Original Programs Could be 10-20 Percent of Netflix’s TV-related Content within 3-5 years, Executive Says

The push for more original content comes as Netflix, which produced Lillyhammer that premiered in February, prepares for several proprietary series for release in 2013, including House of Cards, Orange is the New Black, Arrested Development and Hemlock Grove. Netflix also has a deal with AMC Network, which has underwritten some content production costs while helping the video service secure exclusive streaming access to The Walking Dead, Breaking Bad and Mad Men. Netflix provides AMC user data that it can use in making programming decisions, Wells said.

Netflix needs to be “disciplined” in deciding whether to produce programming itself or license with a third-party to handle, Wells said. The moves come as Netflix seeks to distinguish itself as a streaming service in a field where it faces stiff competition from Amazon’s Instant Video, Best Buy’s CinemaNow and a variety of services based on Rovi’s Rovi Entertainment Store platform. Netflix also signed agreements with DreamWorks and Relativity Media recently for original content, the former starting in Q4. Three ABC programs also will be available exclusively through Netflix starting in October. While films were once 70 percent of Netflix’s content and TV was 30 percent, the latter has since increased to be 60 to 70 percent of the mix, Wells said.

"We need to be always weighing ‘what if this could get produced by someone else and not necessarily us?'” Wells said. “Originals have an aspect of exclusivity of high-quality content to make sure we are not blocked and using our knowledge base of user behavior."

While DVDs, which gave Netflix its start as a mail-order rental business, remain an “important” business for the company, “overwhelmingly streaming will become the choice going forward,” Wells said. Netflix started streaming movies in 2009. Netflix’s paid DVD subscribers fell to 9.9 million in Q1 ended in March, from 11 million the previous quarter, while streaming customers rose to 22 million in Q1 from 20.1 million in December. “DVDs will make sense for folks in rural areas, but people who want choice are much more enamored with streaming,” Wells said.

Streaming also will give Netflix a means for growing beyond the 20 percent of U.S. households that get its service, Wells said. In Canada, Netflix is in 10 percent to 15 percent of households, while penetration is “slightly higher” in the U.K. and “slightly lower” in Latin America, where the service is available in Brazil and Mexico, said Wells. Netflix also plans to launch in Scandinavia in Q4, Wells said. Netflix has 1 million subscribers each in the U.K. and Latin America, Wells said. In many international markets, Netflix’s content is 80 percent Hollywood-produced films and 20 percent local content, Wells said. But that could change in some market like China, where it could be an even split, he said.

Discovery Communications 3D-based 3net channel venture meanwhile with Sony and Imax has about 500,000 customers on Verizon’s FiOS network, the lone carrier to offer it, Discovery Chief Financial Officer Andy Warren said. Sony and Discovery continue to develop 3D content to build a programming library from which to draw when the format becomes more widely distributed, he said. Among the more recent programming on 3net is River Monsters and Storm Surfers, which premiered Aug. 19. The 3D channel is a “minuscule part” of Discovery’s balance that isn’t likely to come into play until autostereoscopic, glasses-free TVs become more widely available, Warren said. Imax remains part of the venture, but more as a “silent partner,” he said. Meanwhile, Discovery’s The Hub channel venture with Hasbro is available in 75 million U.S. households, up from 61 million last year. The Hub ratings are up 50 percent through September. The Oprah Winfrey Network, in which Discovery is a partner, will be “cash flow neutral” by the second half of 2013, Warren said. Ratings were up 50 percent through September for the network, which is available in 77 million U.S. homes. It averaged 326,000 daily viewers in Q1, up from 308,000 in the first three months following its debut in January 2011, Nielsen said. From its 2008 inception through Dec. 31, the network lost $330 million, Discovery said in its 10K SEC filing. Discovery has contributed at least $585 million to the network, including its Discovery Health Channel valued at $273 million and an equity stake along with loans and interest of $312 million, Discovery said. Discovery is expanding in international markets with 11 channels available in Argentina, Brazil and Mexico. It recently opened sales offices in Columbia and Bulgaria, Warren said. Discovery also is offering five free-to-air channels in Italy and Spain after failing to reach a carriage agreement with Sky Italia, Warren said.