OTT Internet TV: Expenditure on Content Production


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How much will OTT internet TV service providers spend producing their own content in 2013 and beyond?

Major OTT service brands like Netflix, Hulu and Google have started producing their own content. Actually, they started in 2011. But back then, it wasn't clear whether this was a fad, or the beginning of a major trend.

The success of the Netflix-produced 'House of Cards' and Google's leasing of a 41,000 square foot video production facility in Los Angeles - plus other content production initiatives by players like Amazon, Hulu and others - suggest that self-production now looks less like a fad and more like a trend.

Traditional TV people might have viewed OTT as a kind of parasitic distribution platform, but what if OTT starts looking like a traditional TV model - including content as well?

So how much will OTT providers invest in producing their own content in the coming years? And how does that compare with what the TV industry will invest?

Examples of where OTT providers are producing their own content


As part of a wider drive to re-position YouTube as a destination site that includes professionally produced, branded TV shows and movies, YouTube launched professional channels featuring original content in 2011.

In May 2012 the company announced a marketing programme under which a range of film makers would create new film content which would then be distributed to users online via exclusive distribution programmes defined by YouTube.

Later in 2012 YouTube announced the investment of USD 150 million in building 60 new online TV channels offering content from production companies known for working with UK broadcasters such as ITV and the BBC, as reported by the Telegraph.

According to a story published in the FT in July 2013, in 2012 Google took out a lease on a 41,000 square foot film-making studio situated in the Playa Vista area of Los Angeles, an area steeped in film-making history. The company then handed the facility over to YouTube who is responsible for encouraging producers to use the studio – for free.


Amazon has also moved into original programming via its Amazon Studios division and has signed a number of exclusive broadcasting deals.

Six children’s series and 8 comedy pilot programmes will be launched in 2013 by Amazon on Prime Instant Video, Amazon Instant Video and LOVEFiLM, a UK-based internet TV company and a direct rival to Netflix which was acquired by Amazon in  January 2011. The company will use customer feedback to determine which pilots will go to full production.


Netflix has also been actively investing in original content. The company first announced plans in 2012 to invest in original content for the US and UK.

During 2013, Netflix marked a shift towards providing high-profile original content with House of Cards (US) and a revival of the sitcom 'Arrested Development' for a new series, some 7 years after the last episodes were made.

House of Cards (US) was seen as a critical and financial success as Netflix added 2 million new US subscribers during the first three months of 2013. Perhaps significantly, this took US subscriber numbers for Netflix to 29.2 million, higher than cable TV provider HBO’s US subscriber numbers of 28.7 million for the first time. Perhaps a real measure of the Netflix phenomenon is provided by figures from Sandvine which show that at peak periods during H2 2012, Netflix accounted for 33% of downstream internet traffic in the US.

More recently, in a move which caused great interest, Netflix took the strategic decision to launch its first content series, 'Hemlock Grove', in January 2013.

Netflix cemented its role as a creator of new content with the critically acclaimed series ‘Orange is the New Black’, a drama-comedy set in a women’s prison, which first aired on Netflix in July 2013. Interestingly, this star-less drama did better than both 'House of Cards' and 'Arrested Development' in its first week of availability on Netflix, both in terms of viewer numbers and hours viewed.[DD1] 

Other notable content production initiatives include Turbo: F.A.S.T. (Fast Action Stunt Team) – which is based on DreamWorks Animation‘s theatrical film Turbo.


Since 2011 Hulu has distributed 25 original and exclusive series, and has a number of 2013 releases including “The Awesomes”, an original animated series, and exclusive showing of UK reality series, “The Only Way is Essex”. In July 2012 Hulu had also announced a partnership with BBC Worldwide Americas to co-produce the fourth season of the UK political comedy “The Thick of It”.

The trend towards self-production of content is not restricted to the largest OTT providers, but can also be seen in markets around the world, for instance:


In Japan, the internet TV provider, GyaO  partnered with Japanese gaming giant, Gree in February 2013 to create Future Content Partners which will develop new anime content. A new dedicated anime site will be launched in 2013.


Cinemoz claims to offer the largest online library of Arab feature films in the world. As well as offering free (ad supported) classic Arab films, Cinemoz also aims to produce its own contemporary films.

The company’s first production was a crowd-funded documentary about Cinemoz’s own development, titled Almoz Famous.

 [DD1]I added this because I thought without it, it looked like it could have been written much earlier in the year and it shows that Netflix is continuing to “get it right” with original content.

What Netflix is Spending on Content

Netflix is by far and away the world’s largest OTT internet TV service provider with 25.6 million paid streaming subscribers worldwide at the end of June 2013.

