Rooting for Netflix (no really)

I realize I've been a bit rough on Reed Hastings and the Netflix business plan and strategies. There are real reasons to be concerned about how the company is being run and how business journalists are covering it, reasons that often get glossed over in the standard narrative, but, in an attempt to add some balance, though, I'm afraid I may be leaving the wrong impression.

For all its problems, there is a lot to like about Netflix. It is, by many metrics, a successful company. In an age of free media, it has built a substantial base of paying customers. It provides a pretty good service at a very reasonable price. Most importantly, Netflix introduces diversity into the dangerously inbred world of major media.

Minor media is fine, as a musician friend of mine recently observed, the people now control the means of production. Anyone can record and mix an album or produce a movie. If, however, you need access to a large budget or a mass outlet or, perhaps most vitally, any kind of press (mandatory Weigel link), you pretty much have to deal with a handful of massive companies, some terribly mismanaged, others oblivious to the interests of the general public, all focused on creating a less and less diversified landscape.

Netflix offers a healthy counterbalance to that concentration of power. That counterbalance is particularly important given that the company's two main competitors are Amazon (speaking of unhealthy concentration of power) and Hulu (one of the most flagrant antitrust violations in recent memory).

I'd really like to see Hastings and company make a go of it. That's one of the reasons I wish they were better at their jobs.

Kevin Spacey has been playing brilliant, manipulative sociopaths for a long time -- another Netflix side note

Kevin Spacey is a stunning actor of tremendous range but as I was putting together recent posts on playing to vs. playing against expectations and how that relates to Netflix, it struck me just often often Spacey has played the sociopath (see for yourself) going all the way back to his first big national role twenty-five years ago.

Actual vs. perceived viewing costs -- side note to the Netflix

Since we're on the subject of streaming vs. traditional TV, here are some n=1 observations.

Even in the case of free (or, more generally, no marginal cost) programming, I'll wager we've all felt cheated after watching a disappointing show. "There's an hour I'll never get back" sums the feeling up nicely. Therefore, part of getting potential viewers to sample a show is creating a low perceived viewing cost and risk of wasted time.

Here's where the n=1 comes in. I've noticed when I channel surf or I realize that a favorite show is about to start, I tend to underestimate the commitment associated with checking it out while simultaneously overestimating the scarcity. Since I don't know when my next chance to see it will be, I'll just watch until Columbo comes in or the Magnificent Seven talk to the old man or Ray Liota takes Lorraine Bracco to the Copa. Invariably, though, when those moments pass, I keep watching.

From a marketing standpoint, the combination of low perceived cost and scarcity is extraordinarily powerful (check out any marketing psychology book for examples), By comparison, when I sit down to watch something on-demand there's no sense of scarcity, I'm more aware of opportunity costs and, for some reason, I feel more like I'm making a commitment to watch the whole show -- opening credits to closing credits.

What a Hulu or a Netflix does have is a selling point often inversely related to scarcity, convenience. "Watch what you want to watch it." The key piece there is "what you want to watch." Once you've made your selection, convenience becomes a big plus.

It is often useful to think of marketing as three stages of persuasion:

1. Convince customers they want a product;

2. Convince them they want to buy it from you;

3. Convince them they want it now.

Recommendation algorithms do a good job with the third and, if you're seeing the recommendation, the second probably isn't a problem. I do not, however, see them doing a good job with the first, at least not without a great deal of help.

Interview with FX President John Landgraf

I'm not a big fan of KCRW's The Business (imagine Entertainment Tonight trying to do Marketplace), but like most interview-based shows, the right subject can make it worth your time.

If you have any interest in the business of television, John Landgraf's segment is something you should check out. Landgraf is a smart guy playing the game at a very sophisticated level. Even when his decisions seem to turn out badly, you can see the sound business reasoning behind them.

The interview is about a year old but with the Netflix programming push a hot topic and the general matter of the economics of original programming getting so much attention, it seems like a good time to check in with someone who actually knows how to make money doing this.

Here's the blurb from KCRW:

President of FX, John Landgraf talks with Kim Masters about the unusually hands-off deal he made with comedian Louis CK for his show, Louie. Essentially FX wires him money and he sends them a show. There's virtually no oversight or input from the network. It's a deal that many in the industry envy but something that Landgraf says that not every creator could handle. 

Landgraf is no stranger to placing bets on shows, and a new show that he's hoping will pay off is Anger Management, starring Charlie Sheen. Landgraf tells Kim that he was prepared to pass on the show but was taken in by the pitch. He also outlines the deal points, which include an unusual arrangement where if the first season of ten episodes gets a certain ratings number then the show will be automatically renewed for 90 episodes. 

