Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Nobody Really Knows If Netflix, Inc. (NFLX) Originals Are a Success

Recently, Internet streaming video service Netflix, Inc. (NASDAQ:NFLX) has been making an aggressive push into producing original content. The company dipped its toe into the water last year with Lilyhammer. This year, the company has ramped up its lineup of originals, with shows such as House of Cards, Hemlock Grove, and a new season of the cult hit Arrested Development.

Original content is by far the most expensive type of content for Netflix, Inc. (NASDAQ:NFLX) to acquire. With so much money on the line, it’s particularly important for Netflix to invest wisely. As a result, shareholders have been looking for clues to understand whether the company’s original content investments are working.

Netflix, Inc. (NASDAQ:NFLX)

However, Netflix’s move into original content is part of a long-term strategy to differentiate itself from streaming video competitors, particularly, Inc. (NASDAQ:AMZN). Netflix hopes to increase user loyalty and dampen “churn” by providing a set of compelling content that subscribers cannot find anywhere else. Investors should be very cautious about drawing any conclusions about the success of this initiative until it has had a couple of years to play out. The long-term nature of this strategy makes it dangerous to use any short-term metrics to measure its success.

Renewals: sign of success or meaningless metric?
In the search for metrics of success, some investors have made a big deal out of the company’s decision last month to renew horror series Hemlock Grove for a second season. While most critics panned the show, Netflix, Inc. (NASDAQ:NFLX) bulls have argued that the decision to renew it proves that it succeeded with its target audience. According to one commentator, the Hemlock Grove renewal demonstrates that the algorithms Netflix uses to inform original content decisions are working.

However, Netflix has been renewing all of its original series thus far. Last week, Netflix renewed the Jenji Kohan dramedy Orange Is the New Black for a second season, even though the first season won’t be released to subscribers until next week! Lilyhammer was renewed for a second season after its debut last year, and House of Cards was picked up for two seasons from the get-go. Of the originals that have aired so far, only Arrested Development hasn’t received a renewal, and that probably owes more to scheduling difficulties than anything else.

So what does a renewal really mean for Netflix, Inc. (NASDAQ:NFLX)? It’s possible that Netflix’s decision to renew virtually all of its original series is indeed a sign that they have been extremely successful. On the other hand, it’s also possible that Netflix is setting a very low bar for renewing a series. After all, a series that has a single season of 10 to 15 episodes won’t do much to drive long-term user loyalty, regardless of how popular it is. Users will get through all the episodes in a couple of months — or even a single weekend — and then need to find other compelling content to justify their membership.

Thus, in some sense, renewing a show for a second season is more of a “no-brainer” for Netflix, Inc. (NASDAQ:NFLX) than picking the show up in the first place. Netflix needs multiple seasons of its originals to keep users busy (and satisfied). The company’s decision to order second seasons of House of Cards and Orange Is the New Black before the first seasons aired suggests that Netflix is willing to give its originals a long leash.

What to look for
Assessing the effectiveness of Netflix’s originals requires patience. Ultimately, the best metric to use is subscriber growth. At this stage in the company’s development, it would be natural to expect Netflix, Inc. (NASDAQ:NFLX)’s domestic subscriber growth rate to slow down. First, the subscriber base has already become very large (with nearly 30 million members in the United States).

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.