The New Digital Original Content Wars
The digital content wars are heating up, with Netflix reporting better-than-expected earnings on Monday. Netflix, along with other distributors, are changing the way they do business by becoming programmers. Original content is their ammunition in a war for consumers.
The first quarter was a turning point in the original content battle: Netflix introduced its first original show, "House of Cards," as its stock moved more than 80 percent higher. And its first-quarter earnings report stressed that the original content strategy is paying off.
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As Netflix reported earnings and revenue—along with net subscriber additions—that beat expectations, it added some color on the success of "House of Cards." The company didn't reveal any metrics on the return on investment on the $100 million investment in the series, but all the commentary was upbeat, and bodes well for other original shows.
"The global viewing and high level of engagement with the show increased our confidence in our ability to pick shows Netflix members will embrace and to pick partners skilled at delivering a great series," Hastings said in his letter to shareholders. "Strong viewing across all our markets gives us faith in our ability to create global content brands in a cost-effective, efficient way."
"Hemlock Grove," which debuted on Friday, was viewed by even more people than "House of Cards" was in its first weekend. And perhaps most important, the acclaim for the new shows is helping with what CEO Reed Hastings calls in his letter to shareholders "the general recovery of our brand."
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The big bet on original content isn't a one-quarter play: Netflix didn't launch "House of Cards" to get a one-quarter bump in subscriber numbers. It is part of a long-term plan to convince subscribers that it has the kind of content, like HBO, that can't be missed.
"I think originals are very important for Netflix to get to the point that people forget about cancelling because they feel like there's always something unique and really interesting coming," BTIG analyst Rich Greenfield said.
However, Netflix faces rising competition in the original—digital—content space.
Amazon announced Monday that its 14 original pilots, which it posted online Friday, were the most-watched TV shows across Amazon Instant Video over the weekend. Amazon posted the pilots to solicit feedback on which it should turn into full digital series. The company didn't disclose which pilots won the best feedback, or which it will be making, but it said that 80 percent of the thousands of reviews gave the shows 4 and 5 stars.
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Amazon is investing in these original shows, with big name talent, just like Netflix, to lure customers to its prime streaming service.
Microsoft is also getting into the game—it's hired a number of Hollywood veterans, including former CBS senior exec Nancy Tellem, to run its Xbox Entertainment Studios. Tellem has been given millions and millions of dollars to spend on original content. This is part of Xbox's plans to build the draw of its video game console as an entertainment hub.
And then of course there's Hulu, which is owned by media giants Comcast, News Corp., and Disney. It has a number of original series and another slate of shows in the works, which it'll showcase for advertisers at its "NewFront" presentation next week.
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And digital distributors aren't just competing with the likes of content companies HBO and Showtime, but also increasingly from traditional distributors. Pay TV provider DirecTV is looking to hold on to subscribers with its own exclusive content. Last week the satellite TV giant announced it has ordered 10 episodes of original drama "Full Circle" from Neil LaBute, in the screenwriter's first move into television.
The definition of television is changing—away from a physical object to a term for premium content flickering on a screen, of any shape, size and location. And with that new terminology comes a whole new slew of players. Tech giant Microsoft and e-tailer Amazon are eager to jump into Netflix's business because they see that premium content is what draws and hooks consumers.
—By CNBC's Julia Boorstin; Follow her on Twitter: