Netflix (NFLX +0.39%) is notorious for its liberal spending on original content. It's been lampooned by SNL and even downright criticized for spending so much on content for its 150 million subscribers. Netflix has historically brushed off a big-budget original film or series that failed to attract an audience as long as it generated significant buzz about the service. It has also green-lit projects that were more likely to attract critical acclaim even if it didn't result in significantly more viewers.
But priorities might be changing for Netflix. If Netflix is going to spend tens of millions on an original film or series, it wants to be very sure it's going to attract a commensurate number of new subscribers or keep existing subscribers from canceling, according to a report by The Information. (A Netflix spokesperson told The Information there's been no change to how the company green-lights new projects.)
Netflix original Stranger Things. Image source: Netflix.
Imperfect data
Netflix has a lot of valuable data, but when it comes to using that data to produce hits, it's not very reliable. Content Chief Ted Sarandos said as much last month at Series Fest.
Netflix can use its data, however, to determine how much it should be spending on certain projects given a certain tolerance for risk. The company may have been willing to take greater risks if it also thought the project would attract considerable attention from critics. That could help it win Emmys or Oscars, which in turn shine a light on all of Netflix's original content.
The shift to focus mostly on audience metrics comes after Netflix has already attracted acclaim for both its television series and films. Netflix has already proven it's capable of producing critically acclaimed content; it doesn't need to keep doing so.
That's important for attracting potential subscribers but probably more important for attracting top Hollywood talent. Actors and directors want to be recognized for their work, and Netflix has shown it can get them that recognition. A greater ability to attract top talent can also help make Netflix's original content spending more efficient.
Importantly, predicting which projects might generate buzz or critical acclaim is likely much more difficult than trying to predict how many viewers a piece of content could attract. Flops will certainly still happen -- just look at the rest of the film industry -- but Netflix has access to more and better data than any other movie studio on what its audiences like.
Overall, Netflix's decision to focus on audience metrics should make its original content spending more efficient.
Peak cash burn
Netflix says its cash burn will peak this year at around $3.5 billion. Subscriber growth and continued price increases ought to outpace increases in Netflix's massive content budget going into the next decade. The company is already expected to spend $15 billion on content this year, which is significantly more than any of its competitors.
The outlook for decreasing cash burn puts pressure on Sarandos and the content team to spend their cash more efficiently. It'll be losing some big content deals over the next few years, and it's been preparing for the departure of that content by rapidly increasing its investment in originals.
The more budget-conscious approach to original productions is a sign Netflix is comfortable with its content library even when it loses some of its most popular licensed shows and films. As a result, Netflix should be able to slow the growth of its total content spending as licensed content leaves the service and it doesn't increase its investments as much in new originals.
If Netflix focuses its original content spending primarily on attracting new subscribers and retaining existing viewers, it should see improvements in cash flow. Its old strategy of generating buzz and interest from critics has worked well, but that no longer generates as much value as it did just a few years ago. Going forward, Netflix should be able to be much more efficient with its content spending and set itself on a path toward becoming cash flow positive.
