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David Poland

By David Poland poland@moviecitynews.com

Netflix 2013

Netflix grew massively in its first years as it created its own leadership in the streaming business.

And here’s the problem. It went from a $2.3b revenue company in 2011 to being a $3.2b revenue company in 2011 to being a $3.6b revenue company in 2012. But costs of revenues went from $1.4 billion in 2010 (the early, cheap era of streaming) to $2b in costs in 2011 to $2.6 billion in 2012. Netflix didn’t break out streaming subscription revenues or costs until July 2011, so those early days are blurry. But basically, Netflix was doing streaming as an added value on deals like Starz… deals which have all evaporated since.

The hot stat being sold as we officially enter the We Want To Be HBO era for Netflix is that they have $2b a year to spend on programming. But the truth is, most of that money (more than $1.5b) is already spent and more than 4 – 7 episodic series a year will require significant thinning out the current available programming on the service.

In one of the media love letters to Netflix (GQ), there is a playful bit about how uncomfortable Fox may be with doing “Arrested Development” for Netflix and not traditional television. But while the smirking suggestion is that producers like Fox are afraid of the network walls of Jericho falling, what is left out completely is the real reason why partnering with Netflix for new series is iffy. it’s simple. Producing shows for Netflix means throwing away all other domestic revenue windows, at least as Netflix is currently positioned.

Do people remember one major reason why HBO going to original programming worked so well? Post-run DVD sales. And if they wanted it—HBO Go is the current strategic choice—HBO could lease its catalog to stream on Netflix or a competitor for at least $100m a year. And HBO has occasionally sold into cable net syndication as well.

And please note… the production company at issue on “Arrested Development” is Fox… which also owns the network on which “AD” first aired, not to mention FX, which has a lower standard for ratings success. And Fox never went ahead to revive “AD” for either network. Yes, there is a great big cult of people who cannot wait to get back to the “AD” experience. But realistically, how many of those people aren’t already on Netflix?

Thing is, what Netflix needs is network-level smashes. They need to expand their subscriber base from 24 million paid streamers to 50 million in the next 3-5 years to make this really work. The holy grail—and I do think this will happen, probably for others, not an independently-owned Netflix—is 80m households. That’s when the entire industry shifts. But will a great Fincher series do that? Or are they preaching to the already converted?

This is the great irony of “We Want To Be HBO.” If the numbers at Netflix, as they currently do, compete with HBO subscription numbers, they will not be able to sustain the overhead of being an original-content creator.

So, you ask, how does HBO do it? Well, the HBO Originals era of “Tales From The Crypt” and “Dream On” is now over 20 years ago. “The Sopranos” and “Sex & The City” started over a decade ago. Netflix needs to turn this corner in 5 years or less. HBO had decades… the same way that Netflix as a cheaper, easier form of DVD rental had free room to run for years before Redbox stepped up.

God bless “Homeland,” but Showtime has been chasing HBO, in terms of originals, for over a decade and has not caught up. Most of their originals—not unlike early originals on HBO—are hard-R content of middling quality. Don’t get me wrong, Showtime has done well for itself over time. But it’s not HBO and it’s not the bar for which Netflix can afford to aim.

This is not an anti-Netflix thing. Not in the least. It is about the rest of the industry… an industry that keeps Netflix in business, not, long-term, the other way around. The film industry has direct investment in every revenue arm, with the exception (though that seems to be changing) domestic exhibition. Why would streaming be any different?

And Netflix’s $2b a year for 2013 already seems to be spent. $100m for “House of Cards,” $300m for Disney lease… how much for “Arrested Development?” I did seem to be the only one writing about content constriction in terms of Netflix’s overall business model, but there seem to be many others who are seeing it (independently, I’m sure) and writing about it now.

There are circumstances in which Netflix can thread the camel through the eye of the needle. But given that a company like Disney has 10x the revenue, is not averse to purchases, and will be more than 15% of Netflix’s content costs this year and for the next couple, their eventual purchase seems almost inevitable.

Look… the dream of Netflix is already dead. It is no longer a source of a high percentage of existing and new film and television content. For $8 a month, it is still a great bargain and worth subscribing to if you have broadband and a little extra money each month, but that was not the big excitement over Netflix. No one expected every single film and TV show. But 18 months ago, the service had a lot more content. And it’s only going to get thinner.

