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February was a rough month for Netflix(NASDAQ: NFLX) original series. Friends From College won't be coming back for a third season, and Netflix also axed two of its popular Marvel original series, Jessica Jones and The Punisher. This marks the end of the Marvel era at Netflix -- the popular Daredevil was canceled late last year over fan protestations. These were popular shows, and fans (including rapper Eminem, apparently) are up in arms. Why would Netflix kill off shows that its own viewers loved?
We've seen this before. Netflix is no stranger to pulling the plug on its own hits. The aforementioned Daredevil cancellation led to fan campaigns to save the show. And Netflix dumped American Vandal last year in a move that stunned fans -- though close observers could see why it happened. Netflix's latest cancellation spree has a similar explanation, with a few fun wrinkles thrown in.
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The math behind Netflix's cancellation spree
To understand why Netflix is cancelling some of its own best shows, we need to remember why Netflix makes original content in the first place.
Netflix's original content helps differentiate the service and gives fans a reason to choose Netflix and its exclusives over competing services like AT&T's (NYSE: T) HBO -- but that's not the main goal here. Netflix, it's worth remembering, has far more subscribers than any of its rivals, and it does not seem to need much in the way of differentiating content.
Netflix calculates its profits the same way that everyone else does -- revenue minus costs -- and a key goal of the company's original content strategy is to reduce its future costs. Though it's expensive to develop content, Netflix will save money in the long run because it will become less reliant on pricey licensed content.
Or, at least, that's how it would work if Netflix made its original series entirely on its own. But that's not the case with all of Netflix's series. Some Netflix "originals" are made in cooperation with outside studios. As Netflix's original content strategy matures, the company is looking to keep more and more content production in-house, and it's killing off shows that cost it more, like American Vandal.
Cost-benefit trade-offs matter, too, of course. The more popular a show is, the more likely it could survive despite higher costs. But the presence of outside stakeholders is a big negative, especially given that Netflix generally pays a fixed price for its original content (meaning that less-popular series don't get any cheaper just because people aren't watching).