Why Netflix is producing original content
blogs.reuters.com
blogs.reuters.com
It's also interesting that this article makes no mention of Netflix's 3 other original series that are not as popular as House of Cards and Arrested Development - Netflix is probably making as many flops as hits at the moment, and that adds an important qualification on the risk/reward calculation of its strategic investment in original series - the headliner shows have to not only justify themselves (as the article describes), but carry the duds as they come along as well.
If Netflix fails, at this point, I don't think it'd be too big a blow. There are plenty of services in the same space and the feeding frenzy for Netflix library contracts would ensure the survivors are offering the same library to the same market.
And I'm not sure why you think Hollywood feels no pressure to get their content in front of viewers. Their proper interest is to maximize the return on their libraries, and they can hardly do that if they enable the creation of an 800 lb gorilla in the streaming market that can dictate terms.
Should Netflix be the undisputed one-true-service for digital delivery, that would almost certainly become bad for viewers. What incentive would they have to work with MS/Google on enabling federated/integrated search/navigation? What incentive would they have to work with new device makers as they have?
Netflix fantastic value proposition is a product of how intensely competitive that space is, due its future up-side. Things that preserve that competition are Good, even if they are bad for Netflix specifically, up until the point they are bad for the entire streaming market.
[1] The current division between Hulu, Netflix, ABC, HBO Go, et al. is about as high a wall as you'd want. Different services, same box, same-ish interface/behavior. If you couldn't get multiple services on the same hardware, it'd be too high. And, of course, if you could get XB1/GoogleTV-style federated search/navigation across services, the status quo would be just fine.
That's a non-sequitur. That content was going to be stripped regardless of what production Netflix was engaged in. In fact, it doesn't matter if Netflix can magically realize 10x revenue per subscriber overnight, because there is game theory at play here. Big content is happy to make nice marginal payouts from Netflix on the side, but they will do anything to prevent Netflix from consolidating a comprehensive library of A-list content because they already have by far the broadest device reach, and if they get all the content, cable cutting will ramp up overnight and destroy any leverage for rights holders because there will be nowhere else they can go for distribution.
> It's not good if Netflix goes all-in on original programming and fails, potentially taking the rest of the company down as well.
They have no choice. Big content will never let them win. With their own content at least they have a chance to control their own destiny.
> It's not good if Hollywood feels little pressure to make it easier for consumers to access their content because they're getting great contracts with traditional distributors.
As long as customers balk at paying $10/month for Netflix while happily shelling out $150/month for cable, Netflix has no leverage.
On balance I have to agree with the OA's assertion. Netflix putting some of its money directly to production can only benefit viewers overall. Putting that money to more contracts is not going to move the needle in terms of production from the major studios, to them it's just gravy at this point.
Their ostensible gameplan is to do this in the short run, in order to get a hit or two on their hands -- at which point they can start dictating terms, rather than being dictated to. This is similar to HBO's playbook, from back when it first entered the scripted development market. It's a very big gamble. It paid off for HBO, and in recent years it's been paying off for basic cable channels like AMC. But Netflix has a very different revenue model that is challenged by heavy, loss leading production costs. It's also starting to face a lot of competition for essentially the same service rendered to consumers.
The question of whether this "can only be good" for consumers is a much thornier one. Economics suggests that more players in the distribution ecosystem will lower costs for consumers. And Netflix has already done a pretty great job lowering marginal costs of consumption. But Netflix isn't really disrupting anyone on the content side, at least not yet; that's largely because the studio system is really savvy about protecting itself from disruption.
The bundling the cable services were forcing on us to support ESPN (which accounts for something like $15-20 in your TV bill) and then topping with the a la cart channels (HBO, Showtime, etc). Now, we have a few a la cart providers that stand on their own with original content (in addition to licensed content).
My big fear is that the a la cart streaming channels will eventually start running commercials in the manner of Hulu. Throw in ISP bundling of streaming services, and voila, we're back to Cable Television... only since it's on demand, we can't DVR through commercials.
Also, I'm not sure the fallback to channels is a bad thing. I've been spending a lot of time in the YouTube ecosystem and finding good regular series on a topic is a HUGE challenge. If there was a well curated food channel or educational channel on YouTube I'd pay to subscribe — It's a huge time suck searching, especially using the current tools.
The conclusion is that bundling benefits both the consumer and the company. The consumer gets both channels cheaper than separately and the company generates more revenue even with cheaper pricing per channel. This completely ignores the fact that I don't want the sports channel AT ALL. Therefore, instead of paying $11.70 for both channels, I'm paying $9 for the one I truly want.
Now expand that over hundreds of channels, including the dozens of sports channels I don't want, and let's see how it breaks down. From the current lineup of channels that I saw the last time I looked I would expect I would only want at most a dozen channels. Compare that to the amount I currently pay would be of huge benefit to the cable company because currently I pay nothing for cable TV as I'm a cord cutter. I haven't paid for cable TV in three years because of their stupid bundling pricing, how did that benefit the company?
