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Soon Netflix, Inc. Won’t Need To Spend Much On 3rd-Party Content

Netflix appears to be performing quite well in European markets, but will that continue? Questions about international subscriber growth were raised after the last earnings report, and this is a huge problem for the company as many bulls have been hanging their thesis on international growth. However, the root of Netflix’s success may be original content as UBS analysts believe the company’s spending on third-party content may not grow much more from where it is now.

In fact, as it increases its library of original content, it will offset all the third-party content that’s missing as many have noticed lately that the company’s full library, including third-party content, has been shrinking.

Content ramp the key

In a report dated May 22, UBS analyst Doug Mitchelson and team highlighted research done by one of their colleagues on the video streaming market in Europe. There’s no doubt that the competitive landscape in the region is changing, but Netflix appears to be well-positioned in the major markets it currently is in, despite intensified focus from local competitors and also Amazon, which entered the U.K. and Germany before it.

The UBS team noted that Netflix is enjoying success while it is still early in its shift toward a focus on original content with global rights. Management has said that in their international markets, only about 20% of the content being consumed by subscribers is local content, while the rest is U.S. content. They continue to believe that U.S. content travels well everywhere, the UBS team noted. Netflix has been heavily invested in making its U.S. originals travel well as it employs a huge staff just to translate the original talk show featuring the filthy humor of Chelsea Handler into multiple other languages.

Based on this, the UBS team doesn’t expect the company’s spending on third-party content to grow much from where it is now. This year it plans to produce 600 hours of original content, but next year, that amount is expected to surpass 1,000 hours, said the UBS team. They also point out that as the company spends money on original content each year, it expands the amount of cumulative original content in its library. By 2020, subscribers will have more than 8,500 hours of Netflix original content available to them.

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A related positive is that usage per subscriber is still increasing in the U.S. and in international markets, which means that programming cost per hour of consumption should continue to moderate, UBS noted.

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So far it seems that Netflix’s bet on original content is paying off too as a recent survey indicates that about half of subscribers think its library is improving.

Netflix prepares for big movie releases

While original content may be the key to Netflix’s success, it isn’t giving up entirely on third-party content. This summer the company will be adding a number of major films to its U.S. library, including The Do Over, which is Adam Sandler’s second Netflix original film; Academy Award-winning film Spotlight, and Sundance hit and Netflix exclusive The Fundamentals of Caring. Also this summer, the company will be adding The Big Short, which was nominated for Best Picture at the Academy Awards, and Brahman Naman and Tallulah, both of which the company acquired the rights for after they were hits at the Sundance Film Festival.

Also coming to Netflix are some older films, including three moves from the Jurassic Park franchise, the Back to the Future and Lethal Weapon movies, The Fast and the Furious, The Wedding Planner, and St. Vincent. Additionally, the company’s deal with Disney begins in September and makes it the only pay-TV home in the U.S. for Disney’s Marvel, Lucasfilm and Pixar movies. Stifel analysts see the Disney deal as potentially being “a game-changer for Netflix’s U.S. movie offering.”

Netflix shares climbed by as much as 2.23% to $100.07 during regular trading hours on Wednesday.