The Economics of Netflix's $100 Million Show

http://www.theatlanticwire.com/technology/2013/02/economics-netflixs-100-million-new-show/61692/

by _pius • 13 years ago

150 110 13 years ago

theatlanticwire.com

Strshps1MoreTim• 13 years ago

Yeah, a desperate attempt to break independent from the Hollywood/TV crooks.

rayiner• 13 years ago

> the Hollywood/TV crooks

What a load of crap. Hollywood/TV doesn't have a lot of leverage because they're crooks. They have a lot of leverage because they sell a non-fungible product. People don't just want to watch a show about advertisers with a lot of sexist banter--they want to watch Mad Men. They don't to watch a movie with some random hot guy, they want a movie with Channing Tatum.

It's the same market dynamic that makes Apple and Louis Vuitton what they are except even more extreme. LV sells purses and so does Kate Spade and so there is competition there. But only Warner Brothers sells Lord of the Rings, and other swords and sorcery movies aren't fungible with LOTR.

stcredzero6• 13 years ago

> other swords and sorcery movies aren't fungible with LOTR.

I'd pay for more Legend of the Seeker, or for someone to do a Mistborn series. I'd pay to see Game of Thrones.

tectonic• 13 years ago

I'm actually quite excited about this. Netflix is in a position to a first example of a new type of higher-budget independent entertainment.

stcredzero6• 13 years ago

I hope they start producing good sci-fi.

hnriot2• 13 years ago

Bring back firefly!

amalag3• 13 years ago

Does anyone know how the Amazon Studio's projects are coming along? Amazon was also looking to disrupt the Hollywood model and it has been a while since it started.

cedricd• 13 years ago

I'm really hoping this works. Partially because I'm a Netflix subscriber, but mostly because I want HBO, AMC, and Showtime to follow suit eventually. If Netflix shows that they can support a high-profile show with a subscription model, maybe non-cable subscribers can eventually get HBO. Or am I just dreaming?

MatthewPhillips3• 13 years ago

You want to pay $9 * N content providers per month? I don't.

jlgreco2• 13 years ago

You could get up to fairly reasonable values of 'N' there and it will still be cheaper than a decent cable subscription.

apendleton3• 13 years ago

You wouldn't? I totally would. Seems like a cable package that includes premium content (HBO, etc.) runs at least $100 per month. If I could ditch the cable and instead get 11 HBO-quality content providers (which is much better than I get from cable), that would be a no-brainer. More likely, I would get half as many, and end up with more solid content than I have time to watch, for much less money.

baddox• 13 years ago

In a heartbeat.

nmunson• 13 years ago

$9/mth for different content I actually want to watch is much, much more attractive than current cable options.

niggler• 13 years ago

HBO already started to shift. It's called HBO GO. With an HBO subscription you have online access.

The problem with HBO adopting a pure-streaming service is that it's still more lucrative for them to work with the cable providers.

sschueller• 13 years ago

If this works Netflix will buy what's left of HBO in a few years.

metalsahu• 13 years ago

I don't think its just a matter of economics, Netflix doesn't have a choice if they have to survive long-term. Thanks to the internet, the power is shifting from content providers to content creators and they risk turning into a dumb pipe at the mercy of whimsical broadcasters who can choose to stream their show directly to their viewers. Reed Hastings has said that it is a race for how fast Netflix can become HBO before HBO becomes Netflix. They need to produce their own shows else soon they will only get access to B-grade content.

stcredzero6• 13 years ago

I've been watching documentaries on Netflix. They're already stuck with B-grade content in some areas.

bobjane• 13 years ago

"...they risk turning into a dumb pipe".

That's their problem, they don't own the pipes either. They don't own the pipes and they don't own the content (before House of Cards). Up to now they provided...well...a useful cute little UI, but it's hard to make a lot of profit for a prolonged period of time on that. So they either go into pipe building or content building. Content building has the better leverage to the large customer base they've got, and in that context producing House of Cards makes perfect sense. I hopes it works out for them.

sp3322• 13 years ago

Their infrastructure is valuable, especially the code they have which determines what quality of video they can send you without stuttering or buffering which was better than anything else at the time. That was what got them my money.

