The term “Original Series” is a relatively new one. Originals, of course, have existed since the dawn of television (or technically radio), but they only began receiving this label in the mid-2000s. At 8:59PM Sunday night, for example, audiences suddenly began to hear phrases such as “And now, the AMC Original Series Mad Men.” The advent of “Netflix Originals,” which were heavily branded as such, solidified this trend in 2013. Five years later, it seems everything is marketed this way – a show simply has to be a TNT Original, an FX Original, an ABC Original or some other Acronym Original (this piece is also published as a REDEF Original).
Using the phrase “Original Series” (or some similar label) was superfluous for the first sixty years of TV. Until a series hit syndication (which took at least five years), ABC shows were on ABC, NBC shows were on NBC, and so on. There was no SVOD window, no “rolling five” window on Hulu and/or the network’s TV Everywhere app, no ability to purchase or rent an episode on iTunes, etc. Furthermore, there were only a handful of networks; it wasn’t hard to know what was on, on which-ish night and around what o’clock. Linear distribution plus episodic (versus serialized) storytelling also meant that audiences didn’t need to see every episode of a show to tune in to the occasional one. In fact, even a series’ biggest fans tended to watch fewer than 50% of the show’s original airings. As a result, even primetime TV viewing was relatively passive, dispassionate and accidental. Most viewers simply watched whatever happened to be on, and then watched whatever aired next on that same network.
But the sudden rise in the number of cable channels, the deluge of original content (“peak TV”) and advent of on demand access and a la carte subscriptions meant that networks’ needed strong, distinct brands in order to attract and retain audiences. As such, it made sense to clearly brand their signature product: primetime original series. If they didn’t, audiences wouldn’t know where to watch their shows (or at least, not until they ended up on Netflix) and wouldn’t know who to credit for the show in the first place (how many people believe Breaking Bad is a Netflix Original not an AMC one?)
Netflix, however, brandishes the term “Original” as a weapon – not just as a calling card or audience aid. The company boasts that it will launch 700 total original series in 2018 (or 14 per week) and offer more than 1,000 by the end of the year. This raises the question of what, exactly, is an “Original” – and how could Netflix possibly produce several times more than HBO, Amazon, Hulu, Starz and Showtime combined? The answer is simple: “Original” isn’t a technical definition but a marketing one. And thus not only is the definition of “Original” vague, it also differs from network to network. And no one has a wider definition than Netflix. Understanding this difference is critical for any attempt to benchmark SVOD services – whether it’s regarding the number of originals produced by Netflix v. HBO, or how much Netflix spends on originals v. HBO, or the returns these originals generate, or whether a network is even any good at making them in the first place, and so on.
So What Does an “Original” Even Mean?
Excluding sports, a streaming service has five core types of programming (fairly simplified):
#1: “Developed Originals”
These are shows developed, produced and released by the network or service that airs them. In this case, the network/service (for simplicity’s sake, we’ll say “Netflix”) can brand the show as desired, controls all creative and budgetary decisions, has full flexibility in renewal or cancellation decisions, and typically owns all IP rights. A “Developed Original” might come from an independent writer/production company, or from a writer/production company with an overall or first-look deal with Netflix. To purchase and release the show, Netflix would therefore only need to cover the cost of production.
Netflix brands all “Developed Originals” as “Netflix Originals”, with examples including Stranger Things or Santa Clarita Diet.
#2: “Acquired Originals”
These are shows developed and produced by a third-party studio, but where Netflix has acquired exclusive rights to air the series (typically by outbidding competitors, acquiring the series before competitors have had a chance to bid, or by having previously paid for a first look, or overall deal with the studio). In this case, Netflix can brand the show as desired, has strong (but far from total) creative control and solely manages renewal and cancellation decisions (though multi-season fee guarantees may have been needed to win the show). However, Netflix would not own all IP rights (e.g. no apparel, merchandise, etc.). An “Acquired Original” may come from an independent writer working with the third-party studio, or from a writer/studio with an overall or first-look deal with said studio. While this creative talent would interact with Netflix and have their output distributed by Netflix, they don’t work for Netflix.
Acquired Originals require Netflix to a pay a premium of anywhere from 15-55 percent above production cost (for exclusive worldwide rights) to the producing studio. Notably, this surcharge not only represents guaranteed profits for the producing studio, it also contributes nothing to the on-screen production quality (i.e. none of it goes to better special effects, bigger casting, etc.). Acquisition agreements also make it harder (and more expensive) for Netflix to change a series’ budget or season length. If Netflix wants to reduce a show’s 10-episode budget by $1MM per episode, for example, they would need the producing studio to accept a $1.5-4.5MM reduction in their own net revenue. To solve this, Netflix might even continue paying this fee despite the budget cut – but this means saving only $450-850k for every $1MM reduction in the on-screen budget. Budgetary increases are contractually easier (everyone likes more money), but it means that a $1MM increase intended to make a show feel “bigger” or more “cinematic” could cost $1.15-1.55MM.
