I used to think journalists were the grown-ups of the world, offering considered, reported perspective when others went off on flights of fancy.
The release of “House of Cards,” a 13-episode TV series costing approximately $60 million (the next, already contracted 13 will benefit from the existing set-up and cost more like $40 million to produce) has put a lot of very smart people in a tizzy. Will this change the way television is made and disseminated?
The obvious answer is, “no.”
The obvious reason is, “math.”
First, I should note that there is no significant reason for Netflix not to release their new product this way… though I suspect that we will see variations on this first experiment in future.
Yes, I said, “experiment.” Netflix has a big problem, really, with the media’s intensity about them at the moment. Some have asked why Netflix is not being treated like Apple right now. Because it’s not their turn yet. With the media so head over heels in love with a company that has, basically, run out of fresh rabbits to pull out of its hat, the backlash when there is a small failure—see Summer 2011—can be equally insane. In the case of the “HoC” full-season release idea, it is the first time Netflix has really delivered this kind of content, fully under its control, and the notion that this first step into the water should define the company’s entire approach forever—lest the media start claiming it’s moving backwards—is preposterous.
If the goal is to increase paid subscriptions (one of the media’s favorite ways of falsely blowing Netflix’s horn is to lump in unpaid subscriptions and international subscriptions as though they were the same thing as paid domestic subscriptions), there is a good chance that releasing, say, four episodes of a series at once could create the same media excitement, but extended over a longer period. I believe we will not see the words “House of Cards” in the media much—until the Emmy nominations—after March 15 or so this year.
Regardless, when you watch “House of Cards” means nothing to Netflix, unless it gets media attention. The media, in theory, will drive interest in the series and that interest will drive subscriptions. All the buzz about how many people watched how many episodes on the first weekend, the first week, or ever, really, means nothing in operational terms to Netflix. In fact, the company has been downplaying the significance of the event as a percentage of their overall viewership… not because this opening weekend was not successful, but because if it becomes perceived as too important, it is easily disregarded just a couple of months from now… like when the next quarterly report comes out and the first $75m quarterly bill for the Disney deal hits their books.
It’s so oddly counterintuitive. The media looks at this event—releasing “HoC”—and touts it as groundbreaking… and then tries to measure it through conventional methods. But the only significance of conventional counting methods in this situation is, again, media. It doesn’t actually matter what percentage of broadband service Netflix usage eats. The only people who have a direct stake in those numbers are the companies providing web access, who should be paying Netflix a royalty for expanding demand for higher-end web access. But the truth is, the consumer has already lost that war, as the cost of home internet has gotten significantly higher in recent years and the wireless providers have capped usage and now, with few exceptions, are charging around $10 a gig for access, which is extremely profitable.
Where is the disconnect that we all seem to have when engaging spectacle? Watching a football game on the field is wildly different than watching in the stands and incomprehensibly different than watching on a TV. Not only is perspective forced in different ways, but the actually connection to the human being performing on the field is a total game-changer. There are intimate moments that we can connect with, like Joe Theismann’s broken leg. But the idea of wide receivers and defensive backs running sprints downfield 25 times an hour and just coming back to the huddle for a minute before running the next one… for the TV audience the hard work of that is completely lost when all they are watching is where the ball is going.
But I digress…
Follow the money. That is all that matters. Here is a show that is, from Day One, averaging a cost of $4 million per episode. How do you pay that price? Is dumping an entire season onto the web at one time with no advertising revenue and, allegedly, no plans for further paid exploitation, a sound financial choice?
Well, it’s great for the show makers. They know their boundaries before they shoot a frame and they have a big, fat budget with which to work.
And if you are Netflix and you decide it is in your interest to subsidize the costs of such a program (or at least half of the costs), that is your call, Deep Pocketed Big Daddy.
Television production funding is a risky business by definition. As brilliant as the team at DreamWorks SKG was when they launched, it was television that put the business in the hole out of which it never climbed (until they sold themselves off and out of the standalone studio business). Lots of money in… wait to see how much you get out. And Netflix isn’t—at this point—trying to play that game like others have for decades. They are not looking for the next “Seinfeld” to not only offset prior losses, but to generate billions in profit in post-network ancillary markets.
Netflix is now in the business of buying bait. And the only way for that bait to be truly exclusive to Netflix is pay for it themselves. And as new kids on the block, the price of playing with established names is enormous.
They could easily, in my opinion, have offset the costs of “Cards” by a million dollars an episode by bringing on a major sponsor to offer the show as Netflix does, without interruptions. How could Mercedes or BMW or Coke or whomever pass that up? Netflix’s subscriber loyalty is epic. And this is a high-end show. $13m is chump change for this kind of thing. But Netflix chose to pay the fare all by themselves. That is a statement. It isn’t a new model. But Netflix wanted to make a statement and they have.