There is nothing wrong with what Netflix will become. It’s just not the dream. There is money to be made… especially when the company is sold. But people—especially media—have to get over the glory days. We need to stop re-reporting the self-flagellation about the conversion to streaming as primary, which was neither a mistake or misstep, but a long-considered choice to reset the foundation of the company for the future. Only then will their eyes be able to see the beautiful, smaller future for this once-singular company.

29 Responses to “Netflix 2013”

  1. StellaPD says:

    So will Netflix release numbers for how many people are watching House of Cards? Will they even know? Will they only release them if they’re good? Is the only way to judge whether or not it’s a success to wait and see if there’s any immediate jump in subscribers?

    I can’t wait to see House of Cards, and I’m still happy with the streaming options for $8 a month. Lots of stuff my kid likes. Good selection of documentaries. Our queue is always well-stocked and there’s always plenty to watch, even if there’s not an overwhelming amount of new content.

  2. scooterzz says:

    it’s not just the disney lease, ‘arrested development’ and ‘house of cards’…already completed for April is the eli roth effects-heavy series ‘hemlock grove’ and late spring’s ricky gervaise sitcom ‘derek’….you’re probably right that the $2b is long gone…
    also, i’m of the opinion that netflix’ strategy of releasing entire series at one time isn’t doing them any favors… i guess time will tell…

  3. Spacesheik says:

    Good article David.
    However you’re a tad tough on Showtime: Dexter is a top show – and great to boot – and The Tudors, The Borgias, Californication, Weeds and Nurse Jackie aren’t chopped liver either.

    House Of Lies also looks like it is here to stay.

  4. The Pope says:

    This article is why I love it here. LOVE. IT. HERE.

  5. palmtree says:

    The Showtime shows are just not “must sees.” Outside of Homeland and maybe Dexter, what really calls out as a pop culture phenom? Not saying they’re bad shows, but just simply that they don’t have the same cultural currency. And I don’t even know why, but “middling” sounds about right…

  6. Captain_Celluloid says:

    David; yet another thoughtful piece on NETFLIX.

    Something for everybody to keep in mind; the possibility NETFLIX is having a disproportionate and decidedly undemocratic effect on “home video” viewing.

    To wit: NETFLIX is only really totally viable for people who have broadband and really FAST broadband at that . . .

    . . . . which is to say not everybody which is to say undemocratic.

    NETFLIX is changing the whole paradigm and possibly REDUCING options for those who do not have broadband . . . .

    AND many people also seem to overlook that the COST of broadband
    factors in to the actual cost and value proposition of NETFLIX

  7. BoulderKid says:

    The law few seasons of Californication are objectively worse than anything HBO has ever done.

  8. scooterzz says:

    i think showtime is currently better than ever…’shameless’, ‘inside comedy’, ‘the big c’ and ‘californication’ are all top notch (i’ve seen all of this season and it ends well)… ‘dexter’ is changing to a summer series, ‘the borgias’ and ‘homeland’ are going strong and what i’ve seen of ‘ray donovan’ and ‘masters of sex’ is pretty impressive…. hbo may rule in made-for-tv movies but showtime has them beat for series…

  9. Joe Leydon says:

    “Do people remember one major reason why HBO going to original programming worked so well? Post-run DVD sales.”

    OK, I am a little confused by this statement. As you later note, HBO has been in the original programming game for decades. Even before the VHS sell-through market had developed, never mind the introduction of DVDs. Right? I mean, 1st and Ten started in 1984. The same year Brothers started on Showtime, by the way. And Philip Marlowe, Private Eye was on HBO as early as 1983, correct?

  10. KrazyEyes says:

    Do you think that Netflix will ever release a series such as House of Cards on DVD sell-through?

    I’m not sure what Netflix’s upside would be since the whole reason of having a series such as this seems to be designed to draw people to their streaming service. I wonder how the post-run DVD market has changed for HBO in the post-HBO-Go era?

  11. Sam says:

    Joe: I don’t want to speak for David, but pre-DVD HBO Original Programming was on a much smaller scale than what it became, wasn’t it? The Sopranos and Deadwood and so forth were obviously much huger successes than Philip Marlowe, Private Eye was. The DVD-era shows were more prolific, more expensive, and more successful.