Finally, with hits like It's Always Sunny in Philadelphia, Sons of Anarchy and Justified, FX skews towards a guy audience. Landgraf talks with Kim about this and also about why he passed on Breaking Bad.

"Things we no longer see on airplanes" from Mental Floss

Kara Kovalchik has an amusing collection of TV spots and photos from print ads showing some of the amenities airlines experimented with before deregulation. One of these days, this might be a good starting point for a new air travel thread, but for now just sit back and enjoy the flight.

Two quotes about Netflix, presented (almost) without comment

Nearing the end of the thread...

Forbes contributor Kosha Gada wrote a somewhat breathless, wave-of-the-future article up about Netflix that included the following:

Of course, the end game may well lie in pivoting away from subscriptions and distribution altogether and moving into the world of content licensing.  This would fundamentally change the company’s equation. Whether a move to content licensing is the key to Netflix’s future growth is yet to be seen, but it certainly sets up fascinating new dynamics—and ironies—for the broader industry.

Put that along side this footnote from the previously mentioned article by Rebecca Greenfield:

This post originally stated that Netflix owned the syndication rights to House of Cards. However, The production company Media Rights Capital own them.

I don't want to make to much of this. Netflix may be planning a pivot to content licensing somewhere down the road. Still, reporting like this does add to my suspicion that the standard narrative has not emerged naturally from the facts on the ground.

Burn Notice and more at Hulu

If you're tired of talking about television and would like to watch some for a change...



(though if you do want to focus on the business of television, check out the arrangement Hulu has made with the cable providers for the more recent episodes.)

I'd also recommend this (particularly the series finale Christmas episode which took things in a totally unexpected direction). Completely ruined the American version for me.



And though I have mixed feelings about Hulu-plus (and Hulu in general -- how can anyone argue this doesn't violate anti-trust laws?), the Criterion Collection really is a film-lover's dream

Weekend blogging -- who are the Becketts in your field and who are the Pinters?

[keep in mind while reading the following that it has been more than twenty years since I read these plays. If you've read either author in this century your opinion is probably worth more than mine.]

I know there are some who would dispute this but I think most critics and literary scholars would, with all due respect to both writers, rank Beckett over Pinter. It's not a position I'm prepared to defend (though I am inclined to agree with it), but, if you are willing to go along with it, the proposition suggests a somewhat counter-intuitive result: the greater writer is the less influential.

I'm using influence here in a fairly specific way to mean later writers' use of specific elements associated with Beckett's and Pinter's work, not to mean general impact. Lots of writers might tell you that see Godot changed their life without being able to point to anything specific in the play that changed in their work.

It's not difficult to why much of Beckett's best known work isn't that widely imitated. When you've written a play where the staging consists of three actors' heads sticking out of urns with the final stage direction "repeat play" and you actually name it Play, you haven't left future generations a lot to build on. I remember being more impressed by Play than by the Birthday Party, but I had no urge to go out and write my own actors-in-furniture cycle.

Lots of writers did go out and try to write their own versions of Pinter plays and many more have incorporated Pinteresque elements, creating a sense of absurdity or menace by the strangely off-kilter use of mundane and colloquial language. You can see Pinter's influence even in popular genres like science fiction (it was actually an arc of the no-budget British time-travel series Sapphire and Steel that got me thinking about this), horror (check out the bar scene in the Shining) and even sitcom. By Beckett's pop culture presence is largely limited to allusion (an unpunctual character might be compared to Godot, for example)

If you've played along up until now, I have a question for you: in your field, who are the Becketts and who are the Pinters?

For example, in mathematics I think you could make a case for Newton as a Beckett and Leibniz (due partly to his superior notation) as a Pinter. When I asked a musician friend, he immediately suggested Thelonius Monk as a Beckett, brilliant but something of a terminal point.

Other than that the competition is open. How would you complete the sentence: Though __________ was more brilliant, _________ was more influential.

House of Cards -- either already in the black or seriously underperforming

More from the ongoing Netflix thread, but I promise the end is near.

One of the underlying issues I have with the coverage of trendy companies is the lack of interest in facts that seem to undercut the narrative and a lack of skepticism about facts that seem to support it.

