This past June, SVOD service Netflix hit a milestone. Its subscribers watched more than a billion hours of video streamed over high-speed internet connections in one month. And just exactly what that content encompassed has caught the attention of the kids industry. Once known primarily for serving up movies, Netflix has changed its course and started to play in the kids space. In fact, some would say it’s not just frolicking, but that it’s on a mission to take over the playground. Last year the SVOD provider launched Just for Kids, a special children’s interface that organizes content for kids 12 and under visually by genre and character icon, such as superheroes, princesses, dinosaurs and girl power. Netflix also provides each of its members with customized recommendations based on their tastes and favorites. And since introducing the section in August 2011, viewers have consumed more than two billion hours of kids titles on Netflix.

There are compelling reasons why children’s content works well on streaming services. Parents like the idea of their kids watching commercial-free programming. A Netflix subscription is cheaper than cable and kids don’t care about repeats or that a cartoon is several years old—to most, the first season of SpongeBob SquarePants is as fresh, funny and relevant as it was when it first aired.

And then there are stats that point to the sheer volume of animated content that passes through streaming. New York-based Janney Capital Markets analyst Tony Wible refers to a recent study based on a sample of two million US set-top box owners that shows users of streaming services like Netflix and Hulu consume significantly more animated content than any other genre.

“Netflix has signaled how important it is by introducing this kids-only interface, which previously only showed up on its website, but has now made its way to the Xbox,” says Wible. He adds that Netflix isn’t necessarily making other genres available in this way.

A crucial aspect of Netflix’s strength is not only its   reach across platforms, but also its abundance of TV content. And to further build that offering, Netflix is licensing content from both distribution companies and  the distribution arms of broadcasters themselves. It effectively creates an opportunity for content owners to sell thousands of old and current episodes from their catalogues. But while this new licensing channel has opened up, many in the industry wonder what effect the growing popularity of Netflix and other SVOD services will have on traditional broadcasters. Will it result in lost ad revenue and cable carriage fees? Will kids and family-oriented entertainment over-saturate the market and ultimately dilute the value of this content?

State of flux
This summer, a report from Wall Street research firm Sanford C. Bernstein, focusing specifically on Netflix’s impact on kids broadcasters made headlines by suggesting that content providers like Disney and Viacom should limit their content availability on Netflix to avoid diluting their linear TV ratings. The report dropped not long after Nielsen revealed that Nickelodeon’s US ratings had experienced a double-digit drop this past spring. Though conclusive evidence for the reasons behind Nickelodeon’s ratings fall have yet to be produced, a Bernstein analyst and several media outlets pointed to the net’s series availability on Netflix as a catalyst.

Janney’s Wible says the SVOD service has, in fact, become an incremental growth driver of revenue for broadcaster distribution arms like Nickelodeon’s. “They still see Netflix as a savior to their businesses because they look at the revenue as helping to offset the ratings decline, rather than as part of the reason for that decline,” says Wible.

Sales force
While the industry struggles to make sense of where ratings are going and whether or not streaming will cannibalize traditional broadcast audiences, one thing is for certain: Content producers and distributors are making the most of the new opportunity to sell their wares. Toronto, Canada-based Cookie Jar boasts the world’s largest independent children’s content catalogue. When its acquisition by Canada’s DHX Media is complete this month, the combined entity will house 8,000 half-hour episodes in its library. Cookie Jar CEO Michael Hirsh explains that a 24/7 kids specialty channel can broadcast a maxiumum of 168 hours of programming per week, which is a fraction of the tens of thousands of episodes that just one streaming network can offer.

Hirsh says the distribution business until now has been tied to the 80/20 rule, which is to say it’s been standard to do 80% of your business using 20% of your library. But with sell-through of older library stock to on-demand services, Cookie Jar turned over 82% of its library—more than 12,000 episodes—between August 2011 and August 2012, compared to the 1,500 to 2,000 episodes it had been selling on average in years past.

“My belief is that we’ll double, and perhaps triple, [those sales] as demand for digital content grows around the world,” says Hirsh. He adds that Cookie Jar has adapted to the new distribution channels by setting up an infrastructure that digitizes all of its content to the specs required by various digital services globally.

Kids series and movies do particularly well because evergreen content attracts the family audience. Hirsh says Inspector Gadget, for example, which was produced 30 years ago, is still an active part of Cookie Jar’s library and is now getting even more play because of streaming services.

The Jim Henson Company’s EVP of global distribution,  Richard Goldsmith, agrees that Netflix especially has opened up a whole new sales opportunity and audience for its older content. In addition to new series like Dinosaur Train, the company has also licensed several of its classic puppet series and movies including Fraggle Rock, Dark Crystal and Labyrinth to Netflix. It has also dusted off lesser-known shows like The Wubbulous World of Dr. Seuss and Mother Goose, which Goldsmith says perform well because the Henson brand name is attached.

Cake Entertainment CCO and MD Ed Galton, meanwhile, says he and his partners proactively went after Netflix sales when he caught wind that the service was starting to focus on kids. The London-based distributor has licensed five series to Netflix so far, and is now in discussions for a second round of sales. As a smaller, boutique shop, Cake doesn’t have the back-catalogue of a Cookie Jar, says Galton. But its content is still desirable, which speaks to the service’s appetite for quality kids content.

