

The Economics of Netflix's $100 Million Show - _pius
http://www.theatlanticwire.com/technology/2013/02/economics-netflixs-100-million-new-show/61692/

======
metalsahu
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.

~~~
bobjane
"...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.

~~~
sp332
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.

------
startupfounder
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.

------
cedricd
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?

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

~~~
apendleton
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.

~~~
MatthewPhillips
I want to pay for content, not brands. This is just a different version of the
problem we have with cable. You're forgetting that most of the content HBO,
Showtime, etc. show is not original content, and it overlaps with each other
(and Netflix, and Amazon Prime), so you'd be paying for the same content many
times over.

~~~
apendleton
No, I don't think I'm forgetting that. Netflix is talking about doing five
original scripted series per year. HBO does... seven or eight, maybe? (Off the
top of my head from the last year, Game of Thrones, Girls, True Blood,
Boardwalk Empire, Newsroom, and Treme; that list isn't complete). That content
is all not only original but, at least initially, exclusive. Showtime is at
about the same level of volume, so this isn't unique.

You're right that in terms of a fraction of hours of content per month, most
of what they show is not first-run original content, but I don't watch TV 24
hours a day, so I don't care. Like I said, if I got that amount of original
content from four or five different providers (let alone 10), that would be
more television than I have time to watch. The fact that they mostly show
movie reruns is immaterial.

~~~
MatthewPhillips
Why should you care who makes Game of Thrones? Isn't that immaterial to you as
a consumer; you just want to watch Game of Thrones, right? Why must we choose
certain producers of content and not just choose the content? If shows were
more competitively priced, say .99 for rentals, 9.99 for season passes, this
would all be a non-issue.

~~~
apendleton
Maybe, maybe not. What's interesting about the HBO/Showtime/etc. model is that
it specifically encourages programming diversity, as the original article
discusses at least a bit. Many people are willing to pay the surplus on their
cable bill just to follow their one or two favorite shows, and few of the
audience watches all eight (or however many). What this means is that whereas
when a network adds a new show, they're trying to maximize its viewership on
its own to maximize ad revenue, HBO only cares about adding new viewers that
aren't already a part of their audience -- if a new show is only of interest
to people already in the target demographic of an existing show and,
therefore, probably already subscribers, nobody new will subscribe and the
show won't pay for itself. As an audience member of their content, then,
you're not expected to watch all of the shows, but you get the opportunity to
watch a few that are probably more-narrowly-tailored to your interests than
would be expected of network programming.

So yes, I would like to just be able to buy Game of Thrones, but I'd also,
personally, like to be able to just buy Deadwood or (on Showtime) Queer as
Folk, and I think if every show had to justify itself to network executives on
raw viewership numbers instead of on audience-broadening power, those shows
would never get made; their audiences are too niche compared to their
production costs. I certainly appreciate the opportunity to see at least some
content that's not aimed primarily at 18-35-year-old straight men.

Of course, this is the kind of reasoning that justifies 100-channel cable
packages instead of a-la-carte cable channels, so take what I'm saying with a
grain of salt. But I think the expectation that a-la-carte show purchasing
could really work, economically, is probably not realistic (and this without
even getting into the issue that it'd be tough to pay for a $75-million Game
of Thrones season at a dollar an episode).

------
halo
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.

------
edouard1234567
"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...

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

~~~
edouard1234567
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?

~~~
amalag
Yes I think you are right about exclusivity. I think what they paid for House
of Cards is significantly more than what they pay for other shows. That is
really my questioning about the model. But yes, they paid the premium to not
only show it, but for exclusivity. If you are right they could license it
outside the US.

~~~
edouard1234567
It would make sense if they had no intention to aggressively expand abroad.
They are doing exactly the oposite. In the last two years they launched in 20+
countries. Like I said they have the ultimate distribution platform for their
content and the cost of expending it abroad is marginal, a couple of CDN deals
and some marketing.

------
siong1987
"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.

~~~
hilko
I love the directness and honesty in that statement.

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

------
alaskamiller
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.

~~~
geuis
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.

~~~
jseliger
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...](http://www.newyorker.com/arts/critics/atlarge/2007/12/24/071224crat_atlarge_crain)
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...](http://www.stevenberlinjohnson.com/movabletype/archives/000230.html)
.

~~~
alaskamiller
I'll defend.

1\. House of Cards was 13 "chapters" that have definite rhythm and flow. Every
hour was a mini three act play and it would make sense considering at the end
of the day, video is just scripts brought to life by an accomplished
playwright, accomplished director, accomplished talent, and accomplished cast.

2\. We don't live in that world anymore. We're a civilization on an escalating
need for input stimulation. It's an addiction, you're either the pusher or
you're user. We've transitioned on the web from merely just hypertext to
multimedia and real time, like how we've transitioned from typing in boring
text updates to photo updates, and how we've moved from just merely chatting
to video chatting.

3\. But you experience much more in a given block of time than just pages on a
book. And look at the movie industry versus the print industry. And the impact
of a well crafted moment in a show, I posit, is much more powerful sometimes
than a page can deliver.

4\. Surf Tumblr for a few hours and you'll understand how things are done
these days. Kids don't just share quotes anymore, kids share GIF screen caps
of their favorite moments in the movie or show they like. And there are better
and better tools each season to make screencapping creation/sharing easier by
the day. Look up what IntoNow is doing with their community and how they're
getting people to interact in real time to individual shows.

