Netflix (NFLX) is entering its next phase of content growth as the company looks to trim costs and boost engagement in an increasingly competitive streaming landscape.
"It comes back to the question of [Netflix] being more cost conscious, but also wanting to take fewer swings, but better swings," Third Bridge analyst Jamie Lumley told Yahoo Finance, pointing to recent reports the company will be parting ways with producer Ryan Murphy.
According to multiple outlets, Murphy, who produced Netflix hits like "Monster: The Jeffrey Dahmer Story" and "The Watcher," will depart the platform at the end of his five-year, nine-figure overall deal before heading to Disney (DIS). Interestingly, he will still produce the follow-up seasons of both "Monster" and "The Watcher" — similar to how he continued to produce FX's "American Horror Story" while still at Netflix.
Netflix and Disney have not yet commented on the rumored departure.
The famed producer joined Netflix in 2018 with a high-profile $300 million contract. Shonda Rhimes also signed with the platform around that time, locking in a reported $100 million deal as the streaming giant leaned into a growth-at-all-costs spending strategy and set off an accelerated arms race for content.
Flash forward to today, and it's a drastically different environment.
A focus on profitability
Revenue initiatives like ad-supported tiers and password sharing crackdowns have become the industry norm. Virtually every major media company has undergone layoffs and restructured its business in a bid to improve streaming profitability and lessen losses. Price increases have also been implemented (or at the very least teased) in order to improve average revenue per user, or ARPU.
Content spending growth has shrunk amid those efforts: "As we now painfully know, money is no longer cheap," MoffettNathanson analyst Robert Fishman wrote in a note earlier this year.
Fishman predicted a "flattening in 2023" when it comes to content spending, which previously enjoyed two strong years of double-digit growth: "As more companies shift their focus away from solely subscriber growth, we would expect industry content spending to be relatively flat or even decline in the out-years."
Netflix has said its content spend will be flat year-over-year at $17 billion. It will cut costs in other areas with plans to slash its overall spending by about $300 million this year, according to the Wall Street Journal. Netflix declined to comment at the time of that report.
"For the longest time, the running industry joke was Netflix would pay for everything and throw as much as they could at the wall and see what sticks," Lumley said. "Content is king. It's still very much prevalent. ...But now with the change in priorities, the idea is that they need to be a bit more strategic."
As Netflix adopts a more strategic approach to driving its content engagement, Wall Street analysts have called out two big drivers of future growth: international content and live sports.
Netflix's global push
Earlier this week, Netflix Co-CEO Ted Sarandos reiterated his $2.5 billion commitment to fund original Korean content over the next four years, adding the company has plans to further expand its original programming to include Korean unscripted series and movies.
"I think what’s brilliant is to see film, unscripted and series all grow according to the interests of our Korean audience," Sarandos said during an event at Seoul’s Four Seasons Hotel on Wednesday. "You’ll see the investment in the ecosystem, in front and behind the camera, including training, to grow the industry."
Sarandos' comments come as the company transitions from a Korean content licensor to full-fledged producer, with recent original series like "The Glory" and "All of Us Are Dead" taking off on the platform.
According to Sarandos, about three-fifths of Netflix’s users have watched a Korean show.
Netflix's first original Korean title debuted in 2018, illustrating its steady push into local-language films and series over the years. Currently, about two-thirds of Netflix subscribers stem from outside the US.
"In general, shows produced outside of the US can be cheaper while still maintaining a high level of quality, which is definitely advantageous for Netflix," Lumley said. "There's the proven demand of international content, and increased acceptability within US audiences."
Lumley called out the record-breaking performances of international series like "Squid Game" and "Money Heist," explaining audiences have become more accustomed to dubbed content, or content that's not in viewers' native language.
CFRA analyst Ken Leon added that international content is "by far" Netflix's biggest edge over its rivals, telling Yahoo Finance: "[Netflix's] competitive advantage is their global reach and their ability to move content around the world to specific countries."
Live sports 'will fit well' into Netflix's content strategy
Live sports content has quickly emerged as another untapped area for Netflix, even as tech giants like Apple (AAPL), Amazon (AMZN) and YouTube (GOOGL) have snatched up pricey professional sports contracts over the past year.
But Netflix has taken its own unique approach by producing docuseries and sports-adjacent content like "Formula 1: Drive to Survive," "Full Swing," and "Break Point" instead of committing to big-ticket deals.
"I'd say in sports, our position has been the same — we're not anti-sports, we're pro profits," Netflix Co-CEO Ted Sarandos said during the company's fourth quarter earnings call in January. "We've not been able to figure out how to deliver profits in renting big league sports in our subscription model. Not to say that won't change. We'll be open to it, but that's where it's at today."
Experts say Netflix's strategy has created a new opportunity around the untapped potential of sports within the streaming market.
"You can see the power of Netflix just in terms of the documentary-style content," Jon Christian, EVP of digital media supply chain at media and entertainment-focused consulting company Qvest told Yahoo Finance. "I think Netflix is solely responsible for F1 being [as popular as it is] in the United States right now."
Christian said Netflix's documentary-style approach helps audiences connect to players, adding, "This is the way that you could franchise around sports."
According to The Wall Street Journal, Netflix is in talks to live-stream its first sporting event — a celebrity golf tournament. The event, which is expected to take place sometime this fall, will feature Formula 1 drivers, along with professional golfers, the Journal said. Netflix did not comment on the report.
"I think the tournament will be a test for live sports," Christian said. "Netflix is dipping their toe in the water and making sure that they could get all their technology right for live broadcast first."
Netflix's live event efforts took a significant hit in April after the company failed to successfully broadcast its "Love is Blind" live reunion special. At the time, Netflix blamed the failure on a technical error but emphasized the platform has the fundamental infrastructure in place to successfully pull off a live event.
Overall, Christian said Netflix may have to eventually pay up for a professional sports contract as "sports is the last frontier of the cord cutters."
Morgan Stanley analysts agree, writing in a new report published on Wednesday, "Eventually we expect Netflix to move into live sports, particularly as it scales in [free cash flow] generation and has the ability to invest in major sports rights around the world. In addition, as its advertising capabilities scale, we think live sports will fit well into its content offering."
"Netflix has consistently expanded its product offering, from licensed to originals, from scripted to unscripted, from TV to film, from US to global, and even into games. It is only logical in our view that eventually it will move into live sports — and likely in a big way," the analysts added.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected]
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