* Netflix seeks originals to compete with rivals
* 'Lilyhammer' show called a success
* Stock sinks after earnings report disappoints
By Lisa Richwine
LOS ANGELES, April 24 An experiment with a
fish-out-of-water story about a New York mobster who relocates
to frosty Norway helped convince Netflix Inc to add
more original programming to its video-subscription service as
it undergoes a transition.
"Lilyhammer," starring Steven Van Zandt, a guitarist in Bruce
Springsteen's band whose acting credits include playing a
wiseguy in HBO's "The Sopranos," racked up enough viewing hours
that Netflix declared it a success. The company, based in Los
Gatos, California, said it would build its slate of original
programming to take on HBO and other cable channels that win
viewers by producing their own shows.
The plan to add original programming is one way Netflix
hopes to boost its bottomr line as it navigates the transition
from its roots as a DVDs-by-mail rental service to streaming
movies and TV shows to its customers' televisions, computers or
mobile devices such as the iPad.
Netflix didn't say what it expects to pay for original
But analysts said the video company could spend up to $100
million this year as it ramps up its production. The company is
licensing the political drama "House of Cards," starring Kevin
Spacey, as well as new episodes of one-time Fox television show
"The more successful we are with original content, the more
we would tend to invest," Netflix CEO Reed Hastings said in an
LIGHTS, CAMERA, KA-CHING!
Netflix hopes original shows that consumers can't get
elsewhere will drive subscribers for its service that instantly
streams movies and older TV shows. Adding streaming subscribers
is crucial to offset declines in customers who get DVDs by mail.
On Monday, the company projected slower growth among U.S.
streaming subscribers, which disappointed investors.
By the end of the year, Netflix expects to add 7
million customers to the business, roughly the same as in 2010.
Netflix shares fell 13.9 percent to close at $87.68 on Nasdaq
on Tuesday. For the year, the stock is up 27 percent.
Netflix also has licensed horror series "Hemlock Grove," a
murder mystery set in a Pennsylvania steel town, and a prison
comedy, "Orange is the New Black."
With "Lilyhammer," Netflix released all eight first-season
episodes simultaneously on Feb. 6, which it says gives it an
advantage over TV channels like HBO that fit shows into a
The company said the series drove "millions" of viewing hours
among its subscribers.
The cost to produce the show "compares favorably to content
that we're licensing from other producers," Hastings said, in
terms of its expenditures and the numbers of viewers each gets.
Netflix had considered original programming an "experiment"
but now feels confident enough to call it an "expansion" of its
business beyond rentals of other companies' movies and TV shows,
Hastings and CFO David Wells said in the company's quarterly
letter to shareholders.
"We are now treating it as a capability we should build,"
Less than 5 percent of Netflix's content spending now goes
to originals, and the company is unsure when or if it will
increase that percentage. Costs to license, acquire and deliver
content reached $1.8 billion last year, according to a
Netflix likely will spend between $75 million and $100
million this year on original content, Piper Jaffray analyst
Michael Olson estimated.
Original shows could give Netflix a "huge competitive
advantage" if it can create compelling content "at a reasonable
price," Olson said. He rates Netflix stock "overweight" and has
a $130 price target.
Janney Montgomery Scott analyst Tony Wible thinks original
programming is a necessity for Netflix.
"When you look at what is available for licensing, most of
the exclusive rights are already accounted for," said Wible, who
rates Netflix a "sell" with a $70 price target. "For Netflix to
stand apart from the growing list of competitors, they have to
have things that are unique and exclusive."