Netflix is having to spend more and more money every quarter for the rights to stream other people's content, so why are they spending $100 million to throw their own content into the mix?
So Netflix's costs are rising. Plus, as more users join, Netflix needs to rent more and more servers to make sure every user has plenty of bandwidth for a smooth stream.
So why is Netflix spending an estimated $100 million to make their own show?
Netflix's first big push into original content is called House of Cards. Netflix has put, or will put, a total of $100 million into the show. In fact, Netflix agreed up front to distribute at least 26 episodes. This is completely unheard of in the classic, non-Internet TV space.
Normally, the creator of a show have to pitch a "pilot" episode of their show to the channel they hope to be on, from their own money. Then, and only then, will the channel order more episodes and give the creators some money to spend. And they aren't guaranteed to get an order at all. You could spend $10 million on a pilot and get turned down.
If those initial episodes, usually 10-13, do well, the channel might order a couple more (usually around 9-14 more). But that's all one season.
Here, Netflix bought 26 episodes, two seasons, without seeing a pilot at all.
This is awesome for people making shows, as it makes it a lot easier to get guaranteed funding, but how on earth is Netflix justifying this in the books?
The most direct comparison now, is HBO, which licenses movies from other people to show on their network (and their streaming service, HBOGO), but also creates their own, big-budget TV shows.
HBO costs $15.99 a month on DirecTV, $16.95 a month on Mediacom (which is a terrible company, never deal with them, ever) and $18 a month on Dish. So HBO is getting much more money than Netlfix, right? Actually, it's not that much
HBO splits that $16, $17, or $18 a month with the cable provider, usually 50-50, but sometimes less. So HBO, at the max, is getting $9 a month from some users, and as little as $7 or less. (Actually, $7 is thought to be the average HBO gets by some analysts).
So they're about on the same level as Netflix.
HBO spends ungodly amounts of money on TV shows. True Blood costs more than $5 million an episode, and the pilot episode of Boardwalk Empire cost a stunning $20 million (from HBO).
But HBO does have huge cable companies handeling their advertising for them, and they also have the behemoth Time Warner Cable backing them up.
Netflix is all on it's own.
But still, there is an explanation. The reason HBO focuses on making great TV shows, and not ones that just tailor to the largest audience, or to advertiser's desires, is that they need a reason for people to really want HBO. When you get the bill every month and wonder why you're paying $17 a month for HBO, they want you to think of Game of Thrones, or Girls, or The Newsroom, or Boardwalk Empire, or any one (or more) of their original series. You think of them, and then you don't cancel.
Netflix is hoping to adopt that same strategy. That's why Netflix is pushing House of Cards so much. It's plastered all over their site, and they're letting you watch the first episode without paying anything at all.
To break even, House of Cards will have to bring in 520,834 new subscribers, and keep them for two years. But that number is technically lower if it keeps people with Netflix. Someone who might otherwise have cancelled their subscription might keep it to be able to watch House of Cards, and keep it longer to watch the second season (which is confirmed, but doesn't have a date yet), and keep it longer because Netflix has promised to do at least five original shows each year.
They've already announced six for this year, way up from one, relatively low budget, original series last year. Those include House of Cards, a new season of Arrested Development (A hilarious comedy that has been off the air since 2006), Hemlock Grove (a horror/thriller based on the book of the same name, premiering April 19), Orange is the New Black (a 40-minute comedy-drama), Derek (Another comedy-drama, but 24-minutes), and a second season of their first (low budget) original series, Lillehammer (a one hour comedy-drama).
Netflix makes all of it's money from it's users. It doesn't have advertisers, or a parent company. The only money it gets is the $7.99 a month each user pays for unlimited streaming.
The content Netflix distributes isn't cheap. In 2008, Netflix made a deal with Starz for $30 million. In 2011, Star left Netflix because even $300 million wasn't enough. Netflix has a $200 million deal with Epix, and is set to pay disney hundreds of millions soon too. They pay $1 million per episode to AMC for exclusive streaming rights to Mad Men. So Netflix's costs are rising. Plus, as more users join, Netflix needs to rent more and more servers to make sure every user has plenty of bandwidth for a smooth stream.
