Why More Netflix Series Cancellations Are a Good Thing

Netflix (NASDAQ: NFLX) announced the cancellation of Girlboss last week, just a couple of months after it debuted the series based on the story of Nasty Gal founder Sophia Amoruso. The series cancellation marks yet another Netflix show to get the axe following The Get Down and Sense8. Prior to this year, Netflix series cancellations were few and far between.

But the growing number of misses for Netflix is actually a good thing if you ask CEO Reed Hastings. "If anything, you know, what I push our content team on is we should have more things that don't work out," he said at Re/Code's Code Conference in May. "As a leader, you're always trying to get people to take risk, take bets, not be safe, so we're doing more and more entertainment that's somewhat crazy."

Netflix is in a unique position compared to competing premium networks like Time Warner's (NYSE: TWX) HBO. It doesn't have limited airtime to place its series, so it can take as many risks as it wants, and it doesn't have to worry about detracting from another series if it fails. At the same time, as Netflix's content budget balloons, it has to be more honest with itself when things don't work out.

All about return on investment

Talking about the cancellations of big-budget shows Sense8 and The Get Down, Chief Content Officer Ted Sarandos said, "A big expensive show for a huge audience is great. A big, expensive show for a tiny audience is hard even in our model to make that work very long."

It's a traditional way of looking at programming investments, and with Netflix's user data, it has precise information to determine the value of a show. If the return isn't high enough, it's got to go.

Girlboss didn't have nearly the same size budget as those other series, but the equation scales. Perhaps the intervening events between Netflix green-lighting the series and its debut (Nasty Gal filed chapter 11) affected the series' performance. Maybe the series doesn't hold up against the original material in Amoruso's book. Regardless, it didn't perform up to expectations, and Netflix made a quick decision to scrap it.

It's not like everything HBO produces turns out great. Recent examples of big failures include Vinyl and The Brink. But HBO has a much shorter leash for its shows than Netflix. The Brink drew 1.6 million viewers. That might be a hit for some networks, but for HBO, which is working toward mass appeal with every show, it's not going to cut it.

Importantly, Netflix doesn't need mass appeal with every show. If it's going to spend a lot of money on a show, it better have a substantial audience. But if it throws a few million dollars at a new series, and it attracts a million viewers and some new subscribers, it may be well worth it. It's not taking away from anything else Netflix is doing because it has unlimited airtime. And if it attracts tens of millions of viewers, so much the better.

The pressure to differentiate

There's more pressure on Netflix to differentiate its programming than ever before. Amazon (NASDAQ: AMZN) doubled its investments in video content in the second half of last year, and it expanded globally to match Netflix's reach in December. Hulu is starting to hit its stride with original series, and premium cable networks are now available over-the-top as stand-alone services.

As Netflix's content budget stretches to $6 billion, it has to be willing to take risks and recognize when those risks don't pay off. Certainly, there's room to expand the content budget as subscribers grow, but Netflix is already taking on lots of debt to help fund its spending as is. Netflix needs to get more bang for its buck with originals, which means taking more risks and axing shows quickly when they don't work out, whether they're big bets or small ones, just as it did with Girlboss.

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 tripled 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 5, 2017.

Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.