Will 'Arrested Development' Be A Cost Center Or Profit Unit For Netflix?

Oh, how times change.  Just a few months ago, Netflix was the darling of the media and investment community, adding subscribers at a torrid pace and being valued by Wall Street at over $12 billion.

Then, Netflix did practically everything in its power to alienate consumers and investors alike, losing a million subscribers in the process and over two-thirds of its market cap.

This past week, Netflix started the road to redemption and recovery by sending fans of “Arrested Development” into a frenzy by signing a deal to bring the show back. The Emmy-winning series is being revived in an Internet production deal with Twentieth Century Fox Television and Imagine Television, and will be available through Netflix rather than an on-air or cable network.

Jason Bateman, who plays the character of Michael Bluth, said it best: “Netflix is gassing up the staircar! I don't think I've ever been happier to wear a pair of khakis” (an obscure observation that a slim percentage of the slim percentage who are show fans will get -- khakis are his preferred choice of pants, if I recall properly).

The high-fives didn’t end there. "Arrested Development is one of the finest American comedies in TV history and its return through Netflix is a perfect example of how we are working closely with studios and networks to provide consumers with entertainment they love," Ted Sarandos, Netflix chief content officer, said in a written statement.  He’s right: the show garnered more critical acclaim than most. What it lacked, was viewers, or at least, enough viewers to please big media marketers, sliding from six million to four million viewers from season 2 to 3.

Mind you, just because those numbers don’t make economic sense for on-air or cable television, it might for Netflix.  Earlier this year, TechCrunch made the case with another cult-classic that was flatlined too soon, according to its fans: “‘Firefly' averaged about 4.5 million viewers when it was on the air in 2002. Let’s say that Netflix could convert just 500,000 of those to paying customers (who weren’t previously) in order to continue watching the show. That would be a half million people paying at least $8 a month. That’s $4 million a month in revenue. And $48 million a year. And you can assume most would end up as multi-year subscribers.”

Maybe.  Maybe not.

Big-name actors and producers have been testing the digital waters for some time now, and while every once in a while the experiment sticks, more often than not, the big-name actors return to the land of big dollars: TV.  Despite the occasional PR effort, Ashton Kutcher’s involvement in his Katalyst Films is as ongoing as his involvement as Mr. Moore -- and now that CBS is paying him handsomely to act in “Two and a Half Men,” it’s only likely that his mindshare gravitates increasingly back to television at the expense of his Internet ambitions.

In other words, the big-name actors and talent that made “Arrested Development” such a great show were drawn to doing the show when it at least aired on good old television, despite the low ratings.  If the show is limited to Netflix -- or for that matter, Hulu or Amazon or Apple or YouTube -- I am not sure if the same talent would sign up.

Don’t get me wrong. I believe this is exactly the kind of thing that we need to see before online video becomes a real business. But this move also reminds me a bit of when Doug Flutie signed with the USFL or Bobby Hull signed with the WHL.  It gave the expansion leagues a flicker of hope and legitimacy -- but before long, it was clear that nothing would replace the NFL or the NHL, respectively.

I’m not sure the analogy applies here, but it’s a fair observation. 

Lastly, I’ve always argued that with the marginal cost of digital production and distribution sliding towards zero, it remains to be seen if content is a cost center or a profit unit.  It’s possible that “Arrested Development” will become a cash cow for Netflix, as a higher-than-expected percentage of its viewers subscribe to the show -- but it’s more likely that Netflix is experiencing the equivalent of a big, splashy marketing campaign that Netflix’s CEO, Reed Hastings, hopes will turn around the company’s sagging goodwill and stock price.

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