GFischer4• 13 years ago

The service Netflix provides is licensing and aggregation, plus the UI and convenience. I'd say the first two are the ones most closely worth U$ 7.99 to me.

IMO, licensing and aggregation are the "hard" problems, not UI or streaming or whatever.

halo2• 13 years ago

Netflix's big long-term advantage is buying power.

They have 30 million users spending $100/yr. Assume they spend half their income on content. That's $1.5bn/yr. That's a huge amount of money, and it's only going to get bigger as they grow and expand into new territories.

Increasingly, Netflix revenue is so high that it will seem inconceivable for content owners to turn them down in a gamble to go it alone and increasingly hard for anyone to compete.

I am extremely bullish on Netflix. I think they have a sound business model with huge upsides and the downsides are hugely overstated.

Aron• 13 years ago

They are spending about 71% on content. Before they hit 40M subscribers they could produce 13 hours of House of Cards level content per week. That would surely be something.

For 8$.

edouard12345673• 13 years ago

"it could turn around and sell syndication rights to networks and overseas."

Very unlikely since Netflix is planning to further expand abroad and the key in their business is exclusivity...

The math in this post is bogus since it's only based on incremental revenue brought by new subscribers. Getting more exclusive content does not only bring new subscribers, it also increases retention.

I think the real news is not that netflix is producing its own content but that it's using state of the art analytics to design this new content predicting/modeling the type of scenario/actors/director that would best work for it's 30M+ subscribers.

That's where the true disruption is. If somehow they are better at predicting what people like or don't like, they can design the right show for a given audience and maybe one day change the scenario in realtime depending on your mood a this very specific time...

amalag3• 13 years ago

What about barter deals? Could Netflix 'trade' the show to AMC for the next season of The Walking Dead?

edouard12345673• 13 years ago

Not only this would be a distraction but I don't think it makes business sense for them. In my opinion exclusivity is key to their long term strategy in a streaming world. They already have the best distribution channel you can think of why would they need to licence their content?

sjg007• 13 years ago

Yep.

qw• 13 years ago

Netflix is available in Norway, but House of Cards will also run on a cable channel in March

sp3322• 13 years ago

Netflix doesn't own House of Cards. They paid most of the money to have it made but they only got an exclusive license.

geuis3• 13 years ago

I'm not a fan of political shows. That said, I decided to watch House of Cards last night.

It's not bad. Having Kevin Spacey as the lead is good. There's a good cast of supporting actors too. The writing is a bit mundane, but not terrible. I know the show is somewhat of a remake of a BBC show from a while back, but I never watched it so my take is purely on this experience.

I plan on watching the rest of it. It was interesting enough to have keep me up till 5am doing the "just one more" thing. The format of no commercials and having all the episodes available at launch is a really good thing. I was pleasantly surprised when the 2nd episode started playing as I finished the first one. I was fully expecting to have to wait a week to see the next one. No episode felt rushed, like things had to be crammed into a specific time slot.

The things that work for this format:

1) Release at once 2) Natural variable time lengths 3) Good production values 4) Good cast 5) Decent writing

If they use this as a framework for other types of genres, I think it will be good. I'd personally like to see the next show be sci-fi. Something with a unique premise that has never really been done by networks, because they screw it up. No time travel, or future detective, or alien invaders thing. Something gritty but uplifting, along the veins of Babylon 5, TNG, or BSG.

I'd like to see a near-future show about solar system colonization. Could have an entire system-wide, multi cultural backdrop like Firefly. Hell, try getting Josh Whedon to do it. Visits to Luna, Mars, asteroid mining colonies, deep space science labs, political intrigue from Earth, the companies that own colonies, immigration rights, etc. The solar system as a backdrop is big enough to have an infinite number of stories, but keeps everything so close together that it feels real. Star Trek provided a big galactic tapestry, but many times still felt distant and isolated.

