

The Economics of a Hit TV Show - sebg
http://priceonomics.com/the-economics-of-a-hit-tv-show/

======
twoodfin
So as I understand it, the author is suggesting that NetFlix produce a bunch
of low-rent pilots (or half seasons or so) throw them against their wall of
subscribers with a bit of recommendation-targeted magic, see what sticks, then
spend the money to produce the "grown up" versions.

At first glance, that isn't a terrible idea, but even if it were their
eventual strategy, I still think it makes sense to spend big bucks on top
shelf series to start. For one thing, they weren't totally "blind": If you
believe their spin, they spent a lot of time analyzing their audience to
target exactly the kinds of shows they should make, and they have a lot more
data to go on than, say, AMC had seven years ago. For another, if they wanted
their subscribers to take them seriously as an HBO-like content producer, it
helps to actually produce some HBO-level content right out of the gate. Once
subscribers trust that you _can_ make Emmy-worthy shows, they're more likely
to tolerate your ultra-targeted but cut-rate test-batch series.

Even so, I'm not sure how the suggested strategy is supposed to play out: Say
they made 100 cheap shows instead of 5 expensive ones. In order to be more
interesting to any particular audience to overcome the fact that they aren't
(yet) Hollywood-quality, one would think they'd have to appeal deeply to a
narrow audience (I'd give a science fiction show about a generational ship a
chance no matter how cheaply it was produced, for example). But now your show
is in a trap: It's too focused, and will have a hard time gaining an audience
even when the production values go up (and how do you "scale" to more
expensive actors?) Time travel geeks loved the movie "Primer", which cost
about the same as a small car to produce, but a million-dollar-an-episode show
based on the concept has roughly 0 chance of making its money back.

~~~
jonnathanson
Author here. I don't disagree with you, especially in the second paragraph. To
some degree I think it was smart for Netflix to make a big splash this early
on. But the perception that they're "paying for quality" is a bit suspect,
given that Hollywood itself -- ostensibly "paying for quality" in its entire
process -- has a 98% failure rate on developing projects. Quality talent
doesn't always yield a quality product in the creative business. Even the best
writers, directors, producers, and actors have their failures. I have no
reason to suspect Netflix was any smarter in its approach to developing _House
of Cards_ than networks would have been -- though I could be wrong (and hope I
am).

At the end of the day, the $100M for HoC was a big bet. It was a signaling
tactic, a marketing tactic, and a bet on top-tier talent. But it was a bet,
nonetheless, and an expensive one. That it seems to have paid off (to an
extent? jury is still out) shouldn't fool us into 20/20 hindsight bias. It
could just easily have busted.

 _" So as I understand it, the author is suggesting that NetFlix produce a
bunch of low-rent pilots (or half seasons or so) throw them against their wall
of subscribers with a bit of recommendation-targeted magic, see what sticks,
then spend the money to produce the "grown up" versions."_

Not necessarily, and I should clarify here. I think pilots can be shot for a
lot less than they are, and I think audiences are proving themselves quite
receptive to previews and other short-form "pilot" systems as proofs of
concept. A lot of movie trailers are increasingly being made before the movies
even start shooting ("teaser" trailers). I think there are ways Netflix can
take the guesswork out of the _development_ process, even if _production_ is
still an expensive endeavor.

You have to pay for a quality product, but the system right now also pays
heavily for the risk in the pre-production process. That process can probably
be de-risked considerably.

I would not recommend testing 100 half-baked concepts to see what sticks. But
I _do_ think Netflix could test or tease concepts in development to determine
which ones to develop, and/or how to present new shows to the right early
adopters.

Something I probably wasn't as clear about as I could have been: half the
battle in finding a hit is developing an _audience_ , not just a show. Netflix
has better audience-development capabilities at all stage of the production
equation. It doesn't need to guess quite as much as networks do.

Maybe -- to your point -- Netflix's audience-segmenting capabilities give it
the _ability_ to play the big bets game more than networks can. But
historically, people have been shockingly bad at predicting what will actually
hit and what will miss. _Star Wars_ was laughed out of every major movie
studio in town, for instance, and at the script level, it sure didn't look
like "quality" to the eyes of the execs reading it. On the other end of the
spectrum, a show like _Firefly_ \-- which fans (including myself) consider one
of the most brilliant things ever made, has repeatedly failed to gain mass
appeal beyond its limited niche, despite many attempts at re-marketing home
video, a feature film, etc. The operative lesson here is that "quality," as an
objective concept, is hard to parse and hard to pin down. "Quality" is more of
a function with a lot of variables, and many of the biggest variables are on
the _production_ side and the _audience_ side -- not the development side.

Tldr: People are over-investing in development, when they could be investing
more heavily in production -- whether at greater scale, or in greater depth
per project.