Netflix brands all “Acquired Originals” as “Netflix Originals”, with examples including The Crown, Narcos and Daredevil. Notably, the first season of the Netflix Original, The Unbreakable Kimmy Schmidt, was written and filmed for NBC, but the network later decided to shift away from scripted comedy programming and resold its (incomplete) rights to Netflix.
#3: “Co-Licensed Originals”
These shows start as “Acquired” or “Developed Originals”, but their market rights are ultimately split between multiple networks before the series enters production (i.e. a co-financing agreement). For example, Network X may develop Show Y in the US, then wait until they’ve secured various international co-licenses with Networks A through G before beginning filming.
To co-license a show, Netflix would commit to a given percentage of its total production budget – a figure which would vary based on the number of market rights bought and competition for said rights. Accordingly, Netflix can end up paying a substantial portion of the production budget for only a single market (e.g. 60% for just the US rights), and sometimes more than 100% for all rights outside of the developing network’s home market (thereby making the show essentially “free” for that network). For example, Netflix is believed to cover more than 100% of the cost of CBS All Access’s Star Trek: Discovery for the exclusive rights to the series in most non-US markets.
The co-licensor’s ability to influence creative, budgetary and renewal/cancellation decisions usually depends on the share of the total budget they cover, as well as their leverage (e.g. how competitive the bidding was, whether it’s original or pre-existing IP, whether the originating network is licensing the IP or owns it, etc.). To this end, Netflix is believed to have virtually no control over Star Trek: Discovery’s creative or budgetary decisions (though there would be pre-defined maximums), and may be forced to buy it for as many as five seasons regardless of whether the show performs well on their service or not. Even where influence exists, there are risks. The primary network may decide the show isn’t working for them and choose to cancel the series or dramatically reduce the budget. While Netflix can solve this by raising their share of the production budget, this isn’t always practical as it also means financing the show for other co-licensors and/or trying to reclaim rights that aren’t for sale.
Netflix brands all “Co-Licensed Originals” as “Netflix Originals”, with examples including The End of the F****** World and Frontier.
#4: “Licensed Originals”
These are shows developed, produced and aired by other networks (either as “Developed Originals” or “Acquired Originals”), and then later bought by another network for original/first/exclusive airing in another country. This sounds like a co-license, but instead of co-financing production, the network wins a bid for the rights after the show (or some of it) has been produced. Accordingly, Netflix typically needs to negotiate branding rights, has no control over any creative or budgetary decisions, holds no control over renewals or cancellations and has no IP rights. The price here is once again based on a competitive bidding process, and as a result, Netflix might end up paying more than 100% of the production budget for non-US rights. While these deals are more expensive than pre-bought “Co-Licenses”, they’re also less risky as the finished product, or some sample of, is typically available to watch before the deal is made (and occasionally, these deals are made years after a show first airs in its original market).
However, these deals have several downsides. For one, market rights are more likely to be sold individually – thereby making it hard for a global network like Netflix to acquire global coverage. This also exposes the licensing network to additional renewal and cancellation risks. If the show isn’t working for Netflix, but is working for the licensor, Netflix can be forced to keep paying for subsequent seasons (which tend to get more expensive). And if the originating network decides to cancel the show, Netflix’s limited set of rights makes it incredibly tough to save the show. For example, the originating network may have already sold SVOD rights in the show’s local (and therefore primary) market to a Netflix competitor.
Netflix brands all “Licensed Originals” as “Netflix Originals”, with examples including Designated Survivor in the UK and Better Call Saul everywhere but the US, Canada, Australia and New Zealand.
#5: “Licensed Series”
These are shows developed, produced and originally released by another network (either as a “Developed Original,” “Acquired Original,” “Co-Licensed Original,” or “Licensed Original”), but where Netflix buys the rights to air the series following its initial release (and typically on a non-exclusive basis).
Netflix does not and cannot brand “Licensed Series” as “Netflix Originals”. Examples include The Office and Friends in the US.
So Why Does This Matter?