Take Rebecca Greenfield's gushy story "Netflix Has Almost Already Paid for 'House of Cards' in New Subscribers":

By adding more than 2 million U.S. subscribers this quarter and another 1 million elsewhere in the world, Netflix has nearly earned back its entire $100 million investment in House of Cards — in under three months. As we explained in our breakdown of the economics of that original show, Netflix only needed about 520,834 new users — in two years — to break even on that program. But the streaming and delivery businesses have added nearly $50 million in subscriber dollars in this country alone, Netflix announced in its earnings report Monday. If you include the overseas users, that number goes up to about $72 million.

Of course, not all of these new (paying) customers will stick around for two years — and Netflix has other costs besides its high-profile leap into original programming, including Hemlock Grove, which premiered this weekend, and the comeback of Arrested Development, which is expected to offer another subscriber boost when it debuts Memorial Day weekend. But CEO Reid Hastings [sic] said in his letter to investors Monday that fewer than 8,000 new users participated in "free-trial gaming — that is, hardly anyone signed up, binged-watched House of Cards, then quit Netflix. If the company keeps building loyal subscribers at this rate into 2014, when it premieres a new series from the Wachowskis, Netflix should be able to break even on all of its original programming — by our calculations, that would take 2.6 million new paying subscribers a month every per year — and then some.

The about free-trial actually is a piece of genuinely good news for the company, but that really spectacular part raises some questions, particularly when you follow the link in Greenfield's story:

Netflix announced net additions of 2.03 million subscribers in the U.S. compared to 2.05 million in the fourth quarter — which historically is its strongest period of subscriber growth — and 1.74 million in last year’s first quarter. As a result, it said that it’s growing its subscriber base and revenues faster than its content spend in the streaming business. It reported that its domestic streaming contribution margin increased to 20.6 percent in the quarter, which was up 140 basis points from the previous quarter

...
In addition to its domestic streaming numbers, Netflix reported 1 million new subscribers in its international business, growing that number to 7.1 million total. That compares to 1.8 million international subscribers added during the holiday quarter, and 1.2 million a year previous. While those numbers might seem low compared to previous quarters, Netflix said it benefitted from launches in new markets in earlier quarters. The company plans to continue its expansion overseas, with a new international market to be added in the second half of the year.

Just to review, in addition to launching a $100 million dollar series, they mounted a huge and very expensive marketing blitz in an improving economy, benefited from the increasing popularity of dropping cable, and offered a heavily advertised free month trial for what is already an extremely inexpensive service.

There are a lot of reasons I might be misreading this -- being LA-based I might be seeing a disproportionate amount of marketing; there may good news if you dig deeper into the numbers; I might just be screwing up -- but looking at these stories and trying to draw reasonable inferences about the accounts attributable to House of Cards, here's what I take away:

1. There's no evidence here that the show was responsible for any of those one million international accounts given the sharp drop;

2. With the LA caveat in mind, it looks like Netflix substantially increased its ads-and-flacks budget in the first quarter ("including advertising buys for primetime TV spots and high-profile billboards"). Twenty million strikes me as a fairly conservative estimate for the increase. If that's close, we're talking significant acquisition costs for what looks like a 300K bump;

(Not just LA)

3. At least some of that 300K should probably be attributed to economic conditions and the widely noted trend away from cable and toward online viewing;

4. A good night at the Emmy's could change this, but, given the direct-to-binge model and the February debut, I'd expect most of the subscribers attributable to House of Cards to sign up sometime in the first quarter. The 520K Greenfield mentions does not seem to include marketing costs which would push it closer to 600K. This would require a substantial bump from the second season as well.

Don't get wrong. As a viewer, I'm very happy with this boom in original programming (my favorite show at the moment is Justified) and I'm looking forward to watching House of Cards. Nor should to much be read into the performance of one show. I'll even allow for the possibility the show catching on and/or of Netflix having a good run and actually becoming a major player for years to come.

What I have trouble with is declaring victory for a player who may not even be winning, particularly when that victory fits far too nicely with a dominant narrative.

Keep up with West Coast Stat Views on Twitter at @MarkPalko1

Damn, another activity I can no longer make fun of.

Yves Smith with more thoughts on the looting phase of higher education

Naked Capitalism has a post up discussing the previously mentioned Pam Martens article on NYU Law School compensation for administrators and select professors.

Now the house deal (which is rather bizarre given that NYU owns lots of nice faculty housing) might be what made [Jack] Lew’s pay deal so out of line relative to his job. But if the forgiveness of debt was not included in the total, it’s even more insane, the equivalent of $1.1 million a year.

There’s simply no way this compensation level (or the house side deal) was justified by any notion of what the position demanded. You don’t need a marquee name for an operations job. I can give a long list of people I know personally who have more relevant experience and be happy with a ton less money. Nor is there any evidence that Lew did enough in the way of fundraising to justify his NYU pay level. This was a low-stress overpaid sinecure arranged by the Rubin mafia.