~~~
shalmanese
The business model of Netflix is entirely different from broadcast TV. Netflix
makes 0 additional marginal dollars from an existing subscriber watching an
extra hour of video. What they care about is producing something "must see"
for a particular niche that would convert a non-member into a paying member.

That means a rabid fan base and buzz is far more important than broad
popularity. That's why shows like Arrested Development and Orange is the New
Black have been so good for them, because they have an in built audience they
can bring reliably.

I'd argue the opposite from you which is that Netflix is worse than
traditional TV at developing audiences. For someone to adopt a new show on
Netflix, they have to be interested in the show AND a subscriber of Netflix or
so interested in the show it would compel them to subscribe to Netflix vs just
switching over to the right channel at the right time to check it out.

Instead, Netflix's strength is in supporting a pre-existing audience.

~~~
jonnathanson
_" Netflix makes 0 additional marginal dollars from an existing subscriber
watching an extra hour of video. What they care about is producing something
"must see" for a particular niche that would convert a non-member into a
paying member."_

Netflix makes 0 marginal dollars on a hit show, but for Netflix, this isn't
about the marginal dollar. This isn't even about adding more subscribers _per
se_. This is an attempt to _preserve_ subscribers in the face of a rapidly
diminishing content library.

As I mentioned in the article, a lot of the networks and movie studios are
raising their rates on Netflix, or pulling their libraries altogether. In the
long run, Netflix risks becoming a "dumb pipes" commodity business, no more
special or different from Amazon, iTunes, and all the rest, if it doesn't have
something exclusive to keep viewers interested.

That's why they're betting the farm on original content. HoC won't appeal to
everyone, but it signals to Hollywood and to tastemakers that Netflix is a
serious buyer, and that it's in town to buy a lot more where that came from.
Hollywood has a strong signaling / social proof system in place, and moves
like this are often great ways to break the ice and establish credibility in a
town that will shut up and listen to money. :)

 _" That means a rabid fan base and buzz is far more important than broad
popularity. That's why shows like Arrested Development and Orange is the New
Black have been so good for them, because they have an in built audience they
can bring reliably."_

Correct, and I don't see us in any disagreement here. This is what I mean
about Netflix's home-field advantage in "audience development." Netflix knows
its niches better than networks know theirs, and furthermore, it can _afford_
to be in the niche game, because it's not dependent on mass advertisers. This
is a significant advantage Netflix can draw upon.

------
r0h1n
I'm really impressed - and curious - about Priceonomics' ability to come up
with such well-researched and well-written (getting both right isn't always
easy) posts on such a wide plethora of topics.

Especially because the authors don't seem to be their staff (I could be wrong
here). What motivates the writers to come up with content that must surely
take a lot of time to research & write?

------
kenjackson
First, nice story!

Question for the author (or anyone else really)... What about what Amazon is
doing at studios.amazon.com? That seems like a new way to build programming.

~~~
jonnathanson
Amazon's approach is very interesting, and I'm paying pretty close attention
to them.

I tend to be _somewhat_ skeptical of open-submission systems, or of voting
systems, because they suffer from the same prediction problems that
Hollywood's development model does. Plus, they're more prone to GIGO problems
(Hollywood actually does a pretty good job filtering crap out _before_ it goes
into the system).

Amazon might be focusing on the wrong thing (development) rather than the
right things (production, support, distribution exclusivity). At least in the
short term. If I were them, I'd probably use my significant capital reserves,
buyer power, and Hollywood's resentment of Netflix to my advantage. I'd cut
exclusive deals on proven or undervalued material that's already been produced
(and could be scaled up, or reinstated, or spun off).

Personally, I think the smartest thing Amazon is doing is tying Amazon Prime
to free VOD streaming. A la carte content purchases are probably going away in
the long run, and Prime is a great transition vehicle into more subscription-
based services to compete with, say, Netflix.

~~~
Nimi
Why do you think a la carte content purchases are going away?

~~~
jonnathanson
For reasons of consumer convenience and marginal purchase costs. Right now, I
believe the reason iTunes is so competitive with Netflix has less to do with a
la carte's strength as a model, and more to do with Apple's strength as a
platform and ecosystem. I would not be shocked to see more subscription-type
offerings from Apple, especially with the whole migration toward iCloud.