There are debates as to which of the aforementioned categories should or shouldn’t be considered an Original. “Developed Originals” (category 1) are clearly Originals. “Acquired Originals” (category 2) represent the vast majority of originals on TV, and given a network’s creative involvement in this content, seem impractical to exclude. “Co-Licensing” (category 3) is debatable. While shows in this category likely needed the co-licensing partner in order to go into production, as long as other potential partners existed the show would likely have too. And it feels incorrect to say a show is a given network’s original if the network has no creative control or input into the series and may have bought it long after production (category 4). Note, too, that many originals change categories – Black Mirror and Designated Survivor began as a “Licensed Originals” for Netflix, but have since become “Developed Originals” (even though these series were actually “developed” by ABC Studios and Channel 4, before being cancelled and then picked up by Netflix). These quibbles may seem academic, but making a distinction between the categories is critical to understanding the video industry overall.
Comparing Programming Volumes and Value
Inconsistent branding conventions means that broad statements like “Netflix will premiere 470 original series by the end of the year” or “Netflix will launch ten times more original series than Amazon and Hulu put together” are hard to compare and mostly meaningless. While every network brands categories 1 and 2 as “Originals”, Netflix is unique in doing so across every eligible title from category 1 through 4. Furthermore, there are significant variations in how categories 3 and 4 are used depending on the network. Amazon, for example, only occasionally brands its ten or so annual “Co-Licenses” as originals. HBO always brands its “Co-Licenses”, but the network airs at most one or two per year. Hulu, meanwhile, has no series in this category. Amazon is also selective with category 4 (most of which are presented as though they were in category 5 – i.e. without branding) – and neither HBO nor Hulu have any series in the category to begin with.
Exacerbating this comparative branding problem is the fact that these networks don’t use sub-brands for their originals based on provenance – even though the differences often matter to audiences. A small international import, for example, tends to have different appeal than a signature, US-developed original.
Without breaking down a network’s original programming by category, it’s also impossible to properly judge how its global catalog is improving. An “Acquired Original” might launch in nearly every single Netflix market, while a “Licensed Original” might launch in only one – yet they both count as a single original. Put another way, 470 “Originals” might launch on Netflix in the second half of 2018, but how many “Originals” will launch in the US (which is close to half of Netflix’s user base)? I track the industry closely and have no idea. However, this ambiguity (which Netflix does nothing to clarify and seems to prefer) certainly aids the company’s marketing message and share price. Put another way, redefining the phrase “Original Series” may literally be worth billions to Netflix.
It’s true that branding every exclusive series a “Netflix Original” can backfire. A reputation for “bad” original programming will eventually reflect on the company’s overall B2B and B2C brand – thereby making it harder to attract talent and convince audiences to try new series. And it’s harder to manage quality over hundreds of series (especially when you don’t own most of them) than 10 to 20 as Netflix’s peers do. However, quality remains subjective. Big Bang Theory, for example, is considered terrible by many – but superb by many more. However, Netflix’s recommendations can hide shows whose “quality” or “style” don’t meet a given viewer’s “taste.” And unlike linear networks, truly “bad” shows can be buried entirely.
Netflix also isn’t being positioned as a network of “outstanding quality”. Unlike HBO, audiences aren’t subscribing to Netflix just because it has outstanding content (which it does have), but because it has an enormous catalog that can be watched for hours each day. And crucially, even the most discerning viewers don’t want to watch five hours a day (the US per capita average video time per day) of A+ content; sometimes they just want to watch TV on the treadmill. HBO, Showtime and Starz aren’t going after casual, passive viewing time. But Netflix is trying to devour every possible minute of time not spent working.
Benchmarking Spend and ROI
Recognizing a network’s relative mix across categories is needed when attempting to compare their relative content investments and “bang for buck.” For example, the vast majority of Netflix’s Originals are “Acquired Originals,” but only one of HBO’s major series is not a “Developed Original.” As a result, Netflix may be spending $130MM or more to get the same volume of product that HBO gets with $100MM (and with that $30MM differential, Netflix is lining a third party’s pockets). Similarly, this delta can easily lead one to underestimate the significance (and impact) of HBO’s increasing originals budget, and/or overestimate Netflix’s budgetary head start.