Oscar

“The whole point is that they want people to watch, so they are just as picky as everybody else in that sense,” says Galton. “And they are becoming more picky because the kids audience is just as sophisticated as adults.” Though Galton welcomes the opportunity to work with SVOD services like Netflix, he admits that trepidation exists—he doesn’t want to burn series out before their time. He still sees linear TV as the big driver of Cake’s business and says there is a balance to find with on-demand services, which are becoming ever-more important.

Expanding windows 
“As an industry, we are navigating through what it means, what it does to second cycles, to repetition, to new properties and to windowing,” says Fernando Szew, CEO of L.A.-based MarVista Entertainment. “They’ve become another touch point in how the audience can see and be involved in content.”

Marvista has worked with Netflix during its international expansion, in particular by supplying family movies and series such as Radio Rebel, Mandie and the Secret Tunnel and Mandie and the Cherokee Treasure to its Lat Am operation, as well as the Mandie movies and Spirit Bear to its UK branch.

Szew believes Netfilix is particularly useful as a tool for introducing series and building excitement and awareness for a broadcast launch. For example, in the summer of 2011, Saban Brands, which works with Marvista as its distributor, licensed all 17 seasons of its 1990s hit series Power Rangers—over 700 episodes—to Netflix in the lead-up to the debut of new seasons, Power Rangers Samurai and Power Rangers Super Samurai on Nickelodeon in February 2011. After the broadcast premiere, the new seasons were then made available on Netflix in North America, Latin America, the UK and Ireland.

Saban VP of distribution Frederic Soulie explains that Nick continues to air current season repeats, library eps and the occasional Power Rangers marathon.

“When you have such a large library, it just makes sense,” says Soulie. “You couldn’t possibly satisfy the fan base by just releasing DVDs. Consider the shelf space that would take.”

Retail sell-through of physical media is still a big part of the equation, however, especially for home entertainment companies like Dallas, Texas-based NCircle Entertainment. SVP and GM Debbie Ries says the preschool-focused company has content deals with every big SVOD player going, but its digital distribution sales account for less than 5% of its revenue. Though the company is restrictive with its digital sales, Ries says NCircle will be looking to make more deals with approaches differentiated by brand. So for example, the company would license out a portion of Cat in the Hat content, but hold back the majority of episodes so that the consumer would still have a reason to purchase its DVDs.

Henson’s Goldsmith says, up until now, he’s been allotting SVOD services third-window rights for new original content. “If a TV network is not in the SVOD business, then normally we would hold back the SVOD window to give the TV audience a chance to grow, and also to give the DVD business a chance to grow,” he says. However, he is seeing interest from both sides in granting SVOD services second-window rights after broadcast. “As a distributor, you have to consider the economics. Will the SVOD service pay us enough for them to buy out the DVD window?” he asks. And like many in the industry, he predicts that it’s only a matter of time before the model will evolve to include the production of series that will either be exclusive to Netflix or premiere on Netflix.

But Goldsmith doesn’t want to dilute the market and has passed on many deals from start-up SVOD companies that offer licensing deals based on a revenue-share mode. In particular, he’s skeptical of small start-up SVOD companies that don’t have a critical mass of users, and also small kids-only services that charge a low subscription fee and have the potential to dilute the value of the brand’s content.

Goldsmith says Netflix and other established SVOD services, such as Comcast and Amazon in the States, “not only give us comfort that we are being adequately compensated for licensing our content to them, but they also give us additional awareness and marketing for our brands, like a TV network does.”

A logical extension? 
Janney’s Wible says Netflix’s increasing market reach has become attractive to large content companies like Viacom, which have seen ratings declines and now depend on SVOD revenue to make up the difference in ad revenues. “Until a rival to Netflix emerges that can pay comparable amounts of money—and we’re talking billions of dollars a year—I don’t foresee a scenario where studios could try and change the terms drastically with Netflix or walk away from that revenue source.” What might change the playing field, however, is other competitors like Amazon and Apple entering the space. “The advantage that [new entrants] have is being very nimble and flexible and not being encumbered by legacy deals and relationships. They’ll get to craft rules in a new environment,” says Wible.

Part of this new environment could be a move away from providing cheap, commercial-free, limitless streaming services and commissioning original content. This year Amazon, expanded its two-year-old feature film commissioning arm, Amazon Studios, to take on the production of kids and primetime comedy series. In June, it announced the first four series in its development slate, including one children’s show, a preschool concept called Buck Plaidsheep that received a US$10,000 option.

“I see it as a logical extension of their business. Why not have someone else who is competing with the other players?”muses Cake’s Galton. “As long as the numbers make sense and there is an opportunity for shows to get made, I think that will increase the opportunity for indies to produce more shows… It opens up the world to more content.”

In the meantime, Wible says Netflix is in a race against time to capture as much market share as possible internationally before new on-demand services emerge from sources including stand-alone VOD entities and regional cable and satellite operators. Cookie Jar’s Hirsh, for one, has seen his company’s Netflix deals in Europe go from just one contract in 2011 to about 20 this year.

On an international scale, however, Wible doesn’t see the future of SVOD trumping TV at large. “I don’t think it will ever replace traditional TV, but it will likely complement it,” he says.