Netflix’s Quest for Vertical Integration
Netflix confirmed this week that Friends would remain in its programming “throughout 2019” for a cost of $100 million. After 2019, there is a nonzero probability that AT&T and Warnermedia will use exclusive rights to bring the show to their own streaming service, debuting in the fall. This deal along with the uncertainty of keeping Friends beyond 2019 underscores the importance of vertical integration for Netflix and why it has invested so heavily in producing its own content.
In the early days of streaming, services including Netflix, HBO and Showtime paid a premium to obtain as much outside content as they could. At this stage, streaming services relied on upstream suppliers to create content. Netflix grabbed Dreamworks Animation and Disney movies from Starz, while HBO got hold of Sesame street from PBS. By 2018, Netflix has shifted towards bringing content creation in house in addition to licensing content from other providers, like Friends. The streaming giant will spend between $12 and $13 billion on original content. Ampere analytics found that Netflix leads in content creation with 245 original shows with Amazon in distant second at 80.
Not only are streaming services beginning to develop content, but content creators are beginning to enter the streaming market as well. Bob Iger has announced that Disney is planning to build its own service with exclusive rights to classic movies like The Lion King and Frozen, along with Marvel and Star Wars films and original Marvel and Star Wars shows. HBO has also developed its own video service, HBO Go, which sits at third behind Netflix and Amazon in its number of original shows with 64.
In the streaming industry upstream firms (content producers) and downstream firms (streaming services), are working to develop the entire chain in house from content creation to the eyes of the consumer. Netflix has taken an early lead in both content creation and its streaming platform, but as more services with original content enter the market it is important for the streaming leader to maintain its competitive advantage by building on its content.
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