Netflix Originals

Netflix Originals are films, series, documentaries, and specials exclusively branded and distributed on the Netflix streaming platform. This label, however, covers more than just content produced in-house. It represents a fundamental strategic shift from being a simple content licensor to a global content powerhouse. Initially, Netflix relied on licensing shows and movies from established studios. But as competition heated up and studios began pulling their content to launch their own streaming services (like Disney+ and Peacock), Netflix was forced to make a bold, multi-billion-dollar pivot. By creating its own library of exclusive content, Netflix aimed to build a powerful economic moat. These “Originals” are the bait to attract new subscribers and the glue to retain existing ones, giving the company a unique asset that competitors cannot easily replicate and reducing its long-term dependence on third-party content providers.

The “Original” tag is an umbrella term for different content acquisition strategies, each with different implications for ownership and long-term value. For an investor, understanding this distinction is key.

• Fully Owned & Produced: These are the crown jewels. Shows like Stranger Things or The Crown are developed and funded from the ground up by Netflix. This means Netflix owns the intellectual property (IP) outright, giving it complete control over global distribution, sequels, merchandise, and other revenue streams. This is the most valuable category.
• Exclusive First-Run Licensing: In this common scenario, Netflix acquires the exclusive rights to distribute a show made by another production company outside its original country. For example, the British show Peaky Blinders is a “Netflix Original” everywhere except the UK. Netflix doesn't own the IP but has secured exclusive streaming rights, making it a vital part of its international catalog.
• Co-Productions: Here, Netflix partners with other studios or networks to share the production costs. In return, they typically share the distribution rights, with Netflix often securing exclusivity in most global markets.

The entire Originals strategy is a classic example of building a competitive advantage. In a world where anyone can license a library of old movies, exclusive, must-see content becomes the key differentiator.

• Brand and Stickiness: A hit show like Squid Game or Bridgerton becomes synonymous with the Netflix brand, driving conversations and new sign-ups. Once subscribers are invested in multiple original series, they are less likely to cancel their subscription (a concept known as 'reducing churn').
• Pricing Power: With a unique and desirable library, Netflix gains more flexibility to raise its subscription prices over time without losing a significant number of customers. This is the definition of pricing power.
• The Flywheel Effect: The strategy aims to create a virtuous cycle, or flywheel effect. Hit shows attract more subscribers, which generates more revenue. This revenue is then reinvested into creating even more high-quality original content, which in turn attracts even more subscribers.

Building a global studio from scratch is breathtakingly expensive. For years, Netflix's content spending—a form of capital expenditure—dwarfed its income, leading to massive corporate debt and negative free cash flow (FCF). This is the central risk for investors. The company was betting that this short-term pain would lead to long-term dominance. To understand the financials, you must grasp amortization. A $200 million movie is a huge asset. Instead of booking the entire cost in one year, Netflix spreads (amortizes) that cost over the asset's expected useful life (typically a few years). How a company chooses to amortize its content can significantly impact its reported profits. Aggressive amortization (writing it off quickly) can depress short-term profits but gives a more conservative view of the asset's value. The ultimate goal is for the lifetime value (LTV) of the subscribers drawn in by the content to vastly exceed the cost of producing it.

When analyzing a company so heavily invested in a content strategy, traditional metrics are only part of the story. A value investor should focus on:

• Subscriber Growth and Churn: Is the content investment translating into more customers and, just as importantly, are they sticking around?
• Content Spend vs. Revenue Growth: Is the massive spending generating a proportional increase in revenue? Look for the gap between the two to narrow over time.
• Free Cash Flow (FCF): The ultimate sign of a sustainable business. When, or if, will the company start generating more cash than it spends on content and operations?
• Debt Levels: How is the content being funded? A high debt load can be a major risk if subscriber growth falters.
• Average Revenue Per User (ARPU): Is the company successfully exercising its pricing power to earn more from each subscriber?

The Netflix Originals strategy was a high-stakes, capital-intensive gamble to transform the company from a media distributor into a global media creator. It successfully built a powerful brand and a deep library of owned or exclusively controlled content. For a value investor, the core analysis revolves around a simple question: Does the economic moat created by this exclusive content library justify the mountain of debt and years of negative cash flow it took to build? The answer lies in the company's ability to eventually slow its spending, retain its massive subscriber base, and turn its market leadership into sustainable, cash-generating profits for its owners.