Even when analyzing a single company, performing a category-by-category breakdown is critical. For example, Netflix has said that they expect originals to eventually comprise 50% of total content spend (as of Q3 2016, they were at 17-25%) and that as of Q3 2018, 85% of “new spend” was on originals. What this means specifically is unclear. If it includes category four (“Licensed Originals”), Netflix is mostly spending that money on market exclusives rather than commissioning and controlling specific titles that it will launch globally. This isn’t that different from Netflix’s historical model of licensing content on a second run or non-exclusive basis (e.g., The Office and Riverdale in the US). Yes, a first run title is more popular and has greater branding significance than a second run title, but audiences have been waiting for shows to stop airing on linear and get to Netflix since the days of Breaking Bad. In addition, conflation means that when Netflix CCO Ted Sarandos’ says that originals are more efficient on a cost per hour watched basis, he’s actually communicating very little. Are Netflix’s “Developed Originals” successful? Or are they just averaged up by low-cost co-licenses and licenses? Similarly, any ranking on the size of Netflix’s original series audiences cannot be divorced from each series’ cost category. The average “Acquired Original” needs to be 30-50% more popular than a “Developed Original” to hit the same cost efficiency (Netflix’s primary metric).
Domestic v. International Perceptions
As Hollywood and Wall Street are both based in the United States, Netflix’s programming quality and brand is primarily assessed based on its US catalog. This is a mistake. Not only are more than half of Netflix’s subscribers now international, Netflix’s library is actually weakest in its home market. Thanks to co-licensed originals and licensed originals, Netflix’s library of branded and exclusive originals is substantially larger and more pedigreed outside the US. In most markets, for example, Netflix’s also offers Star Trek, American Crime Story, Better Call Saul, Fargo and The Walking Dead – all in addition to “Developed” and “Acquired Originals” such as Stranger Things and The Crown. To this point, Netflix’s share of Emmy nominations and winners is several times higher in the UK than it is in the US. At home, Netflix has to compete with the programming produced by world’s best networks and programmers. Abroad, the company has the opportunity to treat these outlets not as competitors, but as suppliers and partners. As a result, Netflix faces not just less competition outside the United States, its offering is also significantly stronger. It’s therefore misleading to assess Netflix’s strengths or prospects based only upon its US offering, brand or critical reviews. And when a given quarter’s original programming schedule looks light, such as Q2 2018, this only really affects US subscriber growth and engagement.
Understanding Comparative Strategies, Strengths and Moats
The composition of a network’s original programming also allows us to better understand the defensibility of their development expertise and brands, as well as their overall business strategies and priorities. HBO, for example, is focused only on developing the highest possible quality of originals that also fit their tightly-controlled brand. As a result, the network’s volume is low and its development efforts focus on “Developed Originals” (which provide HBO with the most control over creative and budgetary decisions). HBO’s unprecedented success under this strategy also speaks to the company’s durability; competitors can’t simply buy-out all would-be “Acquired Originals”, “Co-Licensed Originals”, and “Licensed Originals” and in doing so, crush HBO. To point, HBO has seen the greatest subscriber growth and award nominations in recent years than at any other time in its history – even though the market is more competitive, and more flush with money, than ever.
Like HBO, Netflix uses original programming as a service differentiator. However, the company also use this output to maximize engagement, smother competitors, market the enormity of its overall catalog and value, and to try and offset the thousands of licensed hours of content that are expected to leave the service in the years to come. As a result of these objectives, Netflix is focused on maximizing the total number of originals they release. To do so, it relies heavily on third party-produced titles (i.e., “Acquired Originals”, “Co-Licensed Originals”, and “Licensed Originals”) as this allows the company to most easily and quickly maximize output while minimizing internal development costs and time. As a result, it’s important to highlight that only one of Netflix’s major hits (Stranger Things) is a “Developed Original”. This point is often used to criticize Netflix – and there’s a fairness to this critique. But the provenance of original series is not just immaterial to audiences, it’s imperceptible. And for Netflix, cash spend and “at bats” are key competitive advantages – just as development is HBO’s. Both companies are smart to lean into their strengths and strategies.
Note, however, that the extent of Netflix’s reliance on third party productions is as much about its rapacious appetite as it is about reality. While Netflix has shown a clear desire for more control over its content and been increasingly vocal about driving quality improvements, this ability was historically (and to some extent remains) limited. It takes years to develop a robust pipeline of potential “Developed Originals” – talent deals need to be struck, adaptation rights purchased, scripts churned, etc. You can’t simply spin this up in a few years – partly because the best talent and best production companies tend to be locked up in multi-year deals with third parties. As a result, Netflix needed to look outside the company to access the best content and sate its ambitions. But as it grows and ages, more “Developed Originals” are likely… which brings us to the next point.