Anyway, check out HoC if you have Netflix. Hopefully we'll see more shows from them.

hnriot2• 13 years ago

I agree that house of cards is a great show and casting Spacey was an excellent choice. The American Beauty Kate Mana really works well too. If you're thinking of the bbc's Yes Minister, then this is nothing like that show. Maybe you had something else in mind.

gyardley• 13 years ago

He had in mind the BBC's House of Cards.

azernik• 13 years ago

He's talking about the BBC's 1990 House of Cards (http://m.imdb.com/title/tt0098825/), starring Ian Richardson as Francis Urquhart, the Conservative Party whip in the House of Commons.

You should check it out - it's available on Netflix :-P

joubert• 13 years ago

Anyway, check out HoC if you have Netflix. Hopefully we'll see more shows from them.

If you don't have Netflix, you can watch the Premiere without signing up for the usual first free month.

And the other originals launching this year (in addition to the new Arrested Development season) are listed here: http://en.wikipedia.org/wiki/List_of_original_programs_distr...

jseliger3• 13 years ago

>It's not bad. Having Kevin Spacey as the lead is good. There's a good cast of supporting actors too. The writing is a bit mundane, but not terrible.

This is a tangent, but HBO and Showtime appear to have noticed that there's a deep pool of talent actors with skills equal to famous, expensive actors. The cable networks realized that these lesser-known but very good actors can be hired to create very compelling shows that spend less on actors and more on the surrounding stuff that makes actors more effective.

jlgreco2• 13 years ago

I might be inclined to agree, but to be honest what made me give the show a shot is when I learned that Spacey was in it. Perhaps they won't need to continue to get big name actors though, now that people understand the sort of scale/budget they are operating at.

jcampbell12• 13 years ago

> It's not bad. Having Kevin Spacey as the lead is good.

I like the show, but Kevin Spacey's southern accent is so terrible it is distracting. I normally wouldn't care, but my I grew up in the Carolinas and he sounds nothing like any person or politician from the area. He needs to drop the accent as it takes away from the rest of his performance.

If they wanted a correct southern accent they should have hired Kyle Chandler.

quaunaut• 13 years ago

There's a lot more than one southern accent. Someone from the Carolinas sounds wholly different from Floridian which sounds different from Texan which sounds different from Oklahoma which sounds different from Louisiana and I think you're getting the picture. I've heard more than one person with that accent of his.

groovy2shoes• 13 years ago

When I was at NC State, I met an old doctor who had an accent kind of like that. I had a feeling it was some sort of "Old Raleigh accent of prestige." I've also heard people talk sort of like that in Georgia, where again I got a feeling it was linked to prestige.

His accent might not be spot-on, but I find it plausible.

dualboot• 13 years ago

Grew up in the south. His accent is wonderful.

There are thousands of accents in that portion of the country just like anywhere else.

For me it's a wonderful departure from Kevin Spacey being "Kevin Spacey" in just about everything else I've seen him in.

House of Cards is delightful.

PagingCraig• 13 years ago

The accent is good.

bambax• 13 years ago

I watched the first 4 episodes of HoC this weekend and am quite disappointed.

Production is very good, acting is quite good (although Spacey simply plays "high status" all the time with a rigid upper lip and not much nuance).

For me there are two problems

- The two main characters are cynical people who are obsessed with power and just plain mean... and they win every time. I don't care for them; at this point I would like to watch them fail and be humiliated, but I don't think it will happen, so I lost the main incentive to watch the next episode.

- The whole thing is predictable. At the beginning of each episode a minor setback appears for the Underwoods, and they defeat it with a smirk (Robin Wright's smirk really gets on my nerves now, although she's probably one of the most beautiful women in the world).

- - -

On http://en.wikipedia.org/wiki/House_of_Cards_(U.S._TV_series) a critic is quoted saying "This hardwired venality is what makes this show so watchable. Here are the realities of political life as most of us suspect them to be."