You're also an exception, and if the cable company tried to optimise for you (today) they would lose much much more than they would gain.
Let it take a while, I'm quite happy with the current arrangement of me not paying any money for cable TV.
I'm not sure I agree with your last point though. Because it seems the cable TV industry's idea is that the only thing to do is to increase costs for their customers over time regardless of the quality of the product. I stipulate that the quality of cable TV has gotten worse over the years even with the 300 channels they now offer. You're just paying more and more for low-quality noise you never watch.
And that's just two channels out of three hundred. Yes, there are examples of quality but they are severely drowned out by the noise. I guess I should say the average quality of cable TV has gone down over the years.
I suppose if the majority of the channels on cable offered quality entertainment on the level of HBO's or AMC's offerings then my attitude would be different. But since I can access AMC content now with a agreeable arrangement and possibly get HBO's in the future, I don't feel the need to pay for all those channels I'll never watch. Right now I pay for the shows I want to watch.
Plus, Netflix produced House of Cards of which I'd be happy to compare with any of HBO's or AMC's offerings.
On the other hand, a direct competitor to Netflix is much easier to pull off as there's no cable to lay nor satellites to launch. What I would worry over is if a company like Netflix starts pushing for exclusivity in certain markets using local laws much like how the cable companies obtained their stranglehold on their markets. I don't see how such a thing could be done but never underestimate money and lawyers.
Netflix is the equivalent of watching last seasons DVD release.
I can't see netflix having even 1/5th the cost per episode hulu does.
Amazon offers a similar service where you can purchase an episode for many shows the day after airtime. Even though I have an Amazon Prime account I still have to pay extra to see the show immediately even though that very same episode will likely be free in the future because of the Prime account.
Hulu is doing the same thing, instead of you paying extra you watch commercials. And yet, no one seems to complain over Amazon's model even though it is essentially the same thing.
This will never happen, for the simple reason that you have choice and as a result, competition. You can choose Netflix, Hulu, Amazon Prime, or any of the smaller ones.
Netflix gets commercials? It will literally take a few clicks to switch to Amazon. All 3 get commercials? Watch competition sprout.
That's the beauty of the Internet. Barriers to entry are significantly less than in the real world, which allows for competition to flourish. There is literally nothing stopping you from starting your own streaming service. Most of the technology is proven and widely available. And, of course, anybody can license content. This is universal and required by law.
You will not have choice with regards to exclusive content. If you want to watch Arrested Development (season 4) you will need to be on Netflix, if you want to watch Zombieland you will need Amazon Prime. Just like the networks where HBO, ESPN, etc. have exclusive rights to their content.
When we start getting Netflix producing shows A, B, and C, and Amazon Prime producing X, Y, and Z, if you want to watch only A and Z, you are stuck paying for both services.
It might not be as bad as paying for 200 channels when you only watch 3, but it's still the same model - just at a different scale.
No, I'm stuck using thepiratebay.org and when they get tired of losing revenue, they'll start sharing the content. Piracy is most certainly a force to be considered here and it can actually nudge the players toward a more competitive position where they're not hoarding content.
What's more likely to happen first? Some Microsoft, Google or Apple is able to offer a bunch of TV over IP channels as an tangential part of their business, or some cable company like Comcast or Time Warner will get the rights to run all its channels, or even individual streaming shows to a roku or iPad.
I think it'll be much easier in this circumstance for Comcast or Time Warner will be able to adopt their business (not their prices) before a tech companies will be able to license the content deals for cheap
It also makes you a bitch to both your clients ("I'm switching right now unless you give me a better phone deal!") and to your suppliers ("So you need my content yesterday? Pay me X billion right now or you can go get fucked.")
To make money long term you need to either be the lowest cost producer for non-exclusive goods, or the sole controller of exclusive goods. You can make money both ways, but the former is much, much, much harder. NFLX, and every other company in existence, is either going for volume or for monopoly. That is why they are producing original content. It's because volume sucks.
It's also why startup success is largely luck based. Imagine a million different trolls, building a million different bridges, to a million different islands. Now imagine that upon one island a scarce metal is accidentally discovered and some random dipshit idiotic troll has just somehow, through sheer chance, managed to acquire exclusive control of the resource. Now, if you want to get that metal, you are going to have to pay that troll, and the more people want it, and the more desperately they need it, the fatter the troll will get.
Stand between people and the things they desperately want and you'll never go hungry. But you might get some indigestion.
Fuck competition. Become one with your inner troll; charge people through the nose for what they want, and then charge them again, and again, and again. And then when they can't take it any more, kill the product, and make another one.
Rinse and repeat.
In AAPL we trust; all others bring shitty margins.
Previous comments on competition and monopoly here: https://news.ycombinator.com/item?id=5253747
What a morbid way of looking at things... and it's not terribly accurate, either.
