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Netflix Is Becoming More Like HBO, for Better or Worse

By Adam Levine-Weinberg - Sep 8, 2015 at 8:10AM

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The streaming-video leader is betting on exclusivity rather than quantity.

In early 2013, Netflix (NFLX 5.03%) Chief Content Officer Ted Sarandos told GQ that Netflix needed "to become HBO faster than HBO can become us." Since then, the similarities between Netflix and Time Warner's (TWX) signature premium network have become ever more apparent.

Like Netflix, HBO has a large, passionate fan base. Becoming more like HBO is not a bad aspiration for Netflix to have. However, depending on what you use Netflix for, it's not necessarily a positive thing for every subscriber.

Netflix's HBO transformation
Today, HBO is known primarily for its popular, typically edgy original programming, such as Game of Thrones. Yet the real mainstay of its competitive advantage over the years has been its "pay-one" movie licensing deals with three of the six big Hollywood studios, including fellow Time Warner subsidiary Warner Brothers.

Netflix is trying to become more like HBO. Photo: The Motley Fool.

These deals give HBO exclusive rights to lots of blockbuster movies just a few months after they hit movie theaters. This market-leading access to recent movies -- as well as a large catalog of older movies -- still represents a key piece of the HBO value proposition. Time Warner has wisely agreed to long-term deals extending beyond 2020 to keep this content on HBO.

Netflix made its own splash a few years ago, pledging a substantial sum for the pay-one rights to Walt Disney films beginning next year. This includes films from Pixar, Marvel, and Lucasfilm, thus giving Netflix access to a number of blockbuster film franchises through this one deal. Netflix has also signed exclusive deals with some smaller studios, such as The Weinstein Company.

Netflix has been even more active on the original programming side. Two of its early original programming efforts, House of Cards and Orange Is the New Black, have had significant staying power. Netflix is also constantly launching new original series. It's even investing in original movies, such as a series of Adam Sandler films and a Crouching Tiger, Hidden Dragon sequel.

Another step down the road
All of this new programming will be great for Netflix subscribers. However, original programming and exclusive first-window rights for reruns are expensive by nature. As a result, Netflix has had to cut back on its non-exclusive programming to fund these investments.

Netflix is doubling down on originals and exclusive content. Photo: The Motley Fool.

Most recently, Netflix announced in a lengthy blog post that it didn't renew its output deal with Epix, which holds the pay-TV rights to major film studio Paramount Pictures, as well as mini-majors MGM and Lions Gate. As a result, popular movies such as Hunger Games: Catching Fire and Transformers: Age of Extinction will leave the Netflix U.S. service at the end of September.

The blog post lays out the logic for getting rid of these popular films: "While many of these movies are popular, they are also widely available on cable and other subscription platforms at the same time as they are on Netflix and subject to the same drawn out licensing periods. Through our original films and some innovative licensing arrangements with the movie studios, we are aiming to build a better movie experience for you."

Netflix's management thus implies that customers will be better off under the company's new strategy. Indeed, Netflix subscribers will get some theater-quality movies available for free on the service at the same time they hit the big screen. Netflix is also broadening its original series roster to cover all genres so that there's something for everyone.

As exclusive content becomes the norm, people will need to subscribe to more services to get the content they want. Photo: The Motley Fool.

The downside is that the Netflix streaming service will become less and less comprehensive. You will still be able to access the content that Netflix is giving up -- you'll just have to pay for a different premium network or streaming service to get it.

For people who have cut the cord to save money, this is bad news. There will still be plenty of stuff to watch on Netflix, but if you want a broader selection of movies and TV shows, in the future you may need to subscribe to three to five streaming services. That could set you back $40 a month or more. Add in a live TV service such as Sling TV, and you'd be approaching cable-like fees.

What's good for Netflix isn't always good for customers
Netflix is betting big on exclusive access to a relatively small stable of curated content so that it has "must-watch" content, no matter what your tastes. For movies, it is also pushing hard to close the gap between when a film hits theaters and when it is available for streaming, which will improve the customer experience.

These attributes all make Netflix a great competitor for HBO as a premium subscription service. Netflix, like HBO, is trying to become indispensable for many people so that it can acquire and maintain a massive subscriber base.

However, being indispensable is not the same thing as offering the best value. Many cord-cutters want Netflix to be a cheap one-stop shop where they can find almost any movie or TV show worth watching. Netflix is moving further and further away from that model every year. For better or worse, Netflix has decided that it's better to have a few things that its customers can't give up than to offer a huge selection of content that's also available elsewhere.

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