--HBO's transition to original programming has created blueprint for Netflix
--Netflix sees future in streaming, introduces own programming
--Stock is rebounding from dismal second half of 2011
By Rex Crum
A DOW JONES COLUMN
Once there was a time when HBO was better known as Home Box Office and for stale movies and reruns. The thought of it airing scripted, original programming was about as conceivable as Tony Soprano squealing to the FBI.
But Time Warner Inc.'s (TWX) HBO has been able to transform itself from a pay-TV channel with limited programming into one of TV's premier destinations. The network has won numerous awards and accolades for entertainment now considered classic, including "The Sopranos," "Curb Your Enthusiasm" and "The Wire." HBO has so much cachet it was able to lock up two-time Oscar winner Dustin Hoffman for the horse-racing themed "Luck," which debuted in late January. Oh, and it got Nick Nolte to join the "Luck" cast too.
HBO has blazed a trail that looks more than inviting for movie-rental firm Netflix Inc. (NFLX).
We all know how Netflix began, offering DVD rentals by mail without any late fees or due dates. Then it moved into streaming movies and TV shows online, and this is where the company sees much of its future. Nearly all of its promotions are for watching Netflix-delivered videos on your TV, computer or mobile device, and all of its recent international expansions solely involve streaming.
However, less than two weeks ago, and with little fanfare, Netflix took the next step in its progression when on Feb. 6 it premiered "Lilyhammer." In case you missed it, the show isn't some rarely seen cult favorite, but Netflix's first original scripted series. "Lilyhammer" stars Steven Van Zandt--best known as a guitarist in Bruce Springsteen's E Street Band and for his role in the "The Sopranos"--as a mobster who turns on his cronies and goes into witness protection in, of all places, Lillehammer, Norway.
All eight episodes of the show's first season are immediately available for instant streaming via Netflix.
Original programming may be part of Netflix's long-term strategy to be less dependent on studio and network content, much like HBO has done. But David Miller of Caris & Co. advised not betting the house on a huge shift in the company's approach to delivering video.
"It's way too early to think about Netflix as a content play," the analyst said. "It's a distribution play. They retain a lot of information about what their customers are watching and will be very careful about what they do" with original shows.
Miller holds an underweight, or sell rating, and a $67 target price on Netflix stock.
For the year to date, Netflix's shares have come back from a dismal second half of 2011, surging almost 76% to close Thursday at $121.91.
But what does the addition of "Lilyhammer," as well as the upcoming series "House of Cards" with Kevin Spacey and the highly anticipated return of "Arrested Development" in 2013 really mean for Netflix? Will it eventually evolve into a true Internet-based "TV" network?
"'Lilyhammer' should be considered an experiment for Netflix," said Arvind Bhatia, an analyst with Sterne, Agee & Leach. "I understand why the company wants to have exclusive content, but ultimately I don't really see Netflix as a content company." He has a hold rating but no price target on the stock.
Perhaps it's not surprising that Netflix is at least following the HBO model in a roundabout way, going from a distributor of content to delivering original programming. Chief Executive Reed Hastings has said on multiple occasions that Netflix's biggest threat isn't the cable companies, but HBO's online service HBOGo.
With the HBOGo app competing with Netflix's own instant-watching app for the attention of viewers on their iPads, iPhones and other devices, the battle for eyeballs is becoming more pitched, with all providers looking for new ways to add to their customer base.
"Original programming is exclusive by its nature, so it gives people a reason to subscribe," said Michael Pachter, of Wedbush Securities. He's one of the most bearish analysts covering Netflix and has a sell rating and $45 target on the stock.
Pachter added that it would be a mistake to take Netflix's first original series too seriously until those shows can create a large fan base that can be drawn into watching more programming. "At the outset, these shows will represent less than 1% of Netflix's content," he commented.
Whether that 1% is the seed that germinates and transforms Netflix is still years away; HBO's first dramatic series, "The Hitchhiker," rolled out in 1984. Then again, if "Lilyhammer" and the other shows take off, Netflix can give episodes of "30 Rock" and "Mad Men" a run for their audience.
(Rex Crum is a writer for MarketWatch. He can be reached at 415-439-6400 or via email at AskNewswires@dowjones.com.)