I'm not sure. I think HoC takes itself and its subject much too seriously. I think reality is much more absurd and difficult to control, as described in Armando Iannucci's writing, which I can never get enough of (The Thick of It, In the Loop, Veep, etc.)

- - -

EDIT -- The rant above is a little off-topic; the on-topic point is that this is a very good move for Netflix and that (as others have noted) they really don't have a choice.

If they don't produce their own exclusive content they are at the mercy of other content producers who will try to price them out of the market (and would succeed in doing so).

geuis3• 13 years ago

Just finished the rest of the season after my previous post. It gets a lot better in the last 5 episodes. Some of the issues you mention that made it boring all tie together very well. Things start coming to an interesting peak towards the end, and Underwood stops winning so easily as he does in the beginning. Now looking forward to the next season.

alaskamiller6• 13 years ago

Netflix accomplished two things:

1. They muscled into the "prestige television" club for $100MM. It may be overpriced, or it may be underpriced, either way it's very good for consumers.

2. They validated television is the new book. You gorge on 13 hours of good television the same way you gorge on 13 chapters of a good book. This is very good for show creators.

A triple win aligning interests while getting to say f-you to existing preconceptions. This is what "disruption" looks like. Now I'm just sad I didn't buy NFLX after people freaked out over Qwikster.

geuis3• 13 years ago

Hmm, television as a book. I get the analogy. It's kind of like applying book serialization to video. You quickly read a book and as many sequels exist when you first pick it up. Then you have to wait for the next season, i.e. book, to come out.

alaskamiller6• 13 years ago

New normal are streams of everything.

jseliger3• 13 years ago

I get the analogy and see the value in it, but I'll point out where the TV isn't like a book:

1. Books are obviously composed of text, and, when you read, you're also imbibing the rhythms of the language you're reading (see http://www.newyorker.com/arts/critics/atlarge/2007/12/24/071... for more on this).

2. Related to number one, many more of us need to write than need to shoot and edit videos. Reading skill is related to writing skill.

3. You'll read far more words in a given block of time than you'll hear in video. Reading is much more information dense in this sense (whether a minute of video is worth a thousand words can be debated elsewhere).

4. It's easier to quote and store text than it is video. Notice the word "easier:" I'm aware that it's possible to quote and store video. Related to this, I use the scheme Steven Berlin Johnson describes here: http://www.stevenberlinjohnson.com/movabletype/archives/0002... .

sliverstorm• 13 years ago

Seems to me like the costs are wildly different though.

_delirium2• 13 years ago

On the 2nd, wasn't that validated by the 1960s at the latest? That was a common perception at the time, anyway.

InclinedPlane• 13 years ago

This is a different behavior entirely. In the "couch potato" case people are just spending all day watching whatever is on, which might become a fundamental feature of their life. In the "netflix enthusiast" case people are spending chunks of free time consuming entire TV series, and often it's a thing that they'll do occasionally instead of continuously. This has very different consequences in the impact such behaviors have on someone's life.

davesims• 13 years ago

Only to a limited degree. Yes, there were soaps and other serials that had long-running narrative arcs, but not with the kind of sophistication contemporary writers are using.

Let's call it the 'Post-Buffy' school of thought, where character nuance, motivation, back-story, plot and sub-plot are all delivered with a kind of attention to detail formerly only used by novelists. There may be a few examples from the 60's -- The Prisoner comes to mind -- but even that can't really touch the narrative layers we've seen in the last decade: The Wire, Lost, Mad Men, Breaking Bad, Battlestar Galactica, Game of Thrones (TV as novel if there ever was one), Six Feet Under, Dexter, Band of Brothers, and so forth. These aren't just books, they're novels.

This I think is partially the result of the ability of viewers to sit down and spend concentrated time with a series when they come out on DVD. The first time my wife and I did this was maybe 10 years ago with Buffy and Angel, and it was the most fun I'd ever had with television. This was a new experience. We'd lose 4 or 5 hours late on a Friday just chaining one after another, like the Battlestar Galactica skit on Portlandia.

