is CBS All Access, the streaming service owned by CBS. Or, of course, CBS could use its broadcast television channel. American Vandal's popularity makes it likely to come back, while its status as a CBS Television Studios creation makes CBS outlets disproportionately likely landing spots.
What Netflix's decision means for the streaming business
Netflix's decision to cancel a hit series signals just how important vertical integration on the original content front is to Netflix, and it suggests that such integration is the way of the future for streaming services.
Observers and investors should expect Netflix to keep killing off shows made by outside studios and pushing its Netflix Studios content harder and harder. Other streaming companies with their own original content studios, such as Amazon, will likely follow similar strategies. Studio tribalism is the future of streaming.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Stephen Lovely owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.