Netflix (NASDAQ:NFLX) finally launched in New Zealand and Australia this week, but some binge-watching hopefuls from down under may be disappointed with the selection available on the service at launch. In New Zealand, for example, the Netflix original House of Cards didn't make it into the library. Other original titles are missing from both the Australian and New Zealand catalogs, as well.
For those who are confused as to why Netflix is unable to stream some of its original content in Australia and New Zealand, you're not alone. But the explanation is quite simple: Netflix doesn't actually own any of its original content.
Taking shortcuts to becoming HBO
Instead of producing its original content, Netflix simply signs an agreement for exclusive streaming rights to a production, as well as a first-run window agreement. After that window expires, however, the production company is free to license the content to anyone, including home video distributors and international networks and streaming services.
Such is the case with House of Cards and other early Netflix originals. The company bought global rights for more recent series like Marco Polo, though.
That stands in contrast to Time Warner (NYSE:TWX.DL) subsidiary HBO. HBO produces its originals itself, which gives it complete control over where those series end up. When it expands internationally, its original content is the key for keeping its costs low. Comparatively, Netflix's costs to expand internationally include thousands of new content-licensing contracts, which drive profits in those markets down into negative territory.
Because Netflix doesn't hold the international rights to many of its originals, those rights are often bought by other networks or streaming services in international markets well before Netflix even lays plans to expand into those markets.
As such, House of Cards fans in Australia and New Zealand have been getting their fill from Showcase (a premium cable network in Australia), TV3 (a nationwide broadcast network in New Zealand), and Lightbox (a Netflix analog in New Zealand). With many potential subscribers having viewed its original content already, it decreases the appeal of a new Netflix subscription.
Hedging its bet
The strategy Netflix has chosen with its original programming is not without its merits. Although Netflix doesn't own its content outright and must license its earlier series on a country-by-country basis, it's able to hedge its costs.
Netflix spent an estimated $300 million on its original programming last year. Comparatively, HBO spent $960 million on its originals. The higher price reflects the production costs involved with its originals instead of licensing costs.
On the flip side, HBO is able to get most of its costs back through licensing and home-video distribution. Last year, HBO generated $820 million from licensing its content internationally, as well as to Amazon in the U.S., and from selling DVDs and Blu-Ray box sets. Of course, Netflix isn't interested in offering potential viewers an alternative to subscribing to Netflix through home video sales.
By licensing rather than owning the content, Netflix is able to keep its original costs low and make more bets on more series. And without a traditional television schedule, it's not limited in how many shows it can air. In 2015, Netflix plans to triple the amount of original content it distributes, and many of its new titles will come with international rights. While those international rights might cost more upfront, it will save Netflix time and money in the long run since it plans to operate globally within the next two years.
Turning a profit internationally
As mentioned, Netflix's costs of expansion are significantly higher than HBO's due to the different strategies both companies use. Netflix has to pay the upfront costs of building a content library before it has a subscriber base, while HBO is able to license its brand and content, and offload the audience building to someone else. That makes HBO's strategy a nearly instant profit maker, while Netflix's strategy takes a long time to produce enough subscription revenue to cover its costs.
In the long run, Netflix is showing that it's able to turn a profit, with the U.S. market being the prime example. But without the international rights to some of its most popular original content, the costs of expansion are high, which means profit will remain depressed for the foreseeable future.
Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and 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.