What I think Netflix is doing, and probably what it has massive amounts of data to back up (I watched Buffy through Netflix, come to think of it), is that this new type of viewer engagement -- long sessions of series "gorging" -- has completely transformed the way we experience television. I think this is why they released the House of Cards episodes all at once. This is also probably why they're not releasing viewing numbers -- the new experience context of contemporary viewers has very little to do with the old Nielsen ratings arc, and would be a poor measure of the show's success, from Netflix' own point of view.

reustle• 13 years ago

> With Netflix spending a reported $100 million to produce two 13-episode seasons of House of Cards, they need 520,834 people to sign up for a $7.99 subscription for two years to break even.

Isn't that ignoring profit vs income?

DavidSJ• 13 years ago

When Netflix owns the content, their marginal costs per subscriber are near zero -- essentially just bandwidth and compute fees.

sksksk• 13 years ago

But out of those new subscribers, you need to filter out people who would have subscribed even if Netflix didn't have House of Cards

mrposty• 13 years ago

As an Australian who can't get Netflix without breaking the Netflix Terms of Service I suspect there's going to be an awful lot of downloading going on here, even moreso than the game of thrones situation we had where we were only just behind.

Now it's just 'off limits' entirely.

legally, anyway.

tnuc• 13 years ago

According a "friend";

Game of thrones gets downloaded by many tens of thousands in the first 24 hours. Episodes appear about 15 minutes after screening.

House of cards didn't make it to the torrents until 2 days after release and the numbers are nothing like game of thrones. Only half the episodes are available at this time.

As an Australian you could wait for it to be on TV, then it might be shown out of order, at all different (non-scheduled)times and episodes missed and cut.

halo2• 13 years ago

According to their annual report, Netflix spent almost $500m on marketing last year.

I don't understand why people find it so inexplicable that they're spending $100m/yr on creating exclusive content as an extension to that.

stcredzero6• 13 years ago

Kevin Spacey should play Jeff Bezos in the Amazon biopic. (Jeff Bezos always reminded me of K-Pax.)

brianbreslin• 13 years ago

Will be fun to watch NFLX at the end of this upcoming quarter. http://www.google.com/finance?q=NASDAQ%3ANFLX&ei=Oz0PUaC...

They are going to have to promote the show heavily offline I'm guessing. I am a fan so far after only 1 episode.

mcot2• 13 years ago

If this model works than it is great for Apple and Google. TV "channels" move to becoming apps and it blows open the door for more than just a "hobby" project in the living room.

Osiris• 13 years ago

Even if $100mm seems a bit much for the show, Netflix's first entry into the exclusive content business had to be a hit. Once they've established themselves with quality content, they can later add some less expensive content without harming their reputation.

I'm interested to see how well House of Cards does and if it becomes popular enough for them to afford more exclusive content as well as negotiating lower content costs from other publishers.

startupfounder• 13 years ago

I just finished watching the 13 episodes of House of Cards season one this weekend and my very good friend is in acquisitions for a major network.

House of Cards is phenomenal, period.

"We believe that February 1st will be a defining moment in the development of Internet TV...The constraints of the linear TV grid will fall, one by one." - Page 5-6 Letter to shareholders http://goo.gl/VBGv6

Look beyond the short term $100M price tag for this one show, this is a shift in power. Netflix is building an old stone house...

“Money is the McMansion in Sarasota that starts falling apart after 10 years. Power is the old stone house that stands for centuries. I cannot respect someone who doesn’t see the difference.” - Francis Underwood on House of Cards

Netflix is becoming truly vertically integrated.

jv22222• 13 years ago

They should have done this with Stargate Universe. Easily would have got 500k subscribers.

robryan• 13 years ago

As much as I love stargate universe I don't think it would be the best place to start. The audience is a bit narrow and fragmented, they created a lot of disillusioned fans when they cancelled Atlantis and changed the format so much.

