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Netflix Says Spending Big Is Good Business

While Wall Street is concerned about how much Netflix and other programmers will have to spend in an original programming arms race, Netflix executives say spending big pays off.

On its first quarter earnings call Netflix execs were asked if the returns on the spectacular budgets for their original TV shows was shrinking, and CEO Reed Hastings said that wasn’t the case.

“No I’d suggest an increase in return on spending, if anything,” Hastings said. “That is, when you spend on the big items, they go much, much further than a whole lot of substitutable content. So we’re interested in both spectacular content and spectacular membership growth.”

As Netflix expands around the world, it has found that people generally love content with high production values.

“It's why U.S. content has traveled the world historically so well because of the production value that you're seeing,” said chief content officer Ted Sarandos.

And Netflix has found that its originals no longer have to feature established stars. The fourth season of Orange Is the New Black is highly anticipated worldwide, he said.

“That was kind of a surprise to most people in that it didn't have any of the established movie star talent that some of our other shows have,” Sarandos said. “But it had built up just on the quality of [show creator Jenji Kohan’s] storytelling. And then the spectacular cast and the ability to get to know them better, and then, as we enter its fourth season now, it's got tens of millions of fans around the world that can't wait for that show.”

Netflix execs were asked if they saw the industry-wide spending on original content continuing to rise, or if it at some point it would recede.

“It's hard to tell. People talk about the growing content spend. But what we're able to do is find the shows and get the shows that we want, and we do have to pay a lot for them,” Hastings said. “But coming back to the phrase earlier, they're really spectacular, what we're doing. And I think when you see Orange, when you see The Get Down, when you see The Crown, you'll know why we're investing what we do.”

With Netflix creating so much of it own content, the executives were asked if they’d be interesting in acquiring a studio, such a Paramount, because Viacom is shopping a stake in Paramount.

But Hasting’s noted that Netflix has never done any M&A in its history.

“We'll just hire the people that we want and build it and that could in principle be a constraint on our rate of growth, but Ted's been able to attract an incredible team in L.A.," Hastings said. “And so, when you look at the growth in our originals, you can see that we can deliver on that on this organic hiring basis, which of course is much stronger for the long term than if you tried to juice it with M&A.”