This key sentence from last month’s Netflix quarterly earnings reports, which went unnoticed at the time, may actually suggest that Netflix’s binge-viewing strategy is detrimental to Netflix’s bottom line:
“We are in the early stages of original content, and continue to monitor whether the viewing pattern is higher than initially expected in the first few months to suggest that we amortize at a faster initial rate.”
If that doesn’t mean anything to you, you’re likely not alone. But if you parse the sentence and extrapolate it, as Variety has done, the bottom line is that the way Netflix’s original content is being consumed could force the company to accelerate spending. That’s bad.
In other words, Netflix — which certainly must have anticipated binge viewing — may be concerned that the lifespan of their original series aren’t as long as anticipated. To wit: If they paid $100 million for a season of House of Cards, they expected to absorb that costs over a prorated period of, say, two years at $50 million a yeara in anticipation that the series would continue to receive steady viewership in year two. What they may be seeing, however, is that viewership in their original series is eroding faster than anticipated, and therefore instead of deferring spending, they’d need to spend $80 million in the first year and $20 million in the second year to reflect how the series is being watched. For shareholders, that’s not great news.
Indeed, what they are finding is that original series do not perform like the rest of their library. If they license a season of Scrubs for four years at $20 million, for instance, they might expect that 5 million people will stream it each year, and they’d spend $5 million each year. But with original series, they’re seemingly discovering that, of the same 20 million people watching, 15 million are watching it in the first year, which means significantly larger upfront costs.
A more succinct way of saying that is: More front-loaded viewing means more front-loaded spending, which means lower stock prices in the short term. Or, as Variety put its: Netflix “may be forced to bring itself in line with traditional industry bean-counting precisely because of its boldest practice.”
What’s unclear, however, is whether Netflix would simply have to change its accounting method, or change its entire programming strategy in order to increase the lifespan of their series. It would seem to me that the enthusiasm level for a great series like Orange is the New Black would start high and increase over the course of three months if the series were released on a weekly basis, rather than seeing the enthusiasm level spike and then subside after a series is quickly consumed.