    Not sure you can credit DVD for the entirety of the difference — there’s a huge disparity in the quality of those shows that has to factor in — but I can believe it’s part of the story.

  12. etguild2 says:

    I don’t understand how ANY of the streaming services–Amazon, Netflix, Redbox, Hulu Plus–will be profitable if content keeps being divided and withheld. Certainly, like you said Netflix won’t be able to sustain its current model.

    While someone like me who breathes documentaries, foreign films and indies LOVES Netflix streaming, my fellow 20-somethings are more inclined than ever to seek out illegal torrents. The Oatmeal captures the dilemma perfectly.

  13. Joe Leydon says:

    Sam: I don’t dispute the suggestion that DVD sales have enabled HBO to raise the budgets for original shows. But the snippet I quoted makes it sound as though DVDs drove the decision to start original programming in the first place. Put it another way: The DVD format went on sale in the US in 1997. By that point, HBO and Showtime had been in the original programming game for over a dozen years.

    On the other hand: I’d be curious to see how much DVD sales (domestic and international) is a factor in the production of original programming on basic-cable networks as well. For example: Would USA have kept Peacemakers in production longer if the network knew it might make a profit with DVD? Is DVD a major reason why Mad Men got green-lit in the first place? And why stop with cable? How many cult-fave network TV shows of the past might have lasted longer if there was a DVD payoff possibility? Think of the original Star Trek, for example.

  14. Rupert Pupkin says:

    Has anyone seen House of Cards promoted on their respective Netflix experiences? I had to search for it. Aside from a banner on the login page on desktop, there was no sign of it anywhere. I have seen their off site marketing but not pushing that series to everyone on the service is a fail.

  15. etguild2 says:

    Just this morning, more confusion in the Streaming Wars.

    DOWNTON ABBEY seasons 3-5 are going to be streamed through Amazon only. Seasons 1-2 are streamed through Netflix.

    Yes, splitting a series that is shown on Public Television, through two separate vendors makes so much sense…

  16. YancySkancy says:

    Rupert: I don’t get Netflix’s site at all. If I want a quick, easy way to tell what’s been added and what’s expiring, I pretty much have to go to instantwatcher.com.

  17. hcat says:

    ‘ Most of their originals—not unlike early originals on HBO—are hard-R content of middling quality’

    Aren’t most of HBO current series tit and blood focused? Sure Treme is beloved by a small cabal of viewers but HBO’s bread and butter is Game of Thrones and True Blood, both the television equivelent of pulpy beach reading.

    ‘ the dream of Netflix is already dead. It is no longer a source of a high percentage of existing and new film and television content.’

    I couldn’t disagree with this more, it seems like half the series currently on broadcast and cable have their catalog on Netflix. It has created a whole seperate window for television content between the original broadcast and traditional syndication. And as syndication revenue seems to get smaller and smaller as the TBS programming blocks of Family Guy and Big Bang get larger and larger the studios are going to be looking to streamers to find a home for their not quite blockbuster series.

    As for the film side the Disney deal is sooo much a bigger story than House of Cards. They have poached an elephant away from cable, and with the Dreamworks catalog coming into their possesion soon they will have added an amazing amount of the highest quality family programming to their site.

  18. hcat says:

    And I hate that Oatmeal cartoon that etguild pointed out. HBO is perfectly willing to take your money, but its their show so they get to decide how you get to access it. If you want to spend your money on broadband instead of cable that is your choice, but I loathe the sense of entitlement that is displayed by watching stolen content because you either don’t want to pay premium pricing for it or wait for it to become cheaper. With media you do not pay for quality, you pay for access. You don’t want to pay for HBO, wait for the DVD, this is the business model and the release structure they have chosen and going around it just makes you a spoiled impatient little shit (not you personally etguild, just the generation in general).

  19. celluloidkid says:

    “Has anyone seen House of Cards promoted on their respective Netflix experiences?”

    Yes. I can’t seem to escape it.

  20. christian says:

    “Did Netflix wrong you in another life?”

  21. David Poland says:

    First, Rupert – On Apple TV’s version of Netflix, I had to search all the way to “House of C” to get the show to come up. It brought up the preview and the UK series before it finally brought up the new show. Not on “New Releases” or “Television” or anywhere I could find.

    Perhaps it is different on other platforms, but I felt like I was looking for a needle in a haystack.

