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Netflix’s Winning Formula

In 2016, Netflix will have more series than HBO. The website plans to spend $5 billion on content next year, with roughly 10% going towards production of original series — more than what HBO, Showtime, Amazon, and Starz spent last year combined.

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Netflix’s staggering success illustrates what L2’s Intelligence Report on Media Winners & Losers calls the new winning formula for media: a combination of high-quality content and digital technology. From the beginning, Netflix had digital technology mastered. The challenge was content, as CEO Reed Hastings famously acknowledged (“The goal is to become HBO faster than HBO can become us”). Emulating HBO, Netflix became a content creator, investing in producing its own shows like House of Cards and Orange is the New Black. Netflix shows won seven Emmys in 2014.

Faced with the growing challenge from Netflix, HBO went in the opposite direction by investing in digital. Streaming service HBO GO now competes with Netflix for viewers. The L2 study categorized HBO along with Netflix as a “Luxury” media brand: well defined, with premium and exclusive content and broad reach.

Screen-Shot-2015-07-30-at-4.57.15-PMBut not all Netflix competitors have mastered the winning formula. While Hulu is a digital success, the website lacks Netflix-level original content, as well as Netflix’s broad reach.

This suggests that being a winner at digital media requires a third factor: the ability to fund new content, which often comes from non-digital areas. Netflix is able to fund so much ambitious content because its DVD business earns hundreds of millions of dollars each year. Similarly, HBO remains at its core a TV business.

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