Netflix's 2017 Data on Most Binged Shows Proves Its Content Strategy Is Working

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Netflix's (NASDAQ: NFLX) reign was established back in 2015 when Collins' dictionary named "binge-watch" as its official word of the year.

And that reign has continued this year, as Netflix members around the globe watched over 140 million hours of content per day on the streaming site, the company reported. That translates to more than a billion hours per week.

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Netflix said the most popular viewing day of 2017 was Jan. 1, which means we're less than a month away from potentially the most popular viewing day of 2018.

Spending billions to make bingeable content seems to be paying off for Netflix.

Netflix expects to spend up to $8 billion on content in 2018

Netflix raised eyebrows when it spent $5 billion on content in 2016 and estimated it would spend $6 billion on content in 2017. But the site has managed to grow its revenue and increase subscribers while continuing to increase its content spend.

In 2018, Netflix expects to spend $7 billion to $8 billion on content, Netflix CFO David Wells said on the latest earnings call.

"We really do enjoy the benefits of owned productions, and you are seeing us move more and more of our mix, our content mix, to owned productions," Wells explained.

Investors remain mostly content, considering Netflix's third-quarter revenue grew by 33% year over year to $2.98 billion. Revenue topped expectations, partly because of the 7% increase in the average price that subscribers pay each month after Netflix raised prices in early October.

High-quality content is increasing Netflix's stickiness

Netflix is up to 109 million subscribers as of the third quarter, from 86 million in the same period a year ago. Just in the latest quarter, Netflix managed to add 5.3 million new subscribers globally, topping its own forecast for 4.4 million new subscribers.

This steady uptick in subscribers is evidence that Netflix's focus on producing high-quality movies and TV shows is helping it keep its current subscribers, while also adding new subscribers who have been persuaded by Netflix's advertising or, more likely, by word-of-mouth advertising.

"I think [the growth in subscribers] might be just a reflection of the steady drumbeat of high-quality content that people are watching, that are not necessarily all concentrated in the same pockets," Chief Content Officer Ted Sarandos explained in the earnings call.

Those who are already a part of Netflix are addicted to it, while those who aren't a part of it are being sucked in by the high-quality content that continues to make headlines.

More original content means less dependence on licensing

Netflix maintains that its content library will be at least 50% original content by 2020. That means Netflix's reliance on licensing deals with other companies will continue to drop over the next two years.

That's good news for the investors who were spooked by Disney's (NYSE: DIS) sudden announcement in October that it will pull its content from the streaming site after 2018 to start a competing service.

When viewers are made aware that they're watching original content on Netflix, it reminds them that their subscription is worth it for this exclusive content, Wells said. Original content on Netflix has come to represent the highest tier of content on the site.

"At the end of the day, to the consumer what's important is that it's exclusive and only on Netflix," Wells said.

Producing more original content isn't just about delighting its viewers, though. The sudden breakup with Disney was a wakeup call that Netflix can't be too reliant on outside content producers.

Sarandos sought to calm any fears that other licensing partners would suddenly drop out by saying he's confident that the shift to more original content won't be "erratic," since they have long-term agreements with their partners. By the time the deals run their courses, Netflix will have had time to further build up its original content base.

Netflix continues to improve operating margin

Netflix's winning content strategy that's pulling in subscribers around the globe means the company is steadily improving its operating margin. The revenue, subscriber additions, and operating margin are all interconnected and steadily improving.

Netflix's operating margin has been a concern for investors in the past as the company continues to up its spending. However, the company said growing global operating margin is now its "primary profitability metric."

"This allows us to avoid near-term optimization for specific domestic or international contribution margin targets which could impede our long-term growth," the company wrote in its latest earnings report.

Netflix is projecting 7% operating margin for 2017, up from the about 4% annual operating margin it's maintained for the past two years.

Netflix clearly took the harder road with producing its own content, but it's paying off in the long term. While spending billions on content has cut into revenue and what's left for investors, the strategy is obviously working as people around the world jump on the bandwagon to watch the latest hit series.

Netflix's story is one I'd binge-watch any day.

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Natalie Walters has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.