It is no attack on Netflix to say they engage in smoke & mirrors the same way all entertainment does. They are selling a product. And after breaking onto the scene with a truly brilliant, unique, hard-to-duplicate idea (DVD rental by mail), they are still very smart, very creative, and in a business that is shockingly dissimilar to the one they were in just a couple of years ago.
As a DVD rental business, the product was not very complicated. New stuff… check. Archive… check. Managing supply of DVDs vs demand and operations was—beyond the great idea for a business—the entire ball game.
As a DVD-based business adding streaming, not very complicated. Pay a little extra so a small number of people could do this streaming thing… mostly not in HD… not going to impose much on your on-air ratings, cable channels… new frontier, so tech is the biggest thing.
As a streaming-first company, it gets a lot more complicated. Today, they have some competition from Hulu and Amazon… but that’s just the beginning. Studios literally went from being being paid an extra million or so a year for streaming to looking for a minimum of $100 milion a year for streaming rights alone. Disney is $300m a year. And when does it stream? And is it exclusive? And how much does each purchase help keep existing subscribers and/or create new ones?
Netflix is no longer just selling a product. They can’t just buy the content and have a good quarter or a bad quarter based on how much they paid for those DVDs. Now they are having to decide what to buy and offer their subscribers on a much more limited basis. They also have to convince current and potential subscribers that there is an ongoing value to those subscriptions, even as the amount of available content is declining. And then, on top of it, there is not only a lot of competition, but a lot more competition on the horizon.. competition that owns the content that is now of life-and-death value to Netflix without any option of an end-run, such as simply buying DVDs for a couple of dollars more from a retailer or wholesaler.
Let’s (generously) say that Disney draws 10 million new family subscribers to Netflix. That’s a billion dollars a year. And in 3 years, when Disney decides to take that business to their own company (though I still lean to the idea of them buying Netflix)? Netflix can’t stop them from leaving. The brand loyalty of those additional subscribers is to Disney product. And while the hope is that a good percentage of people who go to get their DisneyOnDemand subscription stick around, even if they lose just 40%, the company has taken a big hit.
Netflix is in the position, essentially, of paying for the first steps and education in streaming for all of the brands it is now paying to stream. Soon the kids will be grown up. What will Netflix do with a half empty 8 bedroom house? They can go after other content, but as the streaming models mature, the cost of leasing is only going to go up.
Media is so hyped up and so in the moment that the simple reality that we are still in the very, very early stages of The Streaming Era is obscured. 2016 is about when this story will actually be told, as the deals that studios have been making with Netflix and Amazon and Hulu are all up or have been up, broadband plugged into TV becomes as ubiquitous as telephones lines used to be in homes, and the lines between internet television and cable/satellite television are almost completely blurred.
But even then, as now, the story will not be about Netflix or Amazon or any of the other pipes so much as it is about the consumer. Springsteen wrote “57 Channels & Nothing On” in 1992. Now it’s 357 channels and nothing’s on. By 2016, it will be, essentially, 2357 channels and nothing’s on.
Households will spend between $150 and $200 a month on internet access and entertainment. That means, generally, $100-$125 for the entertainment side. Who will own what piece of that pie? It’s that simple.
Oh… and the pie will be 80 million to 100 million households… not 25 million.
And at that point, advertising on television will become a pricing option, not a standard. Ratings may well have a direct effect on revenues going back to producing entities. Once the producing entities have absolute control over the distribution of their products, virtually anything is possible.
I think the idea of studios attempting day-and date VOD with theatrical is self-destructive. But can you imagine a one-day event, somehow protected from piracy, a month before the release of a big film or series? I can. Post-theatrical will become static. PRE-theatrical will become a new hook.
(This is a digression, but what is the difference between that and what is being done in indie VOD now? Event structuring. Releasing a film on VOD two weeks before theatrical badly cannibalizes theatrical, in my opinion. And online-only event, for just one show or one day, weeks before the big release, might act more like a worldwide midnight showing… and space between that—at least with a good film—and a theatrical launch may cause more interest and more excitement, not less.)
Summing up… binge viewing is fun. It’s a terrible release model if you and looking for a direct revenue model (ads or tickets or the like). But my big point is, for Netflix, it is just a distraction. It’s a stunt. I can’t say that it doesn’t matter at all how many people watch the show or how they watch it. After all, there is good bait, bad bait, and great bait. And no one knows what kind of bait “House of Cards” really is yet.
What we do know, from the film and television business over many years, is that the magic trick isn’t pulling the rabbit out of the hat once. It’s doing it every week or every month or every quarter. That is where things get tricky for Netflix. How many times do they have to make this work every year before it really gross their business?
And the simple, undeniable answer: No one knows.
Put that in your stream and binge it!