    Joe – The DVD business changed the budgets and the amount of original programming that HBO was doing. Instead of being bait to make their offering unique, it became a cash cow. That was the point at which HBO went from being mostly movies to being dominated by the originals.

    hcat – The movie product is very limited on Netflix and yes, there are a lot of old TV shows… almost all of which are non-exclusive and available elsewhere. The window it’s eaten is syndication, which went from being in trouble to enhanced by DVD and streaming, to now being in greater trouble as prices keep dropping because of alternate availabilities. This is one reason why Big Bang Theory and other shows with a decent syndication life aren’t on Netflix.

    As for Disney, that was not poaching, that was a survival issue. Without Disney, game over. Now, for $300 million a year, which is MASSIVE, they get a reprieve… which ends in 3 years.

    Of course, last year, the argument was that Starz didn’t matter. This year, half that dead – Disney – is the savior.

    We are just at the start of the shake out.

  22. David Poland says:

    Don’t get the quotes, Christian, but no. As I keep saying, I am just trying to add perspective to the insane media coverage they get for any positive thing they do. It’s all still tethered to a different idea of what Netflix is.

    But yeah… listened to that kind of crap for a year before summer 2011 turned and showed that I has been right all along.

    Netflix was a groundbreaking, game-changing, hard to replicate idea. And now, it is in the water with all the sharks… but people are still talking about Netflix as though it owns something. It is in a better position to stay alive than MySpsce, but it’s a very similar situation now. And if you watch what the management of the company does – which is quite different from what is reported – it’s clear that they agree with me a lot more than they agree with the hype… which is why they are trying to rebrand this week for the third time in 2 years.

  23. christian says:

    I just know I watch the hell out of it and for 8 bucks a month it’s a relative steal.

  24. hcat says:

    I am not talking about older shows, at least half of the current running shows have their previous seasons on Netflix, sure Fox holds back Simpsons and Modern Family, and WB keeps the Lorre train off of it, but the number of current television shows on Netflix seems to be increasing and not decreasing. As far as eating into syndication, that trend has been going against the studios for awhile. As cable channels rely on more and more on their own original programming and reality shows the amount of space available to syndicate broadcast series shrinks. As you see the practice that began before Netflix of these huge marathon blocks of programming for a single show (I think TNT might show a total of three different titles in a 24hour period)increasing, the studios can get revenue for their biggest hits but need to find an outlet for their second teir prodcut. For something like Raising Hope which isn’t going to be played around the clock on comedy central or your local UHF station Netflix is a white knight.

    And the arguement was not that Starz did not matter but they were not worth the cost. Now the 300 goes to a studio instead of a middleman, and besides the theatrical they get all that dtv crap that kids can watch for hours (my kid has been going through the Tinkerbell movies for the last few days). With Epix they are also dealing directly with the respective studios. Revenue has increased despite numerous public relations disaters and they are not taking on debt even while expanding.

    But I do agree with you about the cost of the original programming, without the extra revenue of commercials or cable fees Netflix is at a distinct disadvantage. HBO switched to more originals when the rental window started shrinking and people were able to get the product at the corner Blockbuster a few months before cable. And it only got worse once DVD was priced as sell through and people started compulsivly filling up their walls with whatever came out that week. HBO smartly changed their endgame and instead of simply replaying other peoples product they used it as filler for the rest of the schedule while creating unique original programs. USA, FX, TNT, and AMC have all followed this model to success, but again it is the cable fees that keep them afloat. Netflix can get away with a few of these series to keep the news articles flowing, but I do not see them pursueing it as adamantly as the cable channels.

    But then again they don’t need to, they have thousands of hours of other peoples programming at your fingertips for the price of a burrito.

  25. etguild2 says:

    Yeah, I’m not condoning illegal downloading in the slightest, it really bothers me, but the studios and channels must know that the way the current content model is headed, piracy is going to get much much worse. Younger consumers are willing to pay legally if they can have their content NOW, EASILY and CHEAPLY. If not, they’ll get it regardless.

    That’s why, for me, Netflix is such a godsend still, because it has practically everything in a reasonable time whether by streaming or DVD. Of the top 30 films in MCN’s compendium of critic top 10 lists, 19 are available on Netflix via DVD, and many are available to stream. Sometimes I get agitated when a great doc like THIS IS NOT A FILM takes 11 months to get released, but I wouldn’t think of depriving the filmmakers a dime.