Digesting Unprecedented Talent Deals
The difference between “Developed Originals” and “Acquired Originals” also explains ever-escalating investments in overall and first look deals (e.g., Netflix’s reported $300MM deal with Ryan Murphy, $250MM+ deal with Shonda Rhimes and $100MM+ deal with Kenya Barris). While these deals substantially increase Netflix’s fixed costs (i.e., Netflix pays some $125MM+ per year regardless of whether any shows are produced), they allow the company to drastically reduce programming costs over the long run. For example, Netflix has recently bought two “Acquired Originals” from Fox 21 Television Studios that were created by Ryan Murphy. Assuming $50MM per season in production costs and a 40% estimated markup by Fox, Netflix will already be paying at least $40MM per year in addition to the production budget for the right to two series from Murphy. And to get these series in the first place, Fox had to opt against airing them on its own networks (unlike American Horror Story, American Crime Story, Feud, etc.) and Netflix had to outbid the likes of Hulu, Amazon, HBO and others. Which is to say, much of the product Netflix relies on today is not only expensive, it was also passed on by competitors (rightly or wrongly)
By bringing Murphy in house, Netflix will not only have guaranteed access to one of the most prolific and lauded showrunners in the era of Peak TV, they’ll pay no markup on his series as they will be “Developed Originals.” As a result, the company’s breakeven on Murphy’s nine-figure deal is likely around 15 total seasons of TV, none of which actually need to air during the five-year deal (e.g., the 15 total seasons could be three shows that run for five years and premiere a year after the deal ends). And notably, Murphy will have nearly 10 seasons of TV on the air in 2019 alone.
Seeing the Asterisk in “Winner Takes Most”
While OTT video is typically and rightfully seen as winners-take-most, this narrative is complicated by the fact that a variety of ostensible competitors also operate as partners outside their core markets. Hulu, for example, only operates in the United States (Hulu Japan was sold in 2014). As a result, the only way it can finance a big budget “Developed Original” series is if they sell foreign rights (i.e. Hulu’s “Developed Originals” are “Co-Licensed Originals” to networks abroad). These rights can often end up with a Netflix or Amazon, even though these services represent Hulu’s primary competitors in Hulu’s only market. Similarly, Hulu securing an “Acquired Original” such as The Handmaid’s Tale requires the producing entity (in this case, MGM, which actually made the series) to find one or more international licensors (e.g. BBC, Netflix, Amazon), most of whom then rebrand what we commonly understand to be Hulu’s signature show as theirs. Almost all of the forthcoming DC Universe SVOD service’s original content was sold to international services before the first dollar on filming was spent.
This type of patchwork funding (which can span several competitors, not just two) is actually one of the highest growth models in the market today. It’s not that these niche and/or single-market focused networks don’t see a long-term risk here, it’s that they need to focus on making the best possible content for their target audiences. If they don’t, their audiences will just watch content from Netflix or Amazon. But to make the “best possible content” and standout against these services, these services often need to shoot series with budgets so high they can’t be fully amortized/recouped against their own subscribers. As a result, they have no choice but to partner. Meanwhile, the major global services are delighted to take this kind of a deal. Sure, it means they lack the most valuable rights to a given title, but it allows them to more rapidly scale their “original” programming globally, and minimize both the internal production burden and total costs. In addition, financing these types of series can also help Netflix and others meet regulatory requirements for local content investment.
Of course, this type of global partnership model isn’t new. HBO’s The Young Pope, for example, was led by Sky Atlantic (UK, Germany, Italy, among others) and Canal+ (France), with HBO getting US rights and numerous other territories. What’s different is (1) the newest crop foreign partners – Amazon and Netflix – compete against their “partners” in their home markets; (2) older partners, such as BBC and HBO, are increasingly invading (or planning to) enter their partners’ markets; and (3) the cost of these series has grown so substantial that single market and/or niche services need to cede unprecedented creative control to their foreign partners, as they can be covering as much as 80% of the budget. As a result, the creation of new niche services and local market SVODs can actually strengthen Netflix’s global position, even if it steals away some local share over the medium term.
Originals All the Way Down
For all the focus on original series, what they are remains incredibly misunderstood and confused. The nomenclature isn’t as important as how much Netflix really spends, or how it uses technology to compete, or its goal of global domination – but they are a critical weapon in the streaming wars. And that may explain one of Netflix’s greatest insights: audiences don’t care what is and isn’t a true “Original”. They just want to be entertained
Part 1 of this series explained that Netflix spends far more on content than is typically reported. Part 2 explained how (and why) Netflix uses product and technology to economically outspend its competitors. Part 3 explained why Netflix risks so much. Part 5 explained why 2019 and 2020 don’t represent significant threats to Netflix despite the volume of new entrants and their impact on Netflix’s library. Part 6 explained that quality in SVOD is a distraction, if the concept is even real. Part 7 explains why Netflix has been so resilient over the past decade – and why this is likely to continue even as competition intensifies.