Writing's on the wall: People don't read anymore, quoth Steve Jobs.

~~~
stcredzero
_> And the impact of a well crafted moment in a show, I posit, is much more
powerful sometimes than a page can deliver._

Depends on the writer. I've been haunted by single lines in novels for years.

 _> Surf Tumblr for a few hours and you'll understand how things are done
these days. Kids don't just share quotes anymore, kids share GIF screen caps
of their favorite moments in the movie or show they like._

In David Brin's uplift series, he posited that the "uplifted" sentient
dolphins would mimic echolocation signals to beam images and short imagined
movies directly into each other's heads. It's like we're becoming David Brin's
dolphins. Someday, our tools will be so powerful and the interfaces so slick
and efficient, we will just instantly produce little movies and beam them into
each other's brains. We've already seen the effect of video on speech and
syntax: "It was like..."

~~~
hilko
I've been haunted by moments in television as well, though.

The two final episodes of The Wire left me sleeplessly sitting in the garden,
because of the events that transpired and the adrenaline involved.

The Body, one of the best Buffy episodes I can recall, left an impression on
my young self that can still give me goosebumps when I think about it.

And the final episode of last season's Breaking Bad comes to mind, as well as
the last episode so far.

I can't think of other occasions right away, but there are many more like it.

That said, on average books seem to have that effect more. Few things really
topped how I felt after reading 'The Red Wedding' in A Song of Ice and Fire,
for example. I think the main reason is that for television shows, the writers
have to make many more concessions, because of producers, Nielsen ratings, and
so on.

------
Osiris
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.

------
tectonic
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.

~~~
stcredzero
I hope they start producing good sci-fi.

~~~
hnriot
Bring back firefly!

~~~
TruthElixirX
Its been ten years. Let it go. Seriously.

~~~
stcredzero
Summer's still got it. You could pick up the universe 10 years later, and
nerd-dom would flock to it. Joss Whedon could make it work, if he wanted.
Doesn't though. It would be a different show, with maybe a few actors from the
old one, but it would still have the benefit of the franchise.

------
amalag
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.

------
geuis
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.

~~~
jcampbell1
> 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
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.

~~~
kmfrk
They modelled the accent on the writer/producer's father:
[http://www.hitfix.com/whats-alan-watching/house-of-cards-
sta...](http://www.hitfix.com/whats-alan-watching/house-of-cards-star-kevin-
spacey-on-his-return-to-television-sort-of).

I obviously can't speak to how well they nailed it, but there was a very
specific accent in mind.

~~~
jcampbell1
Thanks for posting that. It seems they were more interested in enhancing the
dialog by adding rhythmic lilt rather than being concerned about producing
something that is authentic.

------
brianbreslin
Will be fun to watch NFLX at the end of this upcoming quarter.
[http://www.google.com/finance?q=NASDAQ%3ANFLX&ei=Oz0PUaC...](http://www.google.com/finance?q=NASDAQ%3ANFLX&ei=Oz0PUaCeKqaIlgOhHQ)

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

------
louthy
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.

------
mrposty
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
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.

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

~~~
sksksk
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

~~~
JackpotDen
surely they have the tech to query up the number of new users that watched
house of cards?

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

~~~
brownbat
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...](http://lobbying101.wordpress.com/about-lobbyists/how-much-do-they-
charge/)

*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.

------
mcot2
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.

------
Zarathust
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.

------
jv22222
They should have done this with Stargate Universe. Easily would have got 500k
subscribers.

~~~
robryan
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).

------
Strshps1MoreTim
Yeah, a desperate attempt to break independent from the Hollywood/TV crooks.

~~~
rayiner
> 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.

~~~
stcredzero
_> 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.

~~~
GFischer
Someone is doing Mistborn. Let's hope they don't bungle it.

[http://www.brandonsanderson.com/blog/1074/Mistborn-Movie-
Upd...](http://www.brandonsanderson.com/blog/1074/Mistborn-Movie-Update-and-
Hugo-Nomination)

------
nextparadigms
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.

------
huslage
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.

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

[http://lists.w3.org/Archives/Public/public-
html/2013Jan/0172...](http://lists.w3.org/Archives/Public/public-
html/2013Jan/0172.html)

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

~~~
Encosia
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).

~~~
shmerl
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.

~~~
yardie
> the point is that DRM is a dying trend altogether

Amazon, Apple, Netflix, Steam, Microsoft, Sony and Spotify all disagree with
you. DRM isn't dying, the goalposts have just moved. I think people are
starting to become more educated on what is and isn't acceptable DRM. If it's
handled transparently then most people don't care. If it is handled poorly
(I'm looking at you Installshield) then it's the nightmare we imagined.

There are certain things I can accept DRM on, streaming movies from Netflix,
streaming movies from Spotify, cheap games from Steam, and reasonable SaaS
subscriptions. And there are some things even I won't accept DRM on, ever. My
music collection and my book collection, mainly. I'll pay the rent price for a
game or movie, but I'll never pay the owner price and have you rent it to me.
That's how I see DRM and that is how I instruct others to treat it.

~~~
GFischer
A really sensible answer :) .

As you said, we should be more pragmatic about it. I don't accept DRM on my
e-books or music either, but I'm willing to compromise on movies and some
games.

Sticker price is, as you mention, a big point as well.