Here is where I'll put on my Purely Speculative Futurist hat, and I'll wade
out a little bit into the choppy waters of broad generalizations. But I think
that a la carte purchases, especially for entertainment products, are in many
ways a relic of physical media. That's the way you had to buy physical media,
for the most part. But it's a relic that cloud technologies and streaming
services are obviating the need for. From a consumer standpoint, I experience
zero marginal cost to watch an episode of Breaking Bad on Netflix (whereas I
very much experience the feeling of paying $2.99 for it on iTunes).

Netflix is in a tough spot because it has lost a lot of great content, as well
as competitive windows against services like iTunes. iTunes is (currently) a
much better place to get the new stuff while it's new, and that's a big
liability for Netflix or other subscription services. All other things being
equal, subscription is a better value proposition than ownership for many
categories of goods. It's also more convenient.

------
thenomad
Interestingly, this shows that the economics of TV and the economics of
YouTube are actually not that far apart.

Breaking Bad's $400,000 per ad spot, at 10 million viewers, is noted as being
remarkably high. That's $40 CPM.

Whilst a lot of people are very cagey about their YouTube earnings, if you do
enough asking around the numbers tend toward $2.50 CPM. It's frequently noted
that popular shows which are able to sell show-specific advertising make a lot
more than that.

Even if you assume that a Breaking Bad-level YouTube success would only get a
4x multiplier to its ad value, that's still $10 CPM - only 4 times less than
the on-TV Breaking Bad. I would have expected the difference to be
considerably greater.

~~~
hayksaakian
Maybe the CPMs are so unusually high on TV is because of the fill rates?

I don't actually know the answer to this question:

Can you get 10 million ad views on a youtube ad in a tv-show-length of time?

------
gillianseed
Very interesting article.

I've been thinking about the rise of cable channels versus network tv when it
comes to the cultural impact of their shows.

They certainly seem to get it right in that respect a lot more often than the
networks do, based upon my anecdotal evidence (totally lacking any real data),
cable shows like Game of Thrones, Walking Dead, Breaking Bad, American Horror
Story, Mad Men, etc

It seems to me (not that I have any real data to back it up with) that the
shows people talk about online (and amongst people I meet) are basically all
cable shows, from back with the Sopranos to shows airing today like Game of
Thrones, Walking Dead, Breaking Bad, Dexter, American Horror Story, Homeland,
Mad Men, Boardwalk Empire etc, have a much greater cultural influence than
what the networks are offering apart from a juggernaut like American Idol
(which seems to be fading away these days aswell) and perhaps something like
Big Bang Theory.

I think it's an interesting shift, if there is indeed a shift and not just
something I'm making up.

------
vinceguidry
I don't think the HoC $100 million bet was as big as it looks. Execution
counts for a lot in this business, and it's very tough to get right, but if
you throw enough money at it, and give the right guy enough control, you can
do it reliably. It's like pop music. You can't guarantee that your next album
will be Thriller, but you can guarantee a big splash if you get everything
right and have the cash for it.

It's a question of management bandwidth. If you're at the kind of scale
Hollywood's at, there's just not enough to go around. Not enough cash, not
enough rockstar executors. James Cameron can only make so many movies.

Netflix simply realized that they can put all their eggs in one basket, then
watch it extremely carefully.

~~~
ghaff
You mean like The Lone Ranger starring Johnny Depp and produced by Jerry
Bruckheimer which is expected to lose something like $150 million? Big names
certainly help. (And IMO Kevin Spacey is what elevates HoC from something
fairly pedestrian to something worth going out of one's way to watch.) But
this is a biz that's hard to predict winners in and I'm skeptical that viewing
data makes a big difference.

------
bryanh
No mention of Hulu here or in the article? Hulu has done several of these
cheap shows and none of them seem to have caught on in any meaningful way,
whereas Netflix's obvious "swing-for-the-fences" attempts seem to have
everyone constantly excited.

------
r0h1n
I'm really impressed - and curious - about Priceonomics' ability to come up
with such well-researched and well-written (getting both right isn't always
easy) posts on such a wide plethora of topics.

Especially because the authors don't seem to be their staff (I could be wrong
here). What motivates the writers to come up with content that must surely
take a lot of time to research & write?

------
desouzt
As someone who is in the process of trying to get my sitcom to air this was a
fascinating read. Thanks for posting.