So why is Netflix spending an estimated $100 million to make their own show?
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| This chart shows Netflix's rising expenses. Keep in mind, these numbers are just for the rights to content, they don't include advertising or sever costs or employee salaries. |
Netflix's first big push into original content is called House of Cards. Netflix has put, or will put, a total of $100 million into the show. In fact, Netflix agreed up front to distribute at least 26 episodes. This is completely unheard of in the classic, non-Internet TV space.
Normally, the creator of a show have to pitch a "pilot" episode of their show to the channel they hope to be on, from their own money. Then, and only then, will the channel order more episodes and give the creators some money to spend. And they aren't guaranteed to get an order at all. You could spend $10 million on a pilot and get turned down.
If those initial episodes, usually 10-13, do well, the channel might order a couple more (usually around 9-14 more). But that's all one season.
Here, Netflix bought 26 episodes, two seasons, without seeing a pilot at all.
This is awesome for people making shows, as it makes it a lot easier to get guaranteed funding, but how on earth is Netflix justifying this in the books?
 |
| I love the show's slogan, which isn't on this poster for some reason:Bad, for a greater good. |
HBO costs $15.99 a month on DirecTV, $16.95 a month on Mediacom (which is a terrible company, never deal with them, ever) and $18 a month on Dish. So HBO is getting much more money than Netlfix, right? Actually, it's not that much
HBO splits that $16, $17, or $18 a month with the cable provider, usually 50-50, but sometimes less. So HBO, at the max, is getting $9 a month from some users, and as little as $7 or less. (Actually, $7 is thought to be the average HBO gets by some analysts).
So they're about on the same level as Netflix.
HBO spends ungodly amounts of money on TV shows. True Blood costs more than $5 million an episode, and the pilot episode of Boardwalk Empire cost a stunning $20 million (from HBO).
But HBO does have huge cable companies handeling their advertising for them, and they also have the behemoth Time Warner Cable backing them up.
Netflix is all on it's own.
But still, there is an explanation. The reason HBO focuses on making great TV shows, and not ones that just tailor to the largest audience, or to advertiser's desires, is that they need a reason for people to really want HBO. When you get the bill every month and wonder why you're paying $17 a month for HBO, they want you to think of Game of Thrones, or Girls, or The Newsroom, or Boardwalk Empire, or any one (or more) of their original series. You think of them, and then you don't cancel.
Netflix is hoping to adopt that same strategy. That's why Netflix is pushing House of Cards so much. It's plastered all over their site, and they're letting you watch the first episode without paying anything at all.
To break even, House of Cards will have to bring in 520,834 new subscribers, and keep them for two years. But that number is technically lower if it keeps people with Netflix. Someone who might otherwise have cancelled their subscription might keep it to be able to watch House of Cards, and keep it longer to watch the second season (which is confirmed, but doesn't have a date yet), and keep it longer because Netflix has promised to do at least five original shows each year.
They've already announced six for this year, way up from one, relatively low budget, original series last year. Those include House of Cards, a new season of Arrested Development (A hilarious comedy that has been off the air since 2006), Hemlock Grove (a horror/thriller based on the book of the same name, premiering April 19), Orange is the New Black (a 40-minute comedy-drama), Derek (Another comedy-drama, but 24-minutes), and a second season of their first (low budget) original series, Lillehammer (a one hour comedy-drama).
It's also worth noting that the 520,834 subscriber boost mentioned before is equal to only a 10% boost in users, so it's not impossible to accomplish.
Creating original shows could also potentially bring in other sources of revenue for Netflix, though it's unclear if they plan to take advantage of these opportunities. Netflix could sell their shows on DVD, or even license them to a cable channel after a year or more of being Netflix exclusive.
While we won't know for a while (probably around the end of this quarter) if House of Cards was a financial success, or even if it's on it's way to becoming one, we can already tell people are liking it.
While we won't know for a while (probably around the end of this quarter) if House of Cards was a financial success, or even if it's on it's way to becoming one, we can already tell people are liking it.
It's been out for two days and already has gotten an amazing number of positive reviews from critics, and a 4.5/5 average rating from users. I've only watched 2 episodes, but I can tell you now, I won't be canceling my Netflix subscription anytime soon.
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