Netflix, as it continues to bulk up its muscle within Hollywood, is now seeking to take up residence there.
The Los Gatos, Calif., company is eyeing a major move from Beverly Hills to the center of action in Hollywood that would boost its office space by at least 50%. The video streaming service signed a letter of intent to lease 150,000 square feet in a marquee high-rise office tower under construction on a studio lot on Sunset Boulevard, according to real estate industry observers who know about the deal but were not authorized to speak about it publicly.
Though the deal still could fall through, the intention reflects Netflix’s ambitions to solidify its position as one of the industry’s top players. The company has shot to unforeseen heights in recent years and upended the TV and movie industries as it became a go-to repository for high-quality original content that has amassed more than 65 million worldwide subscribers.
Its growing dominance will be on full display Tuesday in Beverly Hills when the streaming service kicks off the Television Critics Assn.'s press tour — a two-week-plus conference in which networks and, now more notably, streaming services unveil their lineups for the coming seasons. Netflix, once a footnote at the conference, now has a full day of panels, just like many of its big cable and broadcast competitors, with a ramped-up slate of programming that includes “Orange Is the New Black” and the upcoming drug drama “Narcos.”
And as Netflix evolves, its every move is scrutinized.
“They’re in a position where they can’t sit still,” said EMarketer analyst Paul Verna. “Everyone is watching. They have to continue delivering quality show after quality show. And that’s not easy. I think if Netflix has a business risk in the long range, it’s the fact that it’s hard to stay on top for very long.”
Much of Netflix’s success has centered on its strong subscriber growth in the U.S. and abroad, which often captures more investor attention than the company’s financial results.
The $7.99-per-month service added 3.28 million streaming subscribers, better-than-expected results aided by increased international subscribers, according to second-quarter results released this month. That helped bring the domestic subscriber base to 42.3 million members and its international base to 23.2 million.
Analysts expect the uptick to continue as the company carries out the rest of its aggressive global expansion efforts. By year’s end, it will enter Japan, Portugal, Spain and Italy, with more countries slated for next year. All the while, Netflix continues to eye an entry into China.
It’s quite an evolution for a company once known for delivering DVDs to people’s mailboxes. In just over two decades, it has evolved into a prototype for Internet TV and is emerging as a disrupter to the movie distribution business model.
“They are strategic geniuses,” said Laura Martin, a senior media analyst for Needham & Co. “They created a business worth $40 billion entirely based on other people’s assets. Geniuses.”
Fueling much of the subscriber growth is Netflix’s storehouse of content, consisting of a big library of movies and old TV shows. There’s also a growing brand awareness linked to its original projects, some of which showed their strength when Emmy nominations were announced this month.
But the content capable of driving up viewing hours — subscribers streamed 10 billion hours in the first quarter — comes at a cost to Netflix’s bottom line in the near term. Profit fell 63% in the quarter as costs to buy and create content increased, and the strong U.S. dollar lowered the value on revenue generated outside the U.S.
The company projected that spending on content would approach $5 billion in 2016, and expenses for marketing will be nearly $1 billion. About 10% of content spending is on originals — and Netflix Chief Content Officer Ted Sarandos said he’d like to get it to 50%.
“We’re going to continue to grow our content spend on original programming — both in absolute numbers and as a percentage,” Sarandos told analysts. “Because it’s been working. It’s been helping grow the brand and, more importantly, driving hours viewed.”
The need for extra space also signals more hires are on the way.
Analysts said it would also make sense for Netflix to look into acquiring production facility space. The company has said it plans to produce originals that it would own. Netflix was partially responsible for the surge in digital production in L.A. last year, with 10 pilots in its pipeline among those shot locally, according to a recent FilmL.A. report.
Netflix can afford to make these kinds of moves partly because of the strength of its stock price. Shares closed Monday at $106.43, down from the 52-week high of $117.88 that came after it reported its second-quarter earnings this month. The high coincided with a 7-for-1 stock split. Some analysts say the stock could top $150.
Its growing operation comes just as the front-runner of Internet TV faces increased competition in the video streaming market from Amazon, Hulu and more traditional media companies. Comcast Corp. recently made headlines when it unveiled plans to launch a streaming service for its broadband subscribers this summer.
That Netflix has outgrown the physical spaces of its key domestic bureaus is hardly shocking. People familiar with the deal who were unauthorized to speak confirmed that the company was considering space in the 14-story Icon at Sunset Bronson Studios. The building is being constructed at Sunset Bronson Studios, the former Warner Bros. lot on Sunset Boulevard at Bronson Way near the 101 Freeway.
The move, should it pan out, is expected to occur in 2017 and would increase its L.A.-area office space at least 50%.
“If they want to be a Hollywood player, increasing their presence here certainly says something,” said Wedbush analyst Michael Pachter. “But I don’t think it
ultimately matters one way or the other. For appearance’s sake, it does look good.”
The building being erected by Hudson Pacific Properties Inc. is slated for completion late next year. Hudson Pacific declined to comment about whether there is a lease agreement, and Netflix declined to
comment on its L.A. objectives.
The entertainment company now occupies about 100,000 square feet of offices in Maple Plaza in Beverly Hills, according to real estate brokerage Cushman Wakefield.
Netflix is also expanding in the Bay Area, where it rents more than 215,000 square feet in Los Gatos and Fremont. The company has agreed to lease an additional 240,000 square feet in a new office complex in Los Gatos starting in December, the brokerage said.