Netflix, Crackle, AOL On target consumers with original streaming content

Arrested Development fourth-season saga shows widespread interest in original programming
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By Mariko Hewer

Source: Netflix

With the upcoming Netflix (Nasdaq: NFLX) release of the fourth season of "Arrested Development" making virtual waves across the Internet, it's worth taking a look at the increased amount of original content being produced, marketed and--in some cases--sold by online video purveyors. While there is still a significant amount of wrangling over re-runs of TV series and exclusive rights, providers have also begun using production of original content as a way to lure subscribers into the fold. This FierceOnlineVideo feature examines how original streaming content is produced as well as whether it can be an economically viable part of the online video business model.

The growth of original streaming content: not just a side show

Original content may have only recently come to be a visible part of online video providers' distribution catalogues, but it has been around for several years. Sony's Crackle, a streaming video service geared toward men ages 18 to 34, debuted both "Trenches," a sci-fi series, and "The Bannen Way," a crime drama, early in 2010. AOL On, AOL's network of originally-produced content, has been active since April 2012 and is growing at a breakneck pace.

Sony declined to comment for this feature, but Crackle Executive Vice President Eric Berger spoke about original content in his Hot Seat interview with FierceOnlineVideo.

Cahn

Karen Cahn, general manager of AOL On Original Video, says her company was one of the first to produce original content.

"We have a rich history in producing content every single day," Cahn told FierceOnlineVideo. "We believe content really fuels the social Web… we produce probably somewhere in the neighborhood of 150 to 200 videos every single day."

Matthew Garrahan of the Financial Times notes that the quality of original streaming content has also been increasing.

"Forget about skateboarding cats and the amateur, user-generated videos that used to dominate YouTube," Garrahan writes (sub. req.). "These days the Internet is full of slick, professionally produced programming that would not look out of place on prime time television."

Cahn believes original online programming may eventually do exactly that: transfer over onto prime time TV through deals online video purveyors make with networks and broadcasters.

"A trend you're going to start to see is that Web series [and] Web TV are going to be picked up for TV," Cahn says. She cites the partnership of Mark Cuban's AXS TV with the Huffington Post's streaming network, HuffPost Live, for daytime programming.

A similar example of such a deal is an agreement DreamWorks Animation recently made to acquire AwesomenessTV, a YouTube network of 55,000 channels geared toward teens. According to Reuters, DreamWorks will use the network "to showcase family-focused movie franchises such as 'Shrek' and 'Kung Fu Panda.'"

DreamWorks announced on May 1 that it would pay approximately $33 million in cash for the acquisition--a hefty chunk of change for a video platform to stream DreamWorks original content as well as the "online talk shows, sketch comedy and scripted and reality series" already housed on AwesomenessTV. Clearly, original streaming content is no longer a marginal part of the online video business.

Money matters: financing original productions

Creating content is not without its complications, however. For one thing, it can be an expensive endeavor, and without the established, widespread audiences that major cable networks enjoy, original streaming content is not guaranteed to be profitable. The market niche is also too new for providers like Netflix or Internet analytics firms like comScore to have started measuring and releasing metrics.

Rayburn

"Creating content is the most expensive part of the video industry," Dan Rayburn, streaming and online video expert, told FierceOnlineVideo. "We don't know how successful these investments are… none of the companies producing content are willing to say what they're getting in return or even how they're measuring [success]."

Money matters are further complicated by the fact that involving big names and big talent means shelling out more dough.

Netflix's viral hit "House of Cards" features award-winning actors such as Kevin Spacey and Robin Wright as well as directing by David Fincher, who also headed "Fight Club" and "The Social Network." Hulu Plus's original series "The Awesomes" boasts current and former SNL cast members such as Kenan Thompson, Bill Hader and Taran Killam who lend their voices to the show. "Comedians in Cars Getting Coffee," a Crackle comedy series, spotlights legends like Larry David, Ricky Gervais and Alec Baldwin. Such talent doesn't come cheap.

In fact, according to a February Motley Fool article, the first and (upcoming) second seasons of "House of Cards" cost $100 million to produce. "In order to be a profitable investment, Netflix is betting that more than 1 million subscribers will join for at least a year just to watch 'House of Cards,'" says author Adam Levy.

Source: Netflix

"The one material difference worth noting is Originals production is cash-intensive," noted Netflix in its Long-Term View statement, last updated on April 25. "As we expand Originals, they will consume cash. Since we are otherwise using domestic profits to fund international markets, we will raise capital as needed to fund the growth of Originals."

AOL's Cahn says the way companies finance their shows differs based on the specific endeavor.

"It's tough to give you a one-size-fits-all response because no two projects are alike," she adds. "We evaluate who will produce what based on what the concept is, if the talent has their own production company and a host of other factors."

Diversifying content: something for everyone

But companies with pockets big enough to take a gamble on original content may find the investment pays off, says Levy, especially because there are no licensing fees involved. According to a Securities and Exchange Commission filing, Netflix had $5.6 billion of obligations in 2012; compared to that, $100 million looks a lot more manageable.

One of the tricks to making original online content profitable may be creating diverse enough material to appeal to a wide range of viewers. Anticipated releases on Netflix include the fourth season of screwball comedy "Arrested Development," the second season of Swedish crime drama "Lilyhammer" and the first season of comedy drama "Orange is the New Black." The service also caters to fans of the macabre with its newly-released thriller/horror series "Hemlock Grove."

"By personalizing promotion of the right content to the right member, we have a large opportunity to promote our Originals and one that's effectively unlimited in duration," Netflix's Long-Term View statement explained. "The improved economics from whole-season, and improved storytelling that comes from giving creators more scope, are big advantages."

Crackle has branched out in a similar manner. Aside from comedy, sci-fi and crime drama, the subscription service also offers "Ch:os:en," an action/adventure series that has just been renewed for a second season.

Lewis

Other providers, such as AOL On, take a different approach to content creation. Gabe Lewis, co-creator and executive editor of HuffPost Live and head of AOL Studios, told FierceOnlineVideo his company focuses on "short-form, docu-style [videos], authentic voices and remarkable stories."

"Online, authenticity resonates, and that was a guiding principle for all of our series," Lewis adds.

Some think it's too early to predict the future of online original content. "[Original content] is never going to take up a large percentage of Netflix's catalog," says Rayburn. "They're not in the business of creating content, that's not their core strength."

For AOL's part, Lewis maintains that the company will continue to invest talent and capital in online programming but says the type of content may change based on what audiences respond to.

"Our programming over time will evolve based on the performance we get from these series," he says. "It will keep iterating based on what's resonating with our audience."