House of Cards: how Netflix’s $100m gamble made them internet video kings.
With original series now launching every fortnight, Netflix’s business model is truly pioneering. Where next for the company?
Netflix is the most successful paid internet TV service and a poster-child of the great media migration to time-shifted viewing around the world. No ads, no scheduling constraints, and entire season sets made available based on customer data. It’s the emergence of a new model and viewing habit set by Netflix.
In early January the Golden Globe awards saw the traditionally dominant broadcasters make way for Netflix and Amazon, with Kevin Spacey taking best actor for House of Cards and Transparent taking best comedy. This provided further clout to the next generation of “data-driven” productions. With such a prelude, the anticipation has been rife for House of Cards season 3, launching today. The company also plans to launch a new show every fortnight.
Founded as a mail-order DVD subscription service in 1999, Netflix has come a long way to become the second-most popular primetime video destination, behind YouTube
Fifteen years on, Netflix just announced $5.5bn in annual sales, having pivoted to a premium streaming service where subscribers are privy to an all-you-can-watch experience. In context, that’s half of what CBS ($13.8bn) makes today, and approximately double ITV’s revenues (£1.8bn). An impressive milestone for a venturestarted with just $2.5m in cash.
People now invariably expect the latest shows and films to be available for streaming, legally or not.
In other words, bingeing is becoming de facto, with the number of UK legal bingers estimated at three million, while more than 20 million (around 30%) are still engaged in piracy. So the rise of Netflix surely has been a good thing by fighting piracy and returning $5.2bn to the studios in licensing revenues.
The data trailblaze
Netflix has proven that a legitimate and independent paid video streaming service can succeed if the right cards are played. Since 2012, Netflix has made more than 250 hours of original programming, receiving nominations for 45 Emmys, 10 Golden Globes and three Academy Awards.
Later this year we can look forward to Netflix’s first feature film – Crouching Tiger Hidden Dragon II: The Green Destiny. Already causing a stir in Hollywood, the production is a move as bold as the $100m House of Cards story, where for the first time a major feature film will be premiering both online and at cinemas on the same day – as long as the cinema chains don’t all boycott it.
What is its secret? Netflix’s chief content officer Ted Sarandos recently reaffirmed that the company relies on its rich subscriber data to take editorial decisions where “seventy is the data and thirty is judgement, the thirty needs to be on top”. But what data do the commissioners leverage?
Though it is largely unknown, their metric is focused on engagement to identify hard-boiled loyal fans that drive the spread of the title, as opposed to relying on passive viewing figures. Such loyalty data from different fan groups act as a yardstick of elements to bet on for the next big thing to specific audiences. This is not dissimilar to how Amazon creates unique shopping suggestions for every user. For example, Hemlock Grove is a data-driven commission with a clear target to the tween segment.
Hollywood is also jumping on this data bandwagon as they seek to substitute the use of traditional research companies, instead relying on social media-based data mining to discover potential hit factors for their next film.
Future challenges to Netflix and the industry
Netflix have done exceptionally well to mix a third-party distribution model with original content development, thereby mitigating the risk of studios hiking up prices. HBO and CBS recently announced they will be giving chase to Netflix by starting their own services. Broadcasters have been offering catchup services since 2007 but inevitably pegged to the broadcasting deals. While they have stopped relying solely on panel data, it is the first time they depart from the traditional ad model.
While Netflix enjoys its first mover advantage, their biggest threats are Amazonand YouTube’s new ventures. Both companies have deep pockets, big audience data and relentless ambition unrestrained from having to look after broadcasting interests. So what does Netflix need to do to remain dominant?
• More of the same – original content production worldwide, more diversity (lifestyle, gaming, sports) and subsequent licensing and merchandising revenues
• Tie-ups with broadcasters and cable/satellite companies on premieres, keeping Netflix ad-free
• Pay-per-view option for premium film and TV titles including live sports
• E-commerce opportunities for in-show transactions, experiences and product placement
• Partnerships with retailers, device and car manufacturers and theatres
• Fan-sourced commissioning of content to cater for every niche
Netflix, with a limited original content pool, is the go-to online entertainment binger’s club and deservedly walking among the giants. But nothing last for ever – just look at Blockbuster.
Netflix’s success is fuelling the confidence of the “nouvelle riche” entrants, paving the way for a big-spending competitive marketplace. Whether Netflix will prevail or whether the likes of BT, Amazon or YouTube will take over, let’s hope for three things: more choice, better content and better value.
Aki Tsuchiya is the founder and managing director of Streamhub