Netflix served notice of its official arrival on the Hollywood scene this afternoon, announcing a bold deal for first-run rights to the new David Fincher directed TV series, "House of Cards," starring Kevin Spacey. Whereas the company has built a base of 20 million plus subscribers and a streaming franchise largely on catalog movies and TV series, the first-run deal signals that the company will not rest on its successful content acquisition strategy.
In my analysis of the rumored deal (as it stood just a couple days ago), I pointed to three ways that a first-run deal for "House of Cards" contrasted with Netflix's traditional approach. Having discussed the deal with a Netflix spokesman this afternoon, and having read other interviews and analysis, this afternoon, following are updates on those three items:
1. Data-driven approach to content acquisition - In my prior post I described how Netflix heavily relies on subscriber data to help it determine which content to acquire. Given that systematic approach, I wondered how Netflix could evaluate the potential of "House of Cards" without so much as a pilot to go by. Alas, never underestimate Netflix. As their spokesman told me, Netflix did indeed crunch the numbers, focusing on predictors like how much subscribers watch other David Fincher and Kevin Spacey properties, the appeal of political dramas/thrillers, the viewership of the British version of "House of Cards," the popularity of serialized one-hour dramas, etc. Add it all up and Netflix developed a comfort level that "House of Cards" would be a winner with its subscriber base.
2. Controlled financial risk in content acquisition - I previously noted that Netflix is also a financially disciplined company, and when it has come to streaming content acquisitions, it has been very public about explaining that postage savings due to shifting behavior to streaming, and the decline in DVDs purchased, were the key funding sources for streaming acquisitions. So how would a rumored $100 million deal for "House of Cards" fit into that discipline? Well, Netflix isn't saying how much they are actually paying, but they're hinting that it's far less. Netflix's content chief Ted Sarandos said in an interview that Media Rights Capital, which is producing the series, is deficit financing the project, meaning that Netflix isn't picking up the entire $4 million or so it may cost to produce each episode. Ted also said that the cost will actually net out to close to what the company's been paying for catalog TV content, so it's not a big stretch. The Netflix spokesman further pointed out that postage and DVD savings continue to be significant, and that bucket will be tapped for the full range of content acquisitions - catalog and first-rights.
3. "We want to partner with premium cable networks, not compete with them" - This is really the big item to focus on in terms of what this deal means. Netflix has repeatedly said that it wants to partner with premium cable networks and studios, and not disrupt the ecosystem. But then why bid against established networks (rumored to be HBO and AMC among others) for "House of Cards" instead of just waiting to license it from them later? The answer is that Netflix is looking to be as opportunistic as possible in accessing great content for its subscribers, and with its newfound scale and resources, it now has the flexibility to make a play for even the expensive, high-profile originals. And this is no "test." Netflix won't wait until 2012 when the series debuts to see how its bet pays off. If other projects meet its criteria, Netflix will pursue them too, within the confines of the financial guidance it has given investors.
This latter point is what should reverberate most in Hollywood and the larger TV ecosystem. While Netflix points out that another well-resourced buyer at the table is only good news for studios, there's a flip side too: Netflix's gain is inevitably going to be someone else's loss, in this case likely HBO's and AMC's. And nobody else has yet built anything close to the successful online business model Netflix has, so the concern that a new, singularly strong buyer has emerged (which is never a good thing for suppliers) has to be considered as well.
The "House of Cards" deal is a huge milestone not just in Netflix's evolution, but also in the larger online video market. For an online-dependent company like Netflix to go toe-to-toe with some of the biggest players in the business and come away victorious marks the beginning of a whole new ballgame.
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