Wednesday, July 9, 2014

Watching a Variety editor pull back from the obvious on Netflix.

Over at Variety, Andrew Wallenstein has a smart analysis of Netflix’s hiring of Chelsea Handler. Unfortunately he can't quite bring himself to follow where his arguments lead.
From the beginning, Netflix chief content officer Ted Sarandos has been abundantly clear that what Netflix values most is a piece of content’s ability to continue attracting eyeballs long after its premiere. That’s why there isn’t a single episode in its vault of original and library content that isn’t at least semi-serialized storytelling. That’s why Netflix doesn’t care about ratings–because Netflix doesn’t care when you watch something.

But the talk show represents the diametric opposite of the content Netflix has concentrated on to date. It is known to be the most perishable of TV formats. While cable has done some day-after syndication deals to repurpose broadcast late-night shows, there’s never been any kind of aftermarket for late-night content. The conventional wisdom is that no one wants to see monologue jokes about a headline from two days ago, or an interview with a celebrity tubthumping a movie that came out the previous weekend.

What little Netflix has also shared about its programming strategy is that its every decision is guided by data. Spending $100 million on two seasons of “House of Cards” sight unseen, as the mythology goes, was informed by information about Netflix’s viewing audience that indicated robust consumption on the streaming service of Kevin Spacey, David Fincher, and the BBC drama on which it was adapted.

Does that mean algorithms told Sarandos to pursue Handler, too? Fat chance. Not only is she not on Netflix, but no talk show of any kind is. That’s probably an oversimplification of Netflix data capabilities; this decision may have been more guided by what the data says is missing from the service than what’s there. But that’s not much to go on.

[This is where Wallenstein starts getting sucked back into the narrative. If we're talking about high level data -- demographic breakdowns, audience clusters, etc. -- then "what the data says is missing" makes a certain amount of sense. You find shows that are strong where you'd like to be stronger. The trouble, there's nothing special about that. ALL large companies do that kind of analysis. The famed "Netflix data capabilities" are supposedly based on detailed customer-level data which doesn't seem applicable here.]

So if talk shows are perishable and data didn’t work its magic, what gives here?

Well, there’s two different ways to view the Handler hire: as a deviation from a core strategy or the formation of a new strategy. Either way, the move begs explanation.

First, consider the possibility that Handler is just a detour. Fine, Netflix’s success has provided enough insulation in the event that taking a flier goes badly. But surely there’s a rationale for this particular flier.

The rationale might be more understandable if you consider Handler less as a programming strategy and more as a marketing decision.

Netflix wants to be known to its audience and the creative community as a revolutionary upending our traditional notions of what TV is. It’s a smart tactic, though the actuality of its revolution-iciousness is questionable. To date, that brand positioning has rested largely on its audacious decision to provide all the episodes of a series at once. But the novelty of that will wear thin in time (and Netflix knows it was far from the first to introduce that behavior).

Netflix might argue that its original programming slate is so daring that shows like “Orange is the New Black” also set it apart from the rest of the TV pack, but that’s a charitable assessment. As amazing a track record as the company has built for itself, Netflix isn’t really doing anything in original programming much different in tone or style than anything else on pay TV.

So Netflix has to do something to up the ante to earn its bona fides as a true innovator.  There’s no better way to do that than to take on what is inarguably TV’s hoariest, cliche-ridden format–the talk show–and put Netflix’s own distinctive stamp on it.

Stylistically, Handler isn’t really all that different than anyone else in the talk-show genre. But the very fact that she is a woman in a male-dominated genre sets her apart from the pack, which Netflix no doubt loves. What Netflix will also do is figure out one or two things to put a fresh spin on the genre and then trot out the show as the latest example of how capital-d different Netflix is from everyone else.


But maybe writing off Handler as a marketing-driven loss leader underestimates just what Netflix is doing here. The other possibility is that she represents an honest-to-god turning point for the streaming service. The long tail may have always been a short-term strategy. Perhaps the Netflix brain trust has a vision for a second gear for original programming that it has barely hinted at to date, but Handler is the first glimpse at where it’s all going to go.

At the end of the day, there’s one very simple metric for success that matters to Netflix: subscriber totals. And nowhere is it written that can only be increased with content that has equal drawing power whether it’s watched today or 10 years from now.


There’s a lot more to the Handler deal that makes little sense. Given Netflix’s increasing global footprint, Handler seems an odd choice for the type who would play as strongly in Brazil as she would in Peoria. And hoping quarterly specials in 2015 will be enough to keep her a hot commodity until a 2016 launch gives her an awful lot of time to see her career risk cooling down.

Regardless, it’s a mystery at this point as to whether Handler represents an outlier or a pivot for Netflix. And the truth may very well be that Netflix itself doesn’t know the answer but has a willingness to experiment and see what its famous data tells it to do next.

Just to summarize:

1. This was not a data-driven decision (at least not the kind Netflix has built so much of its reputation on);

2. It appears to be a horrible fit with the long-shelf-life streaming programs that Netflix specializes in (without actually owning);

3. Handler will probably be worthless in the overseas market where Netflix has got to establish itself if it wants to compete with HBO.

While most of Wallenstein's analysis is spot on, in the end, he goes badly off track. He more or less locks himself into the assumption that there has to be a good reason for this acquisition, a reason that fits in with a smart, forward-thinking plan for the company. He can't quite make the jump to the third option.

It is possible that Netflix, an at best moderately profitable company with skyhigh price-to-earnings ratios and questionable accounting practices, might be something like a Ponzi scheme with an exit strategy where the longer the top executives at Netflix can keep the balls in the air, the more money they make and, if they can keep this up long enough, there is a very good chance that a company with an  actual business model and deep pockets (either a tech company like Microsoft, Apple, Google, Amazon, or media players like Viacom) may come along and pay obscene amounts of money for the lot.

In order to keep this game going, Reed Hastings, Ted Sarandos and company would need to bill themselves as strategic thinkers playing for the long term (thus justifying those PE ratios), while in reality pursuing a string of flashy short-term tactics such as paying more for a limited rights window for an original series than their competitors would pay to own the show outright or picking up a high-profile cable personality even if her program is the worst fit imaginable for the company.

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