  26. Triple Option says:

    I totally get the Oatmeal comic. It generally bothers me more in music where some old songs I’d be perfectly willing to pay for aren’t available legally for downloading only because of some rights or royalty bs lockdown. Which I have to say I’m good about being good. Maybe hope I’ll find a used CD at Ameoba some time. But if given the opportunity to pirate one song vs pay $27.99 plus tax and shipping for an import, tonz of people are going to lift the song.

    I do agree there’s too much entitlement in what people somehow believe is theirs for the taking. As I write this I think of myself just 3 weeks ago getting pissed at how many sites I had to go to find a song and a TV show, when two weeks prior one was on the shelf. Other songs from the same freckin’ album were available but only a re-recording of what I was looking for could be found.

    As for Netflix, I have streaming only but sometimes wonder if I wouldn’t be better off w/only DVDs. I don’t really have a ton of time to watch. Maybe I will with football ending but it’s a good year for college hoops. Anyway, I have at least 20 items in my queue ready to go and know there’s more I want to see. However, it is a bit depressing that I don’t log onto the site and see many movies that were recently in theaters that make me say “Oh cool! I totally wanted to see this but can’t believe I missed it. And just in time for awards season.”

    I probably could’ve done well putting it on hold for the past 5 months but I have to admit part of me likes having it around jic. Like friends over hanging out and now we need something to watch. Well, we can check out netflix…

  27. Sam says:

    “And I hate that Oatmeal cartoon that etguild pointed out.”

    If you see the comic as a justification for piracy, then I can see why you hate it. But I don’t think that’s the message. It is, after all, the devil on the shoulder that wins out.

    I think the comic is criticizing the wisdom of media distribution companies that are failing to capitalize on the potential of modern communications technology and the demands of the marketplace.

    It may be wrong that the guy in the comic gives up looking for legal access and settling for illegal access, but it is a reality in the world we live in. People do this. The huge success of iTunes for the music industry proved this. If you offer your content cheaply and conveniently, people will largely take you up on that. If you don’t, they’ll go to illegal means.

    Doesn’t mean you’re morally wrong not to offer your content cheaply and easily. Doesn’t mean consumers are morally right to demand how content is offered to them. But it is nevertheless a reality that a lot of consumers behave in this way. If you’re a business seeking to monetize your assets, you’re leaving tons of money on the table if you try to keep too tight a hold on your content and/or get too greedy with your price points.

  28. hcat says:

    I wouldn’t say that HBO is being greedy with their pricepoints. They generate their revenue by keeping their content exclusive to their channel (and their channel exclusive to cable providers). This is How they monetize their assets and giving their content away piecemeal would be leaving tons of money on the table. And while I agree that it is a reality of the world we live in I am pointing out that in this reality contains a lot of spoiled-ass people. Would the content of the cartoon be any different if it was someone wanting to download Skyfall and finding that it was not yet available? Is Sony leaving money on the table by not releasing it to video six weeks after the theartical release?

    “Doesn’t mean consumers are morally right to demand how content is offered to them”

    They can demand all they want, but it is morally wrong to steal content since it is not in the format of their choosing. This is not something that is out of print or held up by rights, it is available in the cartoon, but the kid just doesn’t want to pay for it. This attitude seems to have stealing confused with boycotting, if it is not in a format you are willing to purchase you do without it and the company does without the revenue, thats the unwritten agreement, not give me what I want NOW, how I want it or I am just going to find a way to take it anyway.

  29. James says:

    Netflix has a huge library, just not many new Hollywood releases. Tons of current foreign and independent films. A large back catalogue of older films. All this for only $8 a month. And now as an added bonus it has original programming.

    Netflix can’t be compared to HBOs beginnings. The road has already been paved. Series producers are already used to providing quality TV for outlets other than broadcast networks. Netflix is producing shows head and tails above HBO’s initial original shows (sludge like “The Hitchhiker”)

    Also. The broadcast model is near dead. If networks don’t change to streaming models in the near future they will be, as Francis Underwood would say, – cleaved from the herd and die in the wilderness.

    While Netflix long term survival isn’t known, I believe this is the model that will kill boadcast TV

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