Netflix, Inc. shares were down strongly on Monday morning after the firm revealed that it was not going to renew a contract with Epix. That means that The Hunger Games, a blockbuster series set to conclude this holiday season, will no longer find a place on the streaming platform. Content costs are trouble for Netflix and the firm has to pick and choose what programs it needs to grow.
At time of writing shares in Netflix were selling for $114.82, down 2.39 percent for the day so far. Last week, amidst a market sell-off, shares in the firm jumped by more than 10 percent. The sharp move to original content has not gotten the same kind of support that the firm had last week, and the market is punishing the firm.
Netflix shifts content to original
Netflix said that its major reason for allowing the contract it had with Epic to expire was to further its shift to original content. Own-brand content serves more than one purpose for Netflix. It tends to be cheaper, it nets more interest and buzz for its streaming service, and it forces those who want to follow the latest hit to pony up and pay for a subscription.
The firm said, in a blog post on the Epix change, that “we have begun making movies that will premiere on Netflix globally and in some cases, simultaneously in theaters.”
“It will take us time to build a robust slate of original movies, but we’re hard at work on it with such great stars and directors as Brad Pitt, Ricky Gervais, Judd Apatow, Angelina Jolie, Sofia Coppola and Adam Sandler,” Ted Sarandos, Netflix Chief Content Officer, continued.
Costs are key for Netflix going ahead. The firm, and those on Wall Street researching it, seems sure that it can reach most of the world’s broadband wielding people in the next ten years. What’s not clear is whether it can keep costs down and earn enough money to justify its stock price.
Netflix still has Wall Street’s backing
Netflix is one of the most wholly loved stocks on Wall Street. The firm trades at more than 250 times last year’s earnings, and it has more than doubled in value since the start of the year.
The median price target on the firm from Wall Street sell-side research houses is $121, while the high comes in at $175. Michael Pachter of Wedbush is one of the more bearish analysts on the firm.
He reckons that most of Wall Street is discounting the effect that content costs are going to have on the firm. In a May report he wrote “They’re going to have to pay up, and they will not be compensated by subscriber growth. People are discounting that competition effect.”
Netflix seems to be aware of that trend acutely, and it’s likely that cost, rather than an ethical commitment to original content, played a big role in the Epix contract lapse.