Is Netflix Producing Too Much Content?

MarketsMotley Fool

Netflix (NASDAQ: NFLX) is set to release over 1,000 original titles in 2018. The company provided an estimated budget of $7.5 billion to $8 billion on a profit and loss basis, but it's spending even more on a cash basis because of the upfront costs of producing original titles. It could spend as much as $13 billion in cash, according to The Economist. Another estimate from Barclays put the number at $14 billion.

But more isn't always better.

Continue Reading Below

Analysts at Barclays recently voiced concerns that, "The deluge of originals on the service can worsen user experience by making content discovery more difficult." That sentiment is further supported by Netflix's move to increase its marketing budget over 50% to $2 billion this year.

Is Netflix getting ahead of itself with content production?

The paradox of choice

Everytime you log into Netflix, an algorithm helps filter the thousands of titles on Netflix and serve them up to you to make it easy to find something interesting. Netflix said its algorithms helped save the company over $1 billion in 2015, enabling it to spend less on content and improve subscriber retention.

The idea is to reduce the paradox of choice. While Netflix might have thousands of titles, it would be difficult for a subscriber to choose just one. But given just a handful of options on the homescreen, subscribers can usually pick something they'll like pretty quickly.

With an increasing amount of content, though, Netflix's algorithm might not be able to narrow down the options as well. Users may spend more time sifting through titles looking for the perfect show or film for them. That's a bad experience; it's the same experience that made many consumers disillusioned by the massive cable bundle: 200 channels and nothing good to watch.

Enter the marketing budget

Netflix's increased marketing budget, particularly in the United States, is aimed at solving the problem of finding something good to watch. The marketing efforts will go largely toward increasing awareness of Netflix's originals. That way, people will log into Netflix and already know what they're looking for.

When you're pumping out 20 new titles per week, it's practically impossible for any single person to know about every single title, let alone watch them all. But it's also difficult to determine which ones are worth promoting with marketing dollars.

Of course, like everything Netflix does, its marketing plans will likely lean heavily on lots of data. Netflix's first and foremost billboard is the homescreen of its app. It shows images and trailers for upcoming releases that it thinks will appeal to each user. Netflix could use engagement data from those advertisements to push originals that have seen traction on digital and physical billboards everywhere.

While it's a long ways from letting the content market itself, Netflix is poised to use its marketing budget as efficiently as possible. That should give it an edge when it comes to getting the most out of its original titles in terms of engagement and subscriber attraction and retention.

Is Netflix getting ahead of itself?

Netflix's primary focus is subscriber growth. Anytime it talks about changes to its platform -- content spending, price increases, format changes -- it's always talking about its customers. So, the evaluation of whether Netflix's content spend and the related marketing spend are judicious really comes down to how it all affects subscriber growth.

The results speak for themselves. Netflix added over 26 million subscribers in the trailing 12 months ending in March, nearly 6 million of those in the "saturated" U.S. market. As long as Netflix continues to add subscribers at that kind of pace, the content spending is working. At some point, the company will hit an equilibrium where increased spending doesn't result in a meaningful increase in subscribers, but that day still seems far away.

10 stocks we like better than NetflixWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Netflix wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.