You can make a very good buck on volume, even with fierce competition and extremely tight margins.
So you can't charge a whole lot for the toll because there are a dozen other bridges? Boo hoo! Have you thought of selling coffee to your clients as they pass?
You can easily make up margin on the up-sell or cross-sell. Something that anybody who worked in consumer electronics retail already knows. And that type of retail is extremely low-margin and competitive. The guy across the street and on the internet has the same exact widget as you.
This is something that Netflix isn't doing. Yet. And there's quite a bit of margin there.
Oh and here's a little bit of insight, once you have a "bridge" you can point it at any "island". It's super easy, almost like copy and paste. How many countries have access to Netflix?
There's plenty of opportunity in volume and you serve the greater good. Not every company has to be a hipster love fest like APPL, where you pay through the nose for substandard hardware. That's just as crass as children refusing to wear anything but brand name clothing.
Volume capitalism is beautiful because it mercilessly lowers the price of goods, allowing access to all. And you can make quite a profit too!
If nothing else, I've gotten some fantastic imagery out of this conversation.
True - you can make money on volume, but when you are in a race to the bottom in terms of price, something invariably suffers... it's usually quality. So, if you want to make money selling cheap crap, go right ahead - profit is profit. Just don't assume everyone wants to be in that business.
Alright, alright. The hardware itself is, of course, not substandard. You're paying for the brand, so it's just overpriced. Yes, build quality is wonderful on the Air, but my Samsung Series 9 has similarly wonderful build quality.
You're definitely paying for the brand. That's why everything they sell has a prominent Apple logo stamped on it. If it wasn't for that logo, people wouldn't fork over the kind of money they do. Yes, they built up their brand on good service and quality, but then, every luxury brand does that as well.
Now, somebody has to be the luxury brand and somebody has to make "cheap crap" as you say. That's fine and there's nothing wrong with that.
But please don't pretend that Apple is for the masses. It makes about as much sense as saying everybody should drive a Ferrari.
My point was that not every business needs to be run like a luxury brand to make money. Look at Samsung and many others as an example. You can make plenty of money on volume, up-selling, and cross-selling, as well as expanding internationally.
Not every Apple product is for everyone, but they have done a very good job of creating a product line diverse enough that anyone can afford something. Minimum wage laborers are certainly seen sporting iPods. iPads are still the most popular kind of tablet. If you can afford X for a product you want, if you put in the effort/take out a loan, you can afford 1.5X for a product in the same class. We're not talking about cars, where the luxury brands can easily exceed the expense of commodity brands by factors of ten or a hundred.
> If it wasn't for that logo, people wouldn't fork over the kind of money they do. Yes, they built up their brand on good service and quality, but then, every luxury brand does that as well.
The fact that other luxury brands do something similar vis-a-vis service and quality doesn't mean you get to slyly deduct it from reasons to buy Apple. Buying Apple gets you a pretty thoroughly integrated positive experience. The logo certainly has value, but it's a lot more than just the logo.
Expect to see Apple remaining in their market position for as long as it takes their competitors to develop an appreciation for the advantages these non-technical and semi-technical efforts bring.
You don't have any entitlement to the things you want simply because you want them. When someone spends loads of money creating that thing you want, they can charge what they please. You are free to call them dumb of criticize their terms, but when you're reduced to calling an innovative and very low cost, low margin company like Netflix a "fat troll" you become the sort of caricature the worst, dumbest old line content companies love: A free rider who will never pay, no matter how good the terms, who has no respect for the efforts or rights of others.
Anyone with a track record at this point has far more to gain by letting the streaming providers compete for a license every few years.
Netflix might offer slightly better terms than competition would produce in the short-run, but they'd want a longer license term to make up for it. And that, given the growth and promise of the space, would be silly.
Consider the 700% licensing fee increases. Would Netflix offer a 700% premium over a 3-year license in exchange for a 6-year partnership -- with who-knows-what restrictions on future licensing of content produced under the partnership?
They'd need to find a producer with a track-record for quality, but that was also cash-strapped and needed someone to share future production costs to stay in business or to make some wild expansion gamble. Which would only raise the question of why a producer with a track-record would have trouble finding another partner.
Plus the nature of Hollywood is that it doesn't make too much sense to partner with AMC to get new content, based on their success in hiring successful creatives, when you can just hire successful creatives directly.
What, after all, has AMC brought to The Walking Dead, beyond hiring a successful creative and providing a time-slot? Their input into the situation has seemed to be the 'tweaking for profitability' consideration that requires little industry acumen (AMC was remarkably ham-handed in this case) and that Netflix might not even see the same need for in the first place.
Netflix are beginning to chip away at that bondage by producing original content, and giving people a reason to use Netflix that can't be taken away arbitrarily by external forces.
Netflix could be a great champion of copyright reform ... if that wouldn't cause all their content providers to immediately drop NF in retribution, that is.