------
protomyth
I'm a little confused by the ending regarding Netflix. I thought Netflix went
pilot-less with House of Cards and just paid for a limited exclusive for the
whole season. This is pretty different than the described network system.

~~~
jonnathanson
Hi! Author here.

You raise a good point. Indeed, Netflix went pilot-less, but they still paid
network-level prices to make the show. Essentially, they skipped the pilot and
went straight to the series order (and 2 full seasons at that). In some ways
this was a riskier move than the network model.

My argument is mainly that Netflix has the tools at its disposal to get
smarter about this process. To be fair, I believe a lot of that $100M was a
signaling tactic -- both in Hollywood and as consumer-facing PR -- almost as
much to do with marketing _the fact_ that Netflix has originals as it had to
do with investing in them.

But the investments needn't always be that big up front.

~~~
somberi
Thanks for the article. Regarding "Netflix went pilot-less". BBC had done a
"pilot" for them when they produced the Original HoC in 1990 (and they based
in on a book by Michael Dobbs).

The point I am trying to make is that, they got a sense of what the show was
going to look like, who it will appeal etc because they had carried the BBC
HoC for a while in their inventory. I am assuming, that they had some
viewership data from this.

~~~
protomyth
The BBC HoC probably provided a nice reassurance, but there is a pretty big
chance the US version won't work. I would imagine HoC is even more problematic
given the difference in political systems.

------
logical42
does the bar chart ([http://s3.amazonaws.com/pix-
media/blog/424/ad_cost.png](http://s3.amazonaws.com/pix-
media/blog/424/ad_cost.png)) irritate any one else here? I feel like it's a
rather biased data visualization, it seems patently unfair to compare the
finale of breaking bad with the average of a network. If anything, it should
be contrasted with the finales of each of those network or possibly replaced
with a figure representing the average cost of an ad on AMC.

~~~
jonnathanson
Hi there! Great feedback.

The bar chart isn't perfect, and certainly less so out of context. But I
should clarify my intent behind it. The final episode of Breaking Bad pulled
in roughly the same numbers that your average primetime hit (or even indexed
basket of hits) pulls in every night. So when we're talking about the
primetime averages, we're talking about indices with viewership figures
roughly comparable to Breaking Bad's final episode. The point was that
Breaking Bad was able to put a significant price premium on its finale
relative to the nominal size of the audience it drew. It punched above its
weight, so to speak. (Finale or otherwise, we're talking about 10 million
Breaking Bad viewers vs. 11 million CBS viewers.)

Is the comparison totally fair? In that specific context, in illustration of
that specific point, I believe so. Would it be remotely fair if it were used,
say, to illustrate a point about Breaking Bad _in general_ vis-a-vis the
market? Considerably less so. The point was more about its value to AMC, and
less about the show's ostensible superiority to any other network show.

To that point, I like your idea about contrasting Breaking Bad (finale,
ordinary episode, etc.) with the average cost of an ad on AMC (though we'd
have to control for the skew exerted on that index by Breaking Bad itself).
That might be more apples-to-apples in certain respects, and it might have
driven the point across a little bit better. Duly noted, and in as much as I
am considering a followup, I may want to address that specific concern.

~~~
logical42
I actually feel like it is misleading. I would expect each bar to represent an
item of a similar type. But, in this case, it doesn't.

~~~
jonnathanson
I am sorry you feel that way, and that was certainly not the intent. I didn't
intend for it to be any more misleading than, say, a chart comparing the
performance of one company's stock versus an index or set of indices. I tried
to explain that this is a unit-vis-a-vis-indices comparison in the text, but
the chart could have been clearer in visualizing that point. A bar chart was
probably not the best chart to go with.

Anyhow, thanks for the feedback. I very much appreciate it.

------
Sukotto
I see from the initial image in the post that it contains info about Breaking
Bad. So I backed out of reading it until I know if it contains spoilers.

Before I go read it would someone please verify that it's spoiler-free?
(beyond the initial image which spoils something about Walt/Skylar's
relationship)

.

 _SPOILERS BELOW_

.

I'm partway through season 4 at the point where Skylar makes Walt return the
fancy car he just bought for Walt Jr. saying that "someone has to protect the
family from the man protecting the family". Jessie is riding shotgun with Mike
and Hank is starting to regain interest in the blue meth case.

~~~
johnchristopher
There are no spoiler tags or any mechanism on HN to prevent reading a post or
a part of a post. People who don't want to get spoiled can't parse the page
without taking a huge risk even when they have been warned because they have
to scan for things they don't want to read.

I suggest you edit your spoiler out and just state the last episode you
watched and ask if the article deals with story segments you haven't watched
yet.

~~~
AznHisoka
Seconded. When I saw he posted SPOILERS, I immediately scrolled back up.

To the grandfather: Just post what you wanted, and get rid of the spoilers
section. Sheesh. You're not amusing anybody, or adding anything substantial to
your original point.