Based on an analysis of Netflix’s quarterly SEC filings since 1Q10 we conclude:

  • In 2012, Netflix spent about 48% of revenues on content acquisition, or about USD 1.7 billion. These costs would have been mostly focused on the acquisition of licenses to stream third-party content. The amount spent on the production of original content, such as two 13-episode seasons of ‘House of Cards’  was (at approximately USD 100 million) – comparatively small;
  • On a proportionate basis, this is about what Comcast has been spending on content between 2007 and 2012:  32.4% to 41.7% of revenues. Interestingly, this is also approximately what the UK’s satellite TV provider has been paying for its content between 2007 and 2012: 40.1% to 43.9% of revenues (see chart below);
Title:OTT Internet TV vs. Pay TV
Sub Title:Content Acqusition Costs as a % of Sales
Companies:Comcast, Netflix, Sky
Markets:Television, Internet, OTT Internet TV, Pay-TV, Satellite TV, Cable TV
Years:2007, 2008, 2009, 2010, 2011, 2012
  • If we look at the trend in the value of Netflix’s total contractual obligations for streaming content then we see that the value of total obligations has been increasing steadily, with a particularly sharp rise between March 2010 and December 2011;
Title:Netflix: Value of Contractual Obligations for Streaming Content
Markets:Television, Internet, OTT Internet TV
Years:2010, 2011, 2012, 2013
  • At the end of 2012, the value of Netflix’s total outstanding contractual obligations for streaming content was USD 5.65 billion – compared with 2012 streaming revenues of USD 2.47 billion;
  • However, if we look at the value of Netflix’s streaming contract obligations on a quarterly basis, from 31 March 2010 to 30 Jun 2013, then we see that – apart from a sharp spike around the summer of 2010 – Netflix’s total obligations are running at about 9x quarterly revenues, with a slight downwards trend;
Title:Netflix: Investment in Streaming Content as a % of Quarterly Revenues
Markets:Television, Internet, OTT Internet TV
Years:2010, 2011, 2012, 2013
  • We can also see that from 31 March 2010 to 30 Jun 2013, the value of Netflix’s quarterly contractual obligations for streaming content increased at about the same rate as subscribers as well (see chart below):
Title:Netflix: Comparison of Streaming Content Contract Obligations with Quarterly Revenues and Subscribers
Markets:Television, Internet, OTT Internet TV
Years:2010, 2011, 2012, 2013


The broadcast TV business model is based on two core assets:

  • A mass-scale distribution platform (e.g. cable TV network, terrestrial TV network, satellite TV network);
  • Exclusive, ‘must watch’ content (e.g. material for which there will be mass demand).

The TV broadcaster invests a lot of money and time up front building a distribution network and then, when that is in place, the broadcaster then acquires or self-produces exclusive content which will justify the price of a subscription.

For most subscribers, the important thing is the presence or otherwise of a very select number of TV shows, sports shows and movies.

This is how Comcast works and it is how Sky works in the UK.

We think that this is also how Netflix – and all ‘large’ internet TV service providers will work in the future.

We further think that there is little real difference between how the traditional Pay-TV model works and how Pay-OTT TV will work the future.

Our analysis is that there is no evidence that Netflix’s content acquisition costs, marketing costs or content delivery coasts are getting out of control. In fact, the numbers clearly show that Netflix has been doing a good job of controlling costs while its business scales.

Netflix’s SEC filings show that these costs have for the last few years been running at about the rate we would have expected is Netflix were a Pay-TV provider.

As we have explained before, the problem with Netflix is not the company’s cost structure, business model or the cost of producing its own content, but a suicidal pricing strategy which we think severely undervalues the content and fails to acknowledge that the market can be segmented in order to maximise revenues.

Anyway, if OTT providers like Netflix, Amazon, Google, Hulu and others continue to invest in producing their own content, how much will they spend in 2013 or in 5 years?

Our analysis (see table below) is that the answer to this question is about USD 500 million in 2013 and USD 3.4 billion in 2017 – a truly huge increase in content production.

If Netflix spent USD 50 million producing one 13-episode season of ‘House of Cards’ then we are projecting that, worldwide, OTT service providers will produce the equivalent of 10 seasons of House of Cards this year, and 68 seasons of ‘House of Cards’ in 2017.

It is important, however, to keep these numbers in perspective: even by 2017 the worldwide size of the OTT internet TV industry when measured in terms of service revenues will be barely 10% of the size of the broadcast TV industry (see table below).

So, even by 2017, for every dollar that OTT providers will spend producing their own content, companies like Comcast will be spending 10 dollars - which is enough of a difference to keep OTT providers safely in their box. At least for now.

Title:Comparison of Broadcast TV Industry with OTT Internet TV Industry
Markets:Television, Broadcast, Internet, OTT Internet TV
Years:2012, 2013, 2014, 2015, 2016, 2017
Other:(1) Refers to all input revenues which comes from advertisers paying to place ads on TV and from viewers who pay subscriptions for Pay-TV services and also ad-hoc pay-per-view fees. (2) Includes broadcast TV and Pay-TV. Excludes internet and mobile and apps. (3) Includes revenues derived from advertising, on-demand viewing and subscriptions. (4) Generator projection.

Contact Andrew Sheehy at or follow him at