ORIGINAL PROGRAMMING IS THE NEW BLACK NOVEMBER 2016

Ask anyone to name original TV shows available exclusively from SVOD services—Netflix, Amazon, Hulu—and they’ll probably name about five or six: House of Cards, Orange Is the New Black, Transparent, Stranger Things, Difficult People, The Man in the High Castle…

But here are some fun facts. As of July 2016, online streaming services offered not just 5 or 6 shows, but close to 50 original series to its subscribers. And that number is expected to nearly triple in 2017, to more than 130 original shows.

PROJECTED ORIGINALS

BROADCAST PAY CABLE BASIC CABLE ONLINE SERVICES NETWORKS RESEARCH ABC HBO AETN Amazon CBS Showtime AMC Networks Hulu Fox Starz FX Networks Netflix NBC Other NBCU Cable Other PBS Entertainment CW Turner Broadcasting Viacom Other PROJECTED/ APPROX. 150 50 180 130+

Source: Announcements tracked from daily trades, TV Dailis, Studio System, Variety Insight and FX Network Research; Other for Basic Cable includes Audience, Bounce, PopTV; Other for Pay Cable includes Cinemax, EPIX; Other for Online includes CBS Access, Seeso, Crackle, YouTube Red

There are plenty of reasons behind SVOD’s big push into original, exclusive programming. Naturally, those shows, and the buzz they generate, have the potential to both attract non-subscribers to these services and boost loyalty among existing subscribers.

A greater focus on original programs also means less reliance on traditional TV networks, which are growing more reluctant to give up streaming rights. That’s been an especially strong motivator for Netflix, which has taken an even further step away from reliance on third-party sources of content. Up until now, SVODs have licensed most of their original shows from outside producers (e.g., Orange Is the New Black is produced by Lion’s Gate). Instead, Netflix will begin producing many of its original series itself, in its new production facilities—a move that will also give the company complete distribution rights to those shows, domestically and internationally.

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ORIGINAL SVOD PROGRAMS ARE GROWING IN POPULARITY For example, a study published by Centris at the end of 2014 showed that the percent of Netflix subscribers who had viewed at least some of the companyʼs original programming grew from 57% to 72% in just six months’ time1. And a study published earlier this year by Cowen Group showed a 21-point increase, between December 2014 to March 2016, in the percent of Netflix customers who say they subscribe to the service because of its original programming (37% to 58%)2.

The broader upshot can be seen in our own recently released “Conquering Content” study. Among people who say they’ve discovered a new show in the past year, the percent saying they watch it from an online source has been increasing, with fewer watching through “traditional” methods via their set-top box.

VIEWERS ARE DISCOVERING AND WATCHING MORE SHOWS ONLINE, AND FEWER THROUGH THEIR SET TOP BOX

THINK ABOUT A FAVORITE SHOW THAT YOU’VE DISCOVERED AND STARTED WATCHING IN THE PAST YEAR

HOW DO YOU PRIMARILY WATCH THAT SHOW?

% who watch it from a 2014 64% set-top box*: 2015 57% *Live, VOD, DVR 2016 53%

% who watch it 2014 31% from an online source 2015 38% 2016 40%

IMPACT ON SUBSCRIBER GROWTH: THE JURY IS STILL OUT Our Conquering Content study shows that among those who don’t currently subscribe to an SVOD service, 32% say that original shows make them more likely to subscribe in the future. Good news for SVODs, yes, but that subscription intention percentage is soft—of the 32% saying they’re more likely to subscribe, only 5% say original shows make them a lot more likely to subscribe.

Where original shows have a greater impact is on customer loyalty. Among existing subscribers, nearly 7 in 10 say that original shows make them more likely to keep their SVOD subscription, including a strong 32% saying a lot more likely.

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SVOD ORIGINALS ARE EFFECTIVE AT KEEPING SUBSCRIBERS (LESS SO AT WINNING NEW ONES)

DO SVOD ORIGINAL SHOWS MAKE YOU...

…more likely to sign up …more likely to keep for a subscription? your subscription?

32% 5% A LOT MORE A LOT MORE

% 37% 27 A LITTLE MORE A LITTLE MORE

AMONG THOSE WITH AMONG NO SVOD SUBSCRIPTION SVOD SUBSCRIBERS

This boost in subscriber loyalty is also seen in a Morgan Stanley study released earlier this year. A full 45% of Netflix customers in that study said original programming is the reason they continue to subscribe to the service, up more than 10 points from 34% in 20153.

CHANGING ONEʼS STRIPES BRINGS SIGNIFICANT BRAND CHALLENGES The shift from distributor of shows to content creator changes the brand game entirely for SVODs. Consumers address the value of distributors objectively: e.g. based on selection, customer service, up-time, cost, etc.

But content producers are judged much more subjectively. The strength of their brands will ride on the perceived quality and creativity of the shows they offer.

So far, Netflix’s shift from distributor to producer seems to have had a positive brand impact. In the Morgan Stanley study referenced earlier, 29% of consumers rated Netflix as the TV source with the best original programming, beating out HBO (18%). Indeed, what Netflix has managed to achieve—developing shows that rival a network with a 40+-year track record of acclaimed content, and solidifying the link between those shows and the Netflix brand—is remarkable, considering that Netflix’s original programming experiment began only three years ago.

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But remember the figures we cited earlier. SVODs are slated to offer more than 130 original programs in 2017. And that includes 71 from Netflix. Contrast that with HBO, which has remained very selective in its original programming—about 20 comedies and dramas are slated for next year.

"We're at or near the Some have questioned whether any source of programming can capacity of what we can maintain the same standard of quality as its catalog grows at that pay attention to. You could rate—including FX CEO John Landgraf. give me all the money in the world, and I could not make This rapid shift from distributor of content to the source responsible an organization that could for the quality of that content is a classic big-risk, big-reward supervise 71 shows and gamble. It’s a gamble because these services will now be basing give them the level of their brand reputation on intangibles. If viewers feel their shows attention we do." are consistently entertaining and creative—and stand out from shows on other networks—that gamble will pay off in a big way. John Landgraf But if many of these new shows are forgettable, or worse, that’s 4 going to reflect on the public’s perception of the brand.

FORMER WAYS OF MEASURING VALUE NO LONGER APPLY Up until recently, we’ve been assessing consumer perceptions of SVODs as service providers. But in our latest studies, we’ve begun to measure how SVODs perform as content providers: in general, and relative to traditional broadcast and cable TV networks.

As the situation evolves, the questions we’ll keep track of will need to evolve as well. When, if ever, will consumers begin defining Netflix, Amazon, and Hulu solely as TV networks vs. service providers? Will that perception be accelerated by such developments as having Netflix content available through MVPD set-top boxes (à la Comcast)? Will shifts in brand definition come with major shifts in brand favorability? How will consumers assess the quality of shows from those sources—not necessarily individual shows, but the entire gestalt of their content lineup? And importantly, how will all of these perceptions change as SVODs move from offering a limited, carefully curated lineup of shows to a large, diverse slate of shows, across genres—rivaling the diversity of traditional broadcast networks? One thing is certain: the SVOD original programming train has left the station. The big question now is where it will end up.

Sources 1. https://centrismarsci.wordpress.com/2014/11/25/7-in-10-watch-netflix-original-programming/ 2. http://www.forbes.com/sites/greatspeculations/2016/04/18/is-netflixs-investment-in-original-programming-paying-off/#7243b3ce45d4 3. http://variety.com/2016/digital/news/netflix-hbo-best-original-programming-survey-1201750224/ 4. Remarks at Television Critics Association's summer press tour, August 2016

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