Would be great to see a new Star Trek series with SGU like production (visually the show looked great).

siong1987• 13 years ago

"The goal is to become HBO faster than HBO can become us." - Ted Sarandos, Netflix’s chief content officer.

This is the kind of disruption that we actually need for traditional media companies.

hilko2• 13 years ago

I love the directness and honesty in that statement.

shmerl6• 13 years ago

Netflix is one of the pushers to standardize DRM in HTML:

http://lists.w3.org/Archives/Public/public-html/2013Jan/0172...

So I don't see their growth as a good thing.

Encosia3• 13 years ago

Would you rather they use Silverlight forever instead? Without some form of DRM on playback, there is no Netflix (or Hulu or any other legit web-based streaming for premium content).

shmerl6• 13 years ago

I'd rather them not use DRM at all. I don't use them precisely because of their DRM proliferation. But it's not the point - the point is that DRM is a dying trend altogether, and making it a Web standard is nonsensical. It's not different from proposing to make Flash or Silverlight a Web standard, when the whole Web is shifting to move to pure HTML. That's besides the mere fact that DRM is unethical and goes against the whole notion of the open Web.

louthy• 13 years ago

I signed up because of House of Cards, so I guess that's one account closer to their target ;)

I really enjoyed the series, I expected to be disappointed because most US remakes of UK shows are abysmal - and the original is a stone cold classic, but I thought it was stunning and really enjoyed Spacey's FU 2.0.

brownbat2• 13 years ago

I would have preferred they spent a few hundred million per year on lobbying and amicus briefs to urge Congress and the Courts to adopt compulsory licensing. Then Netflix would be able to stream HBO shows without HBO's permission for a reasonable fixed fee. So could Amazon, and Hulu, and Google Play.

All of them could compete on service, rather than in backroom negotiations.

Instead, consumers should look forward to a war of content exclusivity deals, which should be a boon to content owners, and ultimately lead to increasing prices or decreasing convenience for consumers.

guelo• 13 years ago

Lobbying against the MPAA would not be cheap and would take many years to be successful, years that Netflix doesn't have.

brownbat2• 13 years ago

Building a content brand isn't going to be cheap or short term either.

And the MPAA isn't so formidable an enemy. They lose on issues like SOPA that receive any sort of public attention, because they don't have a populist message. Both sides of the aisle* have basically abandoned them looking for the next grassroots internet issue.

And this isn't that high of a hurdle. We already secured similar compulsory distribution rights for radio and cable without any concerted lobbying effort, because it's a really common sense solution that benefits consumers and producers. There's not as much legislative or judicial inertia on these issues as it might seem.

As to cost, Netflix is spending $100 M per show and doing 5 shows a year (maybe the others are significantly less?). But for just 0.3% of one show per year, you get a top lobbying firm. I'd be willing to bet other distributors would pitch in to defray the cost.

That's more pressure than this issue has ever seen, and it's an issue that's already been won in other domains. Given that history, I don't think it'd take more than two years of effort. Maybe five?

While Netflix is seeing revenues of just under a billion dollars a quarter, they'll be fine for a while.

Pricing: http://lobbying101.wordpress.com/about-lobbyists/how-much-do...

*UPDATE: I should have said "some individuals from both sides of the aisle," I didn't mean to claim the MPAA has lost all support, just that cracks are starting to show.

nextparadigms• 13 years ago

This is what Spotify and others like them need to do, too - try to take away artists from the labels. But I think Spotify already signed a non-competing contract with the labels.

Zarathust• 13 years ago

The article assumes that half a million customer will pay for 2 years. I don't get how allowing a customer to watch all episodes in 1 month will help recurring revenues. Sure, people might get hooked on Netflix after that but I fear that past the initial "wow, Netflix can produce stuff too!" excitement, it will end up being just another show available.

huslage• 13 years ago

This article is skeptical, but in a strange way. The basic argument amounts to "the existing models work so why would netflix do anything else". Useless.

The Economics of Netflix's $100 Million Show

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