And it’s important to recognize that this sort of rent extraction by unproductive overhead is a significant contributor to the explosion in education costs. When I was young, the top administrators were modestly paid. They viewed the job as quasi public service. The hours were generally not taxing, although the politics could be fractious. The faculty looked down on you but you had lots of stature in the local community, the top echelon might live in housing the school owned as a perk and you got the bennies of university life. The sort of people who took those jobs were old money who’d spent some time in the private sector and wanted a change of pace in their middle age or executives who’d lost out in corporate intrigue or via a takeover.

Benjamin Ginsberg says that 30% of the increase in educational costs over the last twenty-five years is due to administrative “growth”. That sounds low to me, and I’d imagine the overheads have attributed as much of their costs as possible to program. For instance, universities have also overspent on facilities, and a big building program not only justifies more adminisphere, but some of those costs may have been allocated to the big build rather than as ongoing overheads. I mean, why have Jack Lew types around if they can’t pretty up the books?

My feed isn't feeding

As you can see from the bottom of the page, new post (like this) aren't showing up. Any suggestions?

Thanks

UPDATE: apparently the feed feeds slowly. Now if I can just get the automated tweets to start tweeting...

Curiously, agressively anti-social

As previously mentioned Certain business models limit you to certain marketing approaches. For example, the standard model for scripted cable series is to run weekly for about three months usually following long story arcs with start dates varying from show to show. This model lends itself to promotion through blogs and social media and it may not be a coincidence that original, scripted shows have increased greatly in popularity and influence over the past dozen years along with social media. When it works well, these shows can create a powerful weekly cycle of buzz and feedback starting with Twitter traffic during the actual broadcast and building from there.

The sheer volume of tweets, posts and podcasts we're talking about is astounding and it's made even more valuable because it bypasses our normal anti-advertising filters. These are people we know recommending a show. What's more, there's a tremendous social norming aspect. Watching the show become part of what's expected.




Keeping that in mind, think about the Netflix direct-to-binge model. Social media thrives on having a critical mass of people sharing a common experience.  With a shows like House of Cards, the kind sustained build-up you see with a Game of Thrones is impossible and even an ordinary discussion requires you to find a group who are at same point in the viewing.

Ted Sarandos, Chief Content Officer of Netflix, responds to this concern with a truly extraordinary statement:

“No one has ever watched anything on Netflix that they couldn’t watch all at once,” Sarandos said. There was no interest in changing that model for a new group of originals. But that not only meant changing consumer behavior, it also meant dealing with the realities of today’s social network environment.

Sarandos called it a “different style of watercooler etiquette.” Rather than having to deal with the weekly conversation that is produced, viewers need to ask each other which episodes they’re watching and dealing [sic] with that. Still, the strategy seems to be paying off, as viewers are continuing to tune in.

(quick aside: "paying off" implies improvement over what would have happened otherwise. By this standard you could argue that having disgusting bathrooms "pays off" for a filling station as long as someone still buys gas there.)

Sarandos is saying that part of the company's strategy is to get viewers to engage in less word of mouth promotion. That's an amazing position, hoping that people will refrain from conversation until everyone has had a chance to catch up on all thirteen hours of a show. Of course, by the time that happens (assuming it ever does), the show will be an old topic for the people who watched it when it first came out.

In an age where social media is generally considered the inevitable wave of the future, Netflix is launching a programming model based on people talking less about their shows. It's possible that there's some method to the madness here.

Of course, it's also possible these people haven't thought this through.

He'll probably get in trouble for saying that

As you've probably noticed, I'm in the middle of a thread about the economics of television that hits on, among other things, the value of exclusive content and social media. This statement (by someone who ought to know) does a nice job of getting to the gist of one of the major points.

But the man who has directed episodes of Game of Thrones, Hung and True Blood had a lot to say as a member of a panel discussing the rise of premium cable TV channels and its challenge to novels as a format of storytelling.
...
Panel mediator Rosemary Neill noted Game of Thrones was the most pirated show of 2012 and that 10 per cent of the downloads came from Australia.

But [David] Petrarca shrugged and said the illegal downloads did not matter because such shows thrived on "cultural buzz" and capitalised on the social commentary they generated.

"That's how they survive," he told the crowd gathered at the University of Western Australia.

