Why Apple might want to get into original content

Kevin Spacey in Netflix's "House of Cards"
Source: House of Cards | Facebook

Ever since the success of Netflix's "House of Cards," digital video companies have been racing to create their own shows. But, if Apple's reported foray into original programming is indeed true, it could mark a new major player in the digital production landscape.

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Sources told Variety that the technology company is moving to produce original video programming next year in order to compete with existing streaming services. An Apple spokesperson declined to comment on the rumor.

The trend of streaming video companies investing in original content is only increasing as more audiences cut the cord and turn on mobile screens and digital devices. Having a platform that simply hosts existing movies and TV shows is not enough to distinguish one company from the rest. Apple's entering the arena may signify its belief that the streaming video industry is only going to grow even larger and that it wants a piece of the revenue.

"The reason they're doing it is the reason everybody else is doing it: So much viewing is shifting to digital platforms," said eMarketer senior analyst Paul Verna. "Particularly for subscription-based companies, there's a direct link between the subscription audience and the quality of content you offer."

Strategy Analytics Director of Digital Strategy Mike Goodman likened the move to create exclusive content to what HBO did to make itself a powerhouse. The premium cable network was known as a movie channel, but it wasn't until it invested in "The Sopranos" that it became known as a place for premium programming, he said.

Netflix, too, recently announced that it was ending its contract with Epix in order to focus more on creating exclusive content.

Likewise, Amazon has found success with "Transparent" and is adding many new shows, including Woody Allen's first television series. Hulu has produced originals such as "The Awesomes" and "East Los High," and has upcoming Stephen King-helmed series "11/22/63" on its slate. Sources close to the situation say the company has a "very aggressive" strategy to increase its number of original programs, and is already planning through 2017.

Having an award-winning series exclusively can boost subscription rates. While Netflix has been mum on how many people are actually watching its programs, eMarketer's Verna said it's clear that exclusive content is one of the main reasons it has grown to 62.3 million subscribers. Likewise, "Transparent's" two Golden Globe wins have helped put Amazon shows on viewers' radars.

"As you progress on the growth curve, (relying on licensed materials) is a limiting factor because your audience is set," said Goodman. "If you really want to be a breakout and you really want to grow, you need original content."

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Experts say the strategy works only if your series are critically acclaimed and get positive buzz, which is why companies are doing anything to score Emmys and other accolades. To hedge your bet, you need top talent and creators, meaning these shows don't come cheap.

"It's definitely a high-stakes games," eMarketer's Verna said. "It turns these companies into TV and movie studios, which are beholden to having hits. However you measure it if Apple decides to develop content, and they don't have something that is really popular, they are going to be bleeding money because it does cost a lot."

Netflix was rumored to have paid $100 million for the first two seasons of "House of Cards," which didn't even fully cover production. The series reportedly costs upward of $4.5 million per episode, according to comments made by CAA TV literary agent Peter Micelli at a March 2013 event covered by Variety. Production company Media Rights Capital covered the additional funds through additional deals, including an international distribution and home video contract with Sony.

While that may seem pricy, the numbers are well within what networks pay for television dramas. Strategy Analytics' Goodman pointed out that most online series tend to avoid more expensive types of shows that may need location shoots or computer graphic animation. For comparison, HBO's "Game of Thrones" costs about $6 million per episode.

Goodman said Netflix placed its biggest gamble on "House of Cards" since it was its first original series, bringing in Kevin Spacey, Robin Wright and David Fincher. After it cemented its Emmy wins, subsequent shows have used smaller name actors and showrunners. Micelli noted that Netflix shows "Hemlock Grove" and "Orange Is the New Black" cost $4 million and a little under $4 million an episode, respectively.

With the increasing cost of licensing existing television shows, creating your own is also an alternative way to boost content. Streaming companies previously relied on television networks' repertoire of shows. TV networks were happy to give lower-cost contracts because they wanted to see the streaming industry grow. However, as streaming platforms became more successful and more competition entered the marketplace, the price has gone up.

By creating the shows themselves, streaming video platforms get content at a lower cost. They retain rights so they can broker other distribution and licensing deals for secondary windows, DVDs and electronic downloads. Goodman said Netflix aired "House of Cards" in France and Germany before it entered those markets. Not only did it get advertiser revenue from those airings, it provided additional publicity for the company before it launched in those countries.

And, while these shows may not have advertising breaks, brands are finding opportunities to bake themselves into the episodes. Season three of "House of Cards" featured product placements from Anheuser-Busch InBev and Samsung.

"Brand integration through content experience is not an ad that interrupts great storytelling," digital strategist BRaVe Ventures co-founder Jesse Redniss said. "You're seeing many more brands take that approach with content from companies like Amazon and Hulu leading the way."

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Apple does stand out because it doesn't offer a streaming video service, yet. Redniss points out original programming could be the technology company's way to pave future relationships with production companies for other areas of business.

But if Apple's motive was to create a competitor to Netflix and other services, EMarketer's Verna believes it's too late. Verna argued that the company has had its biggest successes when it's entered the market with a new product or vastly improved existing offerings, such as the iPhone and iPad. However, he said it's had less success when consumers are already happy with existing services. For now, customers seem very content with market leader Netflix.

"There's nothing that they are doing poorly that you can see a company like Apple come in and blow them out of the water," he said.