Streaming service sets slate, shakes stock tumble

Even if only a small percentage of the $3.9 billion that Netflix spent on content licensing in 2011 will go to its own original series, the attention this growing slate is commanding is becoming increasingly disproportionate to its size. That’s a testament to how aggressive the Los Gatos, Calif.-based company has gotten over the past year in a business in which they didn’t have so much as a toehold the year prior.

“I doubt there’s a serious pitch out there that doesn’t come through here,” says Ted Sarandos, chief content officer at Netflix, where original programming is just one piece of a broader content strategy he oversees. Under his watch, Netflix has already greenlighted four original series.

The first, “Lilyhammer,” is a mob dramedy from Norwegian TV that stars Steven Van Zandt (“The Sopranos”), and has been on Netflix since early February. The second will be an adaptation of the BBC drama “The House of Cards” that is in production in Baltimore and should be on air by year-end, with Kevin Spacey in the lead role.

Slated for 2013 are a revival of the Fox comedy “Arrested Development” that’s still being written and a horror series from “Saw” helmer Eli Roth, “Hemlock Grove,” already in casting. A fifth series, the prison comedy “Orange Is the New Black,” from “Weeds” creator Jenji Kohan has been reported as a done deal, but Netflix is not officially acknowledging it being in the development pipeline.

As badly as Netflix stumbled in the fourth quarter of last year, when ill-advised pricing decisions cut into the company’s market capitalization and subscriber base, Sarandos says the company can still afford its growing content bill.

“Things took a pretty unpredicable turn last year, but relative to the entire business, it was not much of a change,” Sarandos said, firm in his belief Netflix has weathered the storm and come out the other side.

To some degree, Netflix was essentially forced into doing original programming. The kind of series Sarandos coveted most — critically acclaimed serialized dramas from HBO and Showtime — were never going to make their way to the streaming side of Netflix given the incumbents weren’t about to arm a would-be competitor with its own weapons. “Cards” represented a turning point for Netflix when Sarandos outbid his TV counterparts for a property he would never get on Netflix if it went to one of those pay nets.

“We concluded that if this is an area of programming that our customers really enjoy, and the economics work well for us, then we’ll just create a new market if we’re not going to be licensing in that aftermarket,” Sarandos says. “Based on the quality of the slate so far, we have proven that we can bring these shows to market. We’ll see if ‘House of Cards,’ when it starts on Netflix, is just as great an experience or better if it played somewhere.”

With so many buyers of original content to compete with from the traditional TV world, Netflix would seem to have some competitive disadvantages, since it is new to the marketplace and doesn’t develop programming inhouse. But Sarandos says he has an edge in more ways than one. If a series idea comes in the door further along the development process than might be required in the network world, he’s willing to make a larger commitment upfront. Witness the eye-popping 26-episode deal, sans pilot, Netflix made with MRC for “Cards,” with David Fincher onboard as executive producer.

But Sarandos also believes Netflix is a better home for programming because the company isn’t under pressure to launch big out of the gate, allowing a series to establish its value over the course of a long run instead of all at once.

“Our success isn’t dependent on traditional media spending to try to motivate every American to do the same thing at the same time, which has a pretty hit-or-miss record,” Sarandos says. “If you’re going to spend tens of millions of dollars to get America to tune in to a show Wednesday night at 8 p.m., its success is likely more dependent on the marketing working than the show itself. We give creative talent more comfort that we’re more of meritocracy than a test of a network’s marketing group.”

Another Netflix advantage: while a network-TV launch is subject to the incredible scrutiny that comes with publicized ratings, there’s no transparency regarding the performance of a series on a streaming service. Sarandos declines to offer any internal measurement figures for “Lilyhammer,” but says he’s pleased with the audience reception for Netflix’s first original.

“On average, the folks who watch ‘Lilyhammer’ rated it four stars, which is very good for a show that is more than half subtitled in Norwegian,” he says.

Sarandos also believes “Lilyhammer” vindicates the Netflix strategy of evaluating its programming needs through the filter of data derived from the website, which gives a very refined sense of the types of programming that will appeal to the subscriber base. Those algorithms came in handy when the time came to make a decision on “Arrested Development,” which Sarandos believes would have led him to a different verdict had he had only TV ratings to go on, considering the sitcom never performed very well on Fox.

“The data we get from our algorithms can sometimes be wildly disconnected from the ratings data point,” Sarandos says. “Sometimes shows that didn’t fare well on TV do quite well afterward.”

Thanks to “Arrested,” seemingly every TV show that gets canceled these days ends up subject to reports that Netflix is in negotiations to scoop it up, most recently Fox’s “Terra Nova” and ABC’s “The River.” Sarandos wouldn’t address any specific negotiation but he says that while his preference is for original series ideas, he’s glad Netflix has become a must-call for series looking for life after cancellation.

“It’s a phone call that will probably be made on every one of these shows, and it’s a phone call we’ll take,” he says. “There’s room for shows that have a unique, passionate following when you can make the economics work.”.

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