Market Overview

Will 'Arrested Development' Be the Savior of Netflix?

By Sterling Wong, Minyanville Staff Writer

The problems with Netflix (NASDAQ: NFLX) are well-documented.The company has ostensibly decided to de-emphasize its high-margin DVD rental service and concentrate on the much more expensive online streaming business, which has hurt its profit margins. By choosing to compete in the arena of online streaming, Netflix has to compete with big names like Amazon (NASDAQ: AMZN), Redbox Instant by Coinstar (NASDAQ: CSTR), and Verizon (NYSE: VZ), which has sent the cost of licensing content from the likes of News Corp. (NYSE: NWS), CBS Corporation (NYSE: CBS), and DreamWorks Animation (NYSE: DWA) soaring. Strong competition has weakened Netflix's movies depository. The Criterion Collection moved its films over to Hulu+ in 2011; just this week, Amazon announced that it had signed a deal with Epix for streaming movies produced by Paramount (NASDAQ: VIA), Lions Gate (NYSE: LGF), Disney (NYSE: DIS), and MGM. This struck another blow to Netflix, which previously had exclusive rights to Epix movies. On Wednesday, Netflix tumbled 6.4% on investor fears that subscribers could start fleeing to competitors.

However, Netflix does have another strategy to retain and add subscribers: Original programming. Yes, the online movie giant is hoping to become the new HBO (NYSE: TWX) of sorts, as it plans to devote 5% of the estimated $3.7 billion it will spend on content over the five years on original programming. Headlining this strategic move to develop original series is the revival of the beloved sitcom Arrested Development.

Canceled in 2006 after three seasons, the show gained a cult following in the years following its time on the air. Netflix is now producing a fourth season of the show with 10 new episodes. In a bold experiment, all 10 episodes will be available for streaming at the same time when the show premieres in early 2013. Other shows on the pipeline include House of Cards, a political drama directed by acclaimed director David Fincher that will star Kevin Spacey (developed at a reported cost of $100 million) and Hemlock Grove, a horror series developed by Eli Roth, director of Hostel. Following the lead of HBO, which evolved from a movie channel to a network of critically-acclaimed original series like Sex and the City, The Sopranos, and Game of Thrones, Netflix is hoping that its original programming will garner awards recognition and create a virtuous circle where great content creates huge buzz that draws subscribers. And it's not just HBO that has seen success with great original programming. AMC (NASDAQ: AMCX), for example, was also initially known simply for movies and later gained prominence with well-received breakout hits like Mad Men, Breaking Bad, and The Walking Dead. It's a big risk to develop original content, but it's one that Netflix probably had to take if it did not want to compete in content bidding wars with the likes of Amazon, which has far deeper pockets. If the company is successful, it might even upend the way consumers think about television programming. “That kind of sums up the Netflix story. There are major risks, and major opportunities. From the Wall Street perspective, it's one of the most black-or-white stories out there. You're totally on board, or you think that the story is totally unraveling.” Piper Jaffray analyst Michael Olson told The Daily Beast. At the close of trading on Wednesday, Netflix was down 1.73% to $54.96. Year-to-date, Netflix has fallen 20.68%.

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The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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