A belated fact check of an old Felix Salmon Netflix post

In the course of researching an upcoming post replying to this piece by Felix Salmon on Netflix, I followed this link to an earlier post and came across something that slipped past me the first time, probably because I was just starting to dig into the Netflix story.

But what Ball misses, I think, is that Netflix is playing a very, very long game here — not one measured in months or quarters, and certainly not one where original content pays for itself within a year. Netflix doesn’t particularly want or need the content it produces in-house to make a profit on a short-term basis. Instead, it wants “to become HBO faster than HBO can become Netflix,” in the words of its chief content officer Ted Sarandos.

Most importantly, the thing that Netflix aspires to, and which HBO already has, is an exclusive library of shows. If everything goes according to plan, then the Netflix of the future will be something people feel that they have to subscribe to, on the grounds that it’s the only place where they can find shows A, B, C, and D. That’s what it means to become HBO — and Netflix is fully cognizant that this is a process which takes many years and billions of dollars.

If Netflix gets there, then it becomes a license to print money, just as HBO is today. Shows like Arrested Development and House of Cards may or may not pay for themselves over the short term — in fact, they almost certainly won’t. But that doesn’t matter. In the long term, they will become part of a library which has massive value on two fronts: the shows can be licensed out in jurisdictions where Netflix doesn’t want to compete, and they will also help make Netflix a service that can guarantee you a great show that you want to watch, whenever you want to watch it.

The "Netflix is the new HBO" narrative has resonated powerfully with both investors and financial journalists, but it has always been shaky and the part you see here about Netflix building a content library around shows like House of Cards is simply, factually wrong. Despite the huge checks being paid to producers, Netflix doesn't own these shows.

 Rocco Pendola fills in the details:

First, Netflix guarantees 13 episodes right off the bat. Sometimes it will even give you a two-season commitment before the first season even airs. And, in terms of rights, it doesn't demand exclusivity. Outside of the first-run window, you are free to place your show anywhere you wish and, unless it cuts another deal with you, Netflix doesn't receive a cut of this action. Plus, there's very little, if any, creative development from Netflix.

In other words, the folks who output the content -- in this case, Sony -- are simply robbing Netflix blind. It's the type of deal that's too good to pass up.

Put another way, Sony doesn't care how many subscribers watch these shows on Netflix. They're more than happy to collect a fat (likely way too big) check, which subsidizes their risk, as they retain rights to sell the programming in markets where Netflix doesn't operate and in all other markets -- geographic and delivery -- after whatever the relatively short first-run window happens to be.

That's not how HBO, for example, plays the game. Never has been. And HBO sees no reason to start, given the franchise it has built and the enormous success it continues to have.

HBO doesn't give the world to studios and creators because it's not so desperate that it has to. It maintains exclusive rights to the programming it licenses. Unlike Netflix, it routinely produces programming in-house. And it almost always involves itself in the creative process. From what I understand, producers and directors actually appreciate this input, as HBO has a track record of making stars and producing huge hits.

You can find me covering similar ground here and here. Particularly in the second post, I go into quite a bit of detail about the HBO2.0 narrative. The only point I'd like to add: when one of these narratives takes hold, things that should be true according to the narrative start being treated like facts and even the smartest and most clear-eyed observers (like Felix Salmon) may not be immune to the effects.

The irony is that, in principle, Salmon's analysis is entirely sound. There are points I might disagree with -- I'd be more likely to advise Netflix to license out its content more freely. Licensing not only brings in money but also keeps your product in the public eye and cultivates new fans (welcome to the strange world of non-rival goods). I think it's safe to say that syndicating Sex in the City didn't hurt its revenue stream -- but on the whole, Salmon pretty much nails it. If Netflix really wanted to become a major, stable, free-standing media company, it would probably have done pretty much of all of what Salmon suggests.*

The only trouble with the analysis is that the company isn't doing what Salmon thinks it's doing.

*  Of course, there is always the possibility of being acquired by a company that doesn't mind having subsidiaries that lose money.