The Netflix Effect: More Streaming Means Better Shows

Internet video economics will increasingly favor original, higher-value productions.

Kathleen Grace speaks at Stream Con NYC on Oct. 30 in New York.

Kathleen Grace speaks at Stream Con NYC on Oct. 30 in New York.

Photographer: Thos Robinson/Getty Images

Kathleen Grace has done pretty well for herself in 2015. In June her production company, New Form Digital, posted a pilot on YouTube for Single by 30, a show about two teenagers who promise to marry each other if they wind up unattached at that unfathomable age. When YouTube announced its paid subscription service, YouTube Red, in late October, Single by 30 was on the list of its 10 exclusive original series and movies. A month earlier, Verizon had locked up the rights to six other New Form Digital shows for its Go90 mobile video app, including #DoOver, about a woman who has to keep reliving her disastrous 25th-birthday party, and Mr. Student Body President, whose teen protagonist is billed as a cross between Ferris Bueller and Frank Underwood. In the past year, Grace has sold 18 shows to 10 digital video services.

The market has grown a lot since Grace began running her production company in the spring of 2014. “At that moment, the market didn’t exist,” she says. Since then, a series of big-name companies such as YouTube and Verizon has been pouring money into digital-video offerings, most trying to differentiate themselves with shows or movies that can’t be found elsewhere. Because many of them are asking customers to pay, rather than have them only watch ads, those companies have to work that much harder to draw in viewers. Digital-video producers, especially those focused on programming for smartphones, are enjoying something they didn’t have a few years ago: a seller’s market.

Call it the Netflix effect. The streaming leader’s steady push into original shows and movies has forced rivals such as Amazon.com and Hulu to do the same. Netflix is running about two dozen original series, including comedies, dramas, and cartoons, and it has slated 30 more for the coming year, plus a steady stream of original documentaries, standup comedy specials, and the occasional feature film. Transparent put Amazon on the map. Hulu produced seven half-hour comedy series this year; it’s also ordered dramas, including a miniseries based on Stephen King’s novel 11/22/63. The new competitors, including YouTube Red and Go90, have learned the lesson. Exclusivity “has worked effectively for Netflix,” says Peter Csathy, the chief executive officer of consultant Manatt Digital Media. “Others are trying to accomplish that in the long-form and short-form game.”

Snapchat’s videos are a good example of the shorter model. Formatted for viewing on a smartphone, they come from partners such as BuzzFeed and Comedy Central and prompt viewers to swipe from one brief clip to another unless they opt for a longer segment. (Snapchat recently shuttered a separate effort to produce original material in-house.) Other services are targeting different niches. Refinery29’s short videos focus on women; Vimeo aims for art-house fare. Spotify is developing works that can be played “ambiently”—that is, listened to while your phone’s in your pocket.

YouTube Red’s shows tend to hew more closely to the teen aesthetic of YouTube’s biggest stars. Robert Kyncl, chief business officer, bristles at Netflix comparisons. “Our primary focus of the investment are the people who have risen to fame on YouTube,” he told reporters at the Red launch. “We would very much like that to work, because it would make it very unique. And it addresses the Netflix question, the Hulu question, and any other questions.”

Among the entrants, Verizon appears to be splashing around the most money. It says it’ll have 52 original series on Go90 by the end of the year and has programming deals with about 100 companies. Those include established giants such as Viacom and YouTube-grown video networks like Endemol Beyond. Adrian Sexton, the chief operating officer and president of Endemol, says agreements with Verizon and other companies provide the capital to boost production quality above what Endemol could afford on old-school YouTube, where ad-sharing deals are profitable only for the most viral of videos. For Verizon, upstarts Endemol and New Form Digital remain a cheaper bet than a studio like Fox or Paramount, Sexton says. “The production value is in a nice economic sweet spot,” he says. “You’re talking about spending hundreds of thousands, and not millions, on a series.”

This is different from the traditional YouTube model, where creators don’t generally get advances and are paid through a share of the advertising revenue. That model rewards low-budget productions and punishes anyone who can’t attract a massive number of viewers. Subscription services will lead to new types of content, says George Strompolos, the founder and CEO of Fullscreen, which produces and distributes online video and is launching a subscription service to compete with YouTube Red. “No longer is it strictly this ‘build it yourself and get a revenue share’ model, although that still exists,” he says. “People are buying content in the same way they’d buy a TV show.”

There’s only so much time in the day, even if people do watch YouTube superstar PewDiePie every minute they’re stopped at a red light or in line at the pharmacy. And not every company that wants its own video service will be able to pull it off. Microsoft, Samsung, and Yahoo! have recently shut down online video efforts. Grace, who worked at YouTube for three years before starting New Form Digital, says she’s been successful partly because Silicon Valley’s talent for building video services doesn’t particularly overlap with the skills needed to create compelling programming. Most companies will likely struggle to do both at once, she says, because “the pieces don’t always line up.”