Netflix can never be the next HBO*

* given its current model

Certain business models limit you to certain marketing approaches and certain marketing approaches limit your product development. In the case of Netflix, the company is locked into a strategy that effectively prevents it from developing a Sex and the City or Sopranos or Game of Thrones or even a Fraggle Rock.

When HBO introduces and nurtures a major show, it starts with a standard advertising and PR campaign, then gives it a good prime time slot and rebroadcasts it repeatedly through the week. This last part is especially important because, even more than most non-rival goods, television series thrive on familiarity and heavy rotation. By airing Game of Thrones a half dozen times in a week, HBO greatly increases the chances that viewers who are curious or who are just channel surfing will get into the show. This also nicely complements social media. People who see friends talking about an episode have a chance to catch up before the next one airs (and, unlike with Netflix, being into an HBO show guarantees loyalty and regular viewing for at least three months, which gives the network ample opportunity to hook you another show which keeps the cycle going).

Netflix has a far narrower range of marketing options. It can pay directly for advertising and indirectly for PR, but that's about it. For all the talk of neo-programming, Netflix has few ways of getting customers to watch what they want them to watch.

Much has been made of recommendation model and it is a promising area for marketing research, but it occupies a somewhat different niche than lead-ins and surf-driven traffic and, more to the point, it is not a good fit with Netflix. Recommendations are most effective at introducing viewers to the unfamiliar, or, put another way, recommendations add more value to the unfamiliar. Someone who likes the remake of True Grit might be more likely to watch Gunsmoke or Sam Peckinpah's the Westerner. Both were great shows, but CBS Television will charge you serious money to license Gunsmoke; whoever owns the Westerner would probably trade even for what's in your wallet. At the risk of belaboring the obvious, making viewers aware of a show they might like increases its value without increasing its cost.

Netflix has a strategy of maintaining a shallow catalog of familiar titles and focusing on a small number of highly publicized original productions. This is not a business plan that works well with recommendation-based promotion.

Between that and the well-established difficulty of launching a series, Netflix has no choice but to focus on shows that lend themselves to advertising and PR. Those generally breaks down to marketable names, properties or concepts. You can definitely see these groups in the two major and one borderline major launches we've seen from Netflix up until now:

House of Cards -- Kevin Spacey playing a Kevin Spacey character

Hemlock Grove -- Teen vampire/werewolf show from gore king Eli Roth

Arrested Development season 4 -- continuation of cult hit

(I went back and forth about including Lilyhammer, finally deciding not to because it was a co-production that debuted elsewhere and, more importantly, because it does not seem to represent the direction the company has now taken, which is unfortunate since Lilyhammer is, from a business standpoint, the most interesting thing Netflix has done for years.)

What are some of the concerns with limiting yourself high-profile, easily marketed journalist-bait?

Thin margins. You generally pay much more for stars and recognized properties (Spacey knows how much Spacey is worth).

The pool is limited and the process slow. Netflix talks about passing HBO. It took HBO about fifteen years to go from Phillip Marlowe to shows like Sex in the City and the Sopranos, longer still for Showtime to go from earnest efforts like the Paper Chase to hits like Dexter and Homeland. Does anyone think that Netflix can wait that long?

Established properties certainly reduce the chances of failure but there's reason to believe it may limit potential upside as well (see here and here for some thoughts on the relationship between hits and defying expectations). Between the star power, massive marketing blitz, first rate production values and the proven quality of the source material, I expect House of Cards to do reasonably well, but it's a hedged bet when the company needs a big pay-off.

Traditional marketing and, to a slightly lesser extent, automated recommendations, tend to work best on products that customers expect to like. Walk-ins and, to a lesser extent, social media recommendations work best on products that customers like more than they expected to. (Besides if you did want to maximize social media leverage, the Netflix episode dump strategy is probably the last thing you'd want to do.)

HBO has a long history of making hits out of shows with unlikely concepts ("It's about a family of undertakers...") and people you've never heard of ("James Gandol-who?"**). It was able to do this in part because the people who ran the network made good use of all of the good, old-fashioned tricks that programmers have used for decades.

Is it possible to duplicate HBO's success without using those tricks? Probably. Is it possible with the approach Netflix is trying. Almost certainly not. The marketing is badly thought-out, the pieces of the business plan don't fit and when it comes to producing original content, the company has a dearth of new ideas.

That said, I probably will probably check out House of Cards. Kevin Spacey, evil machinations... What's not to like? (other than the $100 million Netflix paid for it -- without even getting the syndication rights)

** No disrespect intended to James Gandolfini, who passed away recently, rather a reminder that David Chase and the executives at HBO were willing to go with a talented unknown who was right for the part.