Attention all movie buffs: News has broke that Netflix (NASDAQ:NFLX) is removing some of its best content after Dec. 31. While the company didn't release a list of the films and TV shows it will no longer make available to stream, Reddit users have created a rather comprehensive one. From dramas like Braveheart and Titanic to cult classics like The Faculty and Brick, more than 90 titles won't be available after the start of the New Year.
If this comes as a surprise, there are a few things you should understand.
1. Movie and TV rights don't last forever.
I've been a loyal Netflix customer for nearly five years, and trust me, this isn't the first time we've seen a mass exodus. Remember when we said goodbye to nearly 2,000 Time Warner (NYSE:TWX.DL) movies earlier this year? What about when the company couldn't reach a deal with Starz (NASDAQ:STRZA) in 2011?
Both instances occurred because temporary streaming rights deals weren't renewed. Similar cases have happened with Showtime and Viacom (NASDAQ:VIAB) in the past. Most movie and TV show licenses don't last forever, and Netflix is constantly adjusting its catalog to focus on quality, not quantity.
Earlier this year, in fact, the company released a statement that gives a ton of insight into this strategy:
We are selective about what's available to watch on Netflix. We often license TV shows and movies on an exclusive basis, so we can provide a unique experience. We'll forego, or choose not renew, titles that aren't watched enough. We always use our knowledge about what our members love to watch to decide what's available on Netflix. Our goal is to be an expert programmer, offering a mix that delights our members, rather than trying to be a broad distributor.
One example of Netflix's selectivity is its decision to individually license Dexter from CBS (NYSE:CBS) and Showtime. Another was when it bought rights to a few of Time Warner's most coveted shows in January.
As the statement also points out, Netflix pays attention to "what [its] members love to watch." Think about that for a second, and realize this: Netflix gathers a ton of data. In addition to total views, it tracks things like the percentage of users who finish an entire series, date and time of day information, search queries, and even scrolling behavior, according to KissMetrics. As Forbes has pointed out, Netflix even admits it analyzes piracy statistics to determine what content to license.
2. The new crop of replacements is promising.
With that in mind, it stands to reason that Netflix must have a pretty good reason to let titles like Braveheart and Titanic go, and it does. The company's new crop of replacements due for arrival to the U.S. on Jan 1 is promising. It includes classics like Bull Durham, Raging Bull, and my personal favorite newcomer, American Psycho.
Here's the full list of noteworthy additions that's circulating the Internet (via Reddit):
- American Psycho (2000)
- Raging Bull (1980)
- Thelma and Louise (1991)
- West Side Story (1961)
- What's Eating Gilbert Grape (1993)
- Big Trouble In Little China (1986)
- Breakfast at Tiffany's (1961)
- Bull Durham (1988)
- Red Dawn (1984)
- Mouse Hunt (1997)
- Spaceballs (1987)
- Star Trek: The Motion Picture (1979)
- The Chinese Connection (1972)
- Amelie (2001)
- Grapes Of Wrath (1940)
- Planes, Trains, and Automobiles (1987)
- Children of a Lesser God (1986)
- Scrooged (1988)
- Days of Thunder (1990)
- The Day the Earth Stood Still (1951)
- The Talented Mr. Ripley (1999)
- Tora! Tora! Tora! (1970)
- Death Race 2000 (1975)
- Ghost (1990)
- Good Burger (1997)
- Play It Again, Sam (1972)
A few of these titles, like Red Dawn and American Psycho, are already available on the various international versions of Netflix, but 2014 will mark their domestic release.
3. Don't forget about original programming.
As programming costs in the cable industry continue to rise, it's becoming increasingly more expensive for Netflix to rely on licensing as a sole means of content. Original Netflix shows like House of Cards and Orange Is the New Black were born out of this reality, which Matthew Ball at the Ivey Business Review explains quite nicely. According to Ball, licensing costs have risen by 700% since 2011. Netflix's latest quarterly report shows that streaming content liabilities now dwarf cash and cash equivalents by a ratio of 6-to-1.
Ball admits that although "per-show licenses will never surpass the cost of original producing a series, their increases will make ongoing investments in [shows like] House of Cards less expensive on a differential basis," and I wholeheartedly agree. While specific numbers aren't available, it's quite possible that Netflix's latest decision to part ways with a significant portion of its content is driven by a desire to expand its original offerings. Within the next few years, the company plans to premier sci-fi thriller Sense8, drug lord drama Narcos, and possibly a series about Marco Polo. New seasons of House of Cards and Orange Is the New Black will also be released in 2014.
As Netflix moves toward a more balanced catalog of licensed and original programming, Ball thinks it will help the company's bottom line:
Original content will help Netflix adjust pricing. It's difficult for Netflix to achieve differentiation when the majority of its core offering...is available to its competitors. If they use their customer analytics to target the right customer segments with high-valued content that isn't available anywhere else, they should be able to extract more than $7.99 per month.
In the future, I expect Netflix to continually adjust its library as user preferences change. There's no way to know how long its newest crop of movies will stay online for U.S. viewers, but if any more films are axed in the future, it will likely be for a good reason, like original programming.
By focusing on quality over quantity, the company is slowly positioning itself to feature a content offering that's diverse enough to warrant a price hike. As Matthew Ball suggests, that's a major theme worth keeping an eye on.
In the meantime, I'll be watching Netflix's newest additions like American Psycho and Red Dawn until season two of House of Cards is released in February. As long as the company keeps offering high-quality original programming, I could care less if it cycles in and out of licensed films and TV shows. In fact, I'd even be willing to pay more than $7.99 a month if Netflix originals continue to be so darn good.
Fool contributor Jake Mann has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.