The Netflix Problem: TV’s Difficult Balance of Original vs. Syndication

In 1997, Netflix began building itself as a content distributor. It started with DVDs but really made a name for itself in 2007 by pioneering and popularizing video streaming. By 2013, the company was clearly established as the biggest player in the cord-cutting movement, but at that point, legitimate competitors had emerged—mainly Hulu and Amazon. Then came House of Cards, Netflix’s first original show, which debuted February 2013.

Why House of Cards? Netflix noticed that people who streamed the British version (created in 1990) also liked David Fincher and Kevin Spacey movies. The company smartly decided to combine the three, investing $100 million in the first two seasons. Sure enough, House of Cards was (and still is) a hit. Since then, the show has been joined by other acclaimed originals such as Orange Is the New Black, Stranger Things, and Marvel’s Daredevil.

But today, Netflix’s future isn’t as bright as it was in 2013. Despite being to streaming what Xerox is to copy machines, it just had an incredibly bad Q2. After adding 6 million new subscribers in Q1, its best quarter ever, Netflix added only 1.7 million in Q2. Furthermore, its catalog of shows and movies is shrinking while the price for a subscription is increasing.

The extreme growth from the beginning of the year has a likely explanation: Netflix rolled out its product to the entire world in Q1. The Q2 slowdown, however, isn’t as clear. It could be a symptom of growing pains as Netflix shifts focus to compete in a more crowded field, or the first signs of the company straining from over-extending itself.

Either way, the problem will be a fascinating look into how TV companies address a content dilemma on everyone’s mind: What’s the right balance of original work and syndication?

Much of this drama stems from increased competition. The syndication licensing for streaming is getting more expensive as multiple distributors bid for exclusivity. According to The Motley Fool, the Netflix library has shrunk over 40 percent since 2012. As networks like CBS, TCM, and HBO refine their own streaming services (FYI: Hulu is owned by Disney, Fox, and Comcast), they have less incentive to make syndication deals with Netflix. As former Reuters writer Felix Salmon put it a few years ago, Netflix “can’t afford the content that its subscribers most want to watch.”

As exclusive syndication gets more difficult, Netflix seems to be turning more of its efforts and resources to original programming. According to Bloomberg, Netflix is spending $5 billion on original content this year, which comes with its own set of legitimate challenges.

Original TV content is incredibly expensive. Sense8, for example, allegedly costs $9 million per episode, more than Game of Thrones. If Netflix sways too much toward creating originals, it risks saturating its catalog with costly shows that could struggle to find an audience. Even HBO, the high watermark for premium TV, has flops that just don’t take off.

For every Netflix original you’ve enjoyed, there are probably three you haven’t even heard of. Netflix is notorious for not releasing ratings, so it’s hard to say which shows generate impressive ratings and how those ratings compare to shows from other networks, but we do know that Marco Polo has been disappointing, and while it’s still getting renewed for another season, other Netflix originals have been cancelled.

Netflix’s shrinking catalog, meanwhile, hurts its ability to use subscriber data as a barometer for what new shows to greenlight. For instance, if it were to make House of Cards today, there’d be no way to know that people like David Fincher movies, because subscribers can no longer stream his films. If Netflix continues to use the House of Cards strategy to research what it’s audience would enjoy, that info would increasingly drive Netflix to turn its content inward, investing in shows for the people who already enjoy its existing work instead of making content that would appeal to a larger audience.

Of course, building a loyal audience that’s mostly hungry for originals wouldn’t be a terrible future for Netflix. At $9.99 it’s still very affordable compared to big cable bundles that can run well over $100. But that path would solidify Netflix as just another television network, like a Discovery or USA, rather than a unique platform that recommends and delivers both new and old content.