February 27, 2013, 11:32 AM

Streaming video services get creative

Netflix, Amazon and Hulu are producing more original shows for customers.

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Online entertainment provider Netflix Inc. this month released the first episode of its originally produced political drama “House of Cards,” available for free for one month to all consumers in the 40 countries where the Netflix streaming video service is available, the company says. The rest of the 13-episode season, which stars Kevin Spacey as a ruthless, power-obsessed congressman from South Carolina, is available to subscribers who pay $7.99 per month for unlimited access to Netflix content. Netflix released the entire season Feb. 1.

The show’s release is the latest in a series of moves by Netflix and its Internet rivals Amazon.com Inc. and Hulu to produce their own original shows, providing exclusive access to content without negotiating costly licensing agreements with TV networks and movie studios. However, analysts have mixed opinions on whether that strategy will draw enough new subscribers to these services to make them worth the investment.

“It's early for us on the proprietary original content,” Netflix CEO Reed Hastings said in the company’s last quarterly earningscall with investors. “We're staying flexible, learning and we'll grow into original program[ing] step-by-step.”

Last year, Netflix’s content costs grew from 22% of revenue to 44% of revenue ($704 million to $1.588 billion), according to Ed Liston, CEO at financial analysis and reporting company StockRiters. Despite expansions in the United Kingdom and Nordic regions, Netflix gained only about 5 million new subscribers last year, Liston says.

“To capture a higher market share and grow rapidly in the international arena, Netflix needs to develop high-quality content,” Liston says. “While investing heavily in content quality is a prerequisite for international markets, it could only break even with the content cost if the subscriber base grows large enough. Going forward, high content costs may incur losses in 2013.”

In the last quarter of 2012, Netflix reported it had 27.1 million U.S. subscribers and 33.3 million subscribers globally. In the same quarter, Hulu reported more than 3 million U.S. subscribers. Amazon does not report the number of its Instant Video subscribers. But Scot Wingo, CEO of e-commerce services provider ChannelAdvisor Corp., which helps retailers sell on such online marketplaces as Amazon and eBay, puts the number of its Prime members at 18 million, and those members get access to Amazon’s Instant Video at no extra charge.

Amazon streams TV shows and movies to customers via Amazon Instant Video and via its Lovefilm subsidiary for U.K. and German customers. Hulu provides videos for free with advertising during and between videos, or for $7.99 per month for Hulu Plus members, who see limited advertising only between videos, it says.

In addition to “House of Cards,” Netflix last year released an original comedy about an ex-gangster who enters the witness protection program, called “Lilyhammer.” This April, it will release an original horror series, “Hemlock Grove,” and, later this year, a new season of the comedy “Arrested Development,” which originally aired on the Fox TV network. The online retailer also plans to release this year two comedy-drama series: “Derek,” from comedian Ricky Gervais, and “Orange is the New Black,” based on a woman’s memoir of time spent in prison. In production without a definitive timeframe, Netflix is also working on an original kids’ series with DreamWorks Animation SKG Inc., it says.

Netflix may have a leg up on competitors in how it creates original content, because it leverages its vast store of customer information to figure out what kind of shows will appeal to viewers, says Jake Mann, another analyst and editor at trading news site InsiderMonkey LLC.

“In the past, the company's system has given it the ability to accurately determine which third-party content maximizes viewership,” he says. “Already an advantage over its traditional TV-based peers, Netflix's new focus on original programming makes even better use of this information, allowing it to decide which actors and themes are most likely to succeed at any given time.”

Meanwhile, Amazon says it has 11 pilot TV shows in production. Six are comedies, which have already begun filming, and five are shows aimed at preschoolers; Amazon did not reveal when filming begins for those shows. It says it will determine which pilots to develop into full series based on viewer feedback.

Unlike Netflix, Amazon invites the public to pitch movies or TV shows of any genre and budget to its production house, Amazon Studios, via its web site. Online it lists 26 TV shows and 23 movies in development as potential programs, for which it has paid each writer $10,000, Amazon says. If it turns a pilot TV show into series, Amazon will pay the writer $55,000 and 5% of sales from merchandise connected to the series, like toys or shirts, according to Amazon Studios. If it develops one of the movies, it says it will pay $200,000 to the writer and another $400,000 if the film generates $60 million or more at the U.S. box office. Amazon has a deal to give Warner Bros. Pictures a first look at top Amazon Studio projects for theatrical development, it says.

Hulu, while smaller than both Netflix and Amazon in terms of annual revenue—it reported revenue of $695 million in 2012 versus $3.61 billion for Netflix and $61.09 billion for Amazon—is also revving up its own original content production. This year it will launch three new original series: an animated comedy series for adults, a drama and a documentary about sports mascots, it says. That follows the launch of four other original series the company produced and released in 2011 and 2012.

Producing a TV show costs $1.5 million to $2 million on average per episode, though premium networks like Home Box Office might pay much more, says Dan Rayburn, executive vice president of news service StreamingMedia.com and a principal analyst at Frost & Sullivan. He and other analysts report that Netflix spent at least $100 million to produce the first two seasons of “House of Cards;” Netflix declined to comment on that estimate.

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