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Do Consumers Even Care About Original Content?

As the pioneer in the streaming-video industry, Netflix, Inc. (NASDAQ: NFLX) created the template that its competitors are following, and it plans to spend between $7 billion and $8 billion on programming in 2018. While it doesn't break out the current percentages, the company has said its goal is to have 50% of its library be exclusive original content, while the remainder is licensed programming.

A recent report, however, raises question about the viability of that strategy.

How does the performance of Netflix originals match up according to Nielsen? Image source: Netflix.

Big budgets for content

Netflix isn't the only company spending big on streaming programs. Amazon.com, Inc. (NASDAQ: AMZN), through its Prime service, will spend an estimated $4.5 billion this year, while Hulu will drop $2.5 billion on content. Even relative newcomer Apple Inc. (NASDAQ: AAPL) reportedly plans to spend $1 billion over the next year on programming.

You'd think that with all that money being spent on original content, subscribers to these streaming services would be devouring the stuff. That's simply not the case, according to ratings company Nielsen.

They're watching what?

Nielsen rolled out a new content-ratings service that it says can determine viewership of subscription video on demand services. The ratings service uses set meters, devices that are connected to televisions of thousands of U.S. homes. The device reportedly collects information and transmits that data back to Nielsen.

In conjunction with the launch of its service, Nielsen's chief operating officer, Steve Hasker, revealed a number of surprising statistics regarding streaming video consumption. According to recent data the company collected, 80% of the time spent on streaming services is spent watching "back catalog," or reruns of familiar shows licensed from television networks and studios. Only the remaining 20% is spent viewing original content.

Nielsen revealed specific viewership data for three Netflix original series -- Marvel's The Defenders, House of Cards, and Fuller House. The company reported that The Defenders averaged 6.1 million viewers in the week following its release, while Fuller House and House of Cards, garnered 4.6 million viewers each.

In an exclusive interview with MediaVillage, Hasker said, "an original hit on Netflix, Hulu, or Amazon Prime generates about the same ratings as hits on HBO and Showtime over the course of a season." He went on to say that "what's driving subscriptions and renewals may be the originals, but our research shows most of the viewing time is spent with catalog programming."

Say that first part again...

If the assertion that "what's driving subscriptions and renewals may be the originals" is correct, that's effectively a vindication of the strategy the streaming services, particularly Netflix, are employing.

In its second-quarter letter to shareholders in July 2017, Netflix stated: "In Q2, we underestimated the popularity of our strong slate of content, which led to higher-than-expected acquisition across all major territories. As a result, global net adds totaled a Q2-record 5.2 million ... bucking historical seasonal patterns." Netflix itself admits that a "strong slate of content" results in bigger subscriber additions, but that's where the agreement ends.

It's all in the numbers

It's important to note that Netflix disputes Nielsen's viewership data. In a statement, a Netflix spokesperson said, "The data that Nielsen is reporting is not accurate, not even close, and does not reflect the viewing of these shows on Netflix." 

There are several fairly obvious shortcomings to Nielsen's data. The company only tracks data from TV, while ignoring the streaming that occurs on mobile devices such as phones and tablets. In addition, it only tracks programs shown in the U.S., while more than half of Netflix viewers hail from its international markets. This may account for the the disparity.

Netflix isn't beholden to the same advertiser-driven model as linear TV and therefore doesn't release viewership numbers. The company uses its internal data to determine the value of a show, and based on recent record subscriber additions, its original content strategy is paying huge dividends.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon, Apple, and Netflix. The Motley Fool owns shares of and recommends Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.