Netflix Inc.'s "50% Originals" Goal: What You Need to Know

By Markets Fool.com

Image source: Getty Images.

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You may have heard that Netflix (NASDAQ: NFLX) is doing a radical makeover of its content library. Recent headlines will hammer home the message with perfect clarity:

  • "Netflix Wants Original Content to Make Up Half its Library" -- ScreenCrush
  • "Netflix Targeting 50% of Content to Be Original Programming, CFO Says" -- Variety
  • "Netflix wants 50% of its library to be original content" -- TechCrunch

There you have it, clear as day. Netflix plans to replace at least half of its streaming content library with homegrown material in the image of House of Cards or Orange Is the New Black. Case closed.

Netflix CFO David Wells. Image source: Netflix.

Actually, nope

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That is not at all what Netflix CFO David Wells said at the Goldman Sachs Communacopia conference this week. Close but no cigar. And that's actually a very big difference.

Before digging into the analysis, let me tell you what Wells actually said. Here's the full quote, courtesy of Seeking Alpha's presentation transcript:

I think you should expect us to continue to push toward more 50-50 in terms of original exclusive content and licensed content, but I fully expect us even with the environments that we're in today and the questions that folks are trying to manage their own transition with the consumer that we'll have both, and we'll be producing in a mixture of production models both pure Netflix-owned original co-productions, licensed content, we'll do all of that. But we will be pushing more and more toward a 50% of original exclusive content.

So far, so good. Everything Wells said here could most certainly be interpreted as a goal of having half the catalog populated by Netflix Originals.

But that is probably not what Wells actually wanted to say. Jumping further ahead, he also shared this illuminating detail:

It will take us another couple of years to meaningfully progress more toward the 50% number that I said. So I'd say we are a third to halfway through getting to where we'd like to be.

OK, let's do some simple math here.

If you search the U.S. version of Netflix for some variation of "Netflix original," you end up with 217 results. Some of these are single stand-up comedy specials or short documentaries, or just descriptions of upcoming original shows. But let's be generous and count all of these as current Netflix Originals.

Next, let's be equally generous to the statement that Netflix has reached "a third to halfway" of its intended Originals volume. If 217 titles works out to one-third of the endgame, then Netflix would want as many as 650 original shows and movies ready for American consumers.

Netflix doesn't make it easy to count its current catalog titles, but the excellent Instantwatcher service can help. According to that third-party catalog browsing site, Netflix U.S. offers 4,097 movies and 1,212 serial shows these days. The650 Netflix Originals would work out to just 12% of that content cache.

Swatting down the devil's advocate

You could focus on the 1,212 shows, where something like 600 originals would indeed work out to about half of the catalog. But that argument falls on the fact that more than 70 of the current originals would fall in the "movies" category today. That's one third of the total title count, so you would end up with no more than 440 original series if you stuck with the shows alone. And that's just 36% of the whole serial show selection. Nowhere near 50% here.

You could also argue that Wells was talking about the percentage of material that Netflix customers actually watch. In other words, maybe the CFO simply aimed his original content crosshairs at half of the hours being watched, or gigabytes of data downloaded, or some other traffic-centric metric. But the company is infamously tight-lipped about such measurements, making Wells unlikely to drop traffic targets into casual on-stage conversation.

What Wells really wanted to say

So David Wells didn't choose the perfect words to express his actual point. That's all right -- happens to the best of us. He was probably not talking about the content catalog as such. He must have been thinking about the inflow of new content.

In that light, the math starts to make sense. Instantwatcher says that Netflix U.S. has brought in 137 movies and 56 series so far in 2016 (alongside 61 new seasons of previously available series). Compare that to 20 new series and 23 movies or comedy specials, with a side of 14 new seasons for existing original series, and we're getting somewhere. The all-new material works out to 22% of the total incoming content flow. Throw in the additional seasons and the ratio rises to 29%.

Indeed, 22% is nearly halfway to a 50-50 portion of originals in the incoming content stream. In my eyes, this is the only way to think about David Wells' oft-covered but rarely understood quote.

Image source: Netflix.

What's the big deal?

Ensuring that half of Netflix's new content is of the original kind is one thing. Tossing out third-party material until the entire catalog reaches a 50-50 balance is another, and very different, thing.

Those headlines you saw earlier often veer into worries about having too much original content. Some think the quality of the Netflix catalog could be reduced by too strong of a commitment to original titles. Others see the strategy driving up content costs on Netflix's end, which must lead to either rising service prices or a failed business model.

Both of these potential problems become far less worrisome if you dial back your expectations from 50% of the catalog to 50% of the new stuff.

Of course, keeping this 50-50 model up for long enough will eventually land Netflix in a 50-50 catalog as well. But that would be a very long-term situation, as many of the company's content licenses will remain valid for many years.

So, no, Netflix is not planning to chop out shows and movies from other studios in order to reach an ideal 50-50 balance with in-house productions. Nor is the company aiming to create that allegedly perfect catalog at extreme costs over the next few years. It's business as usual, with a heavy but not insane ratio of originals versus third-party content licenses.

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Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days.

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