On Feb. 1, Netflix released its original production of “House of Cards” starring two-time Oscar winner Kevin Spacey and directed by Oscar-nominated and Golden Globe-winning director David Fincher. It is estimated that Netflix paid $100 million for 26 episodes of this American remake of the successful 1990 BBC and PBS mini-series that brought juicy stories of political ambition and treachery to a level last seen in “Macbeth.”
The first, necessary element of this gamble has been successfully delivered, in my opinion (I’ve watched the first four episodes). The quality of the writing, acting, directing and overall story is terrific. It is great television.
The next element of the bet -- whose fate has yet to be determined -- is that this is a new kind of business model, one far afield from the traditional ways that television distributors and program creators have made money.
I believe this $100 million investment can and will help Netflix accelerate the changing face of what we used to call television, and can now refer to as T/V (television/video). Here’s why:
1. It sets the stage for Netflix to compete for new revenues against Hulu, Amazon and others, possibly expanding to a two-tier and/or ad-supported revenue model.
It’s no coincidence that, also on Feb. 1, Amazon announced it had purchased exclusive online subscription service rights to the PBS hit "Downton Abbey." Amazon Instant Video has something Netflix doesn’t – yet: a two-tiered subscription, and pay-per-view (PPV) service. Viewers pay $79 a year for free streaming VOD access for those properties designated as “Amazon Prime.” Other premium offerings can be purchased or streamed in HD or SD for prices that vary by property. Some are only available for purchase. No ads are included for now. Amazon has explored original programming, but not at the level to which Netflix has.
Hulu has free offerings and includes premium offerings through a Hulu Plus subscription at $7.99 per month that includes “limited advertising.” Hulu has also ventured into some original programming.
It's worth noting that YouTube is also looking at a subscription service, though it would not likely compete for viewers of premium content. Its parent, Google, is a leader in monetizing through digital advertising.
At some point, to compete with Amazon and Hulu, Netflix will need to find a way to expand its revenue sources. If it wants to keep up in the big-league battle for subscribers through new premium programming, without the benefit of the bundled cable/satellite T/V funding machine, it needs to increase value. Netflix’s price increase debacle of 2011 taught the industry that a straight price-doubling move without an increase in value won’t be tolerated.
A quick look at the bundle-loving approach of the cable, satellite and network television providers for correlating value increases to price increases demonstrates that viewers will respond to the right package.
2. It positions Netflix to compete in an evolving “T/V Everywhere” world. This phrase is used by cable operators to describe the expansion of content delivery from a single television screen to multiple viewing platforms. Netflix will need to run more than just reruns and second-run movies to earn the kind of demand that will truly cause viewers to “cut the cord” with their cable/satellite subscription bundles and switch to its streaming VOD model. We may only watch a fraction of the 1000+ channels on cable and satellite each week, but we love the idea that they’re there. I’ll pay the cable bill because with all those channels, there must be quality in the package somewhere. Netflix and VOD can simplify – and, most importantly, reduce -- subscriber out of pocket costs while still satisfying their T/V appetite for content.
3. It retains and builds on the next generation of T/V “cord cutters.” Netflix surprised the marketplace by revealing that it had attracted 2 million new subscribers in Q4 2012, even before the “House Of Cards” launch. Reporting on a recent NPD study, analyst Russ Crupnick said, "Over half of the viewers for streaming TV are between the ages of 18 and 34, so the YouTube generation is evolving from short-form and user-generated content to TV shows and, like YouTube, they can watch where and when they want." Is there a better description of the kind of on-demand viewing preferred by this age group who grew up with the Internet?
Netflix must approach its next revenue growth move wisely. Great T/V content needs funding. We’re tired of all the ads that we need to avoid on traditional linear television (even with the convenience of DVRs). Netflix has a leg up in the age of “on-demand.” If company strategists don’t get greedy by increasing pricing without a reasonable increase in value, or by flooding the system with commercials that add no value for viewers or advertisers, Netflix might just become the next great media company.
The original television networks had the benefit of managing distribution and content creation, and surprisingly, Netflix has made the boldest move toward creating and optimizing those dual-revenue assets, mostly in a consumer-friendly way. Having learned lessons from its big Qwixster misstep, Netflix’s “House Of Cards" is a bold and major step toward increasing value and attracting new subscribers in an increasingly competitive streaming T/V ecosystem.