Tuesday, September 2, 2014

Netflix and the big swinging check syndrome

Another post in what what was supposed be a fairly brief Netflix thread. I want to move on to other topics, but this latest news item was just too good an example of certain bad trends in journalism to pass up.

You may have seen the following news story earlier:

Netflix Acquires ‘The Blacklist’ For $2 Million An Episode

EXCLUSIVE: In what is believed to be the biggest subscription video-on-demand deal for a TV series, I’ve learned that Netflix has acquired the rights to hit NBC drama The Blacklist from Sony Pictures TV in a deal that will net $2 million per episode. I hear Season 1 of the series starring James Spader will debut on the streaming service next weekend. As for future seasons, Netflix usually makes them available shortly after the season finales.

Sony TV first tested the off-network market waters for The Blacklist in March. While other streaming services, like Amazon and Hulu, do joint syndication deals with cable networks, Netflix, which largely pioneered the series SVOD business, insists on getting first dibs. Twentieth Television just recently sold New Girl to TBS and MTV, more than an year after prior seasons of the Fox series landed at Netflix in a rich deal, said to be worth $900,000 an episode. Like was the case with New Girl, I hear Sony TV has the right to also sell The Blacklist in cable and broadcast syndication, with Netflix getting an exclusive first window. The $2 million per-episode fee is said to be the biggest for an off-network series paid by Netflix (or any others streaming company), eclipsing previous record holder, AMC’s The Walking Dead, whose sale price to Netflix is believed to be $1.35 million per episode.
For starters, you will notice that the headline is somewhat misleading. Netflix did not "acquire" the Black List in the sense that, say ABC would have. The show will still be running on NBC next year. Nor did it acquire the rights to stream the episodes during the regular season; those will presumably stay with Hulu. What Netflix did acquire was the right to stream the previous year's episodes.

Furthermore, if you hit a few relevant Wikipedia pages and do some quick back-of-the-envelope calculations, you will see it is difficult to see how Netflix can justify this price-per-episode to its shareholders or how Sony could have negotiated it.

It is the nature of television, whether broadcast or streamed, that while the quality has a way of tapering off after a few years, the commercial value tends to increased sharply once a show has established itself. As a rule of thumb, it is not until programs approach 100 episodes that you start talking real money.

Just to put things in perspective, while a long running, syndication friendly, proven hit like NCIS can bring in over $2 million a year. That is very much an upper bound. The Blacklist is years away from having a viable syndication package. Even when it gets there, its serialized elements will probably keep it from making the really big bucks. A forty-four million dollar deal one year into a series run is extraordinary. It is almost inconceivable that Sony would not have settled for much less.

I realize that the following point should be too obvious to bother with, but the object of business is to bring in as much money as possible while sending out as little as possible. If Netflix just paid $44 million for something which they could've gotten for 20 or even 10, this would indicate a fundamental lack of confidence by the management of the company.

Here though, we get into one of the great paradoxes of modern business journalism. From a strictly logical standpoint, the best run businesses are, almost by definition, those which do the most with the least. From an emotional standpoint, journalists are most impressed by those executives who spend extravagantly without apparent hesitation.

For lack of a better word, the willingness to sign large checks is seen as a sign of virility. The bigger the check, the more positive the impression it makes on the reporters covering the story. The soundness of the purchase does not matter, nor does its positive or negative impact on the executive's company.

Netflix has long been something of a joke within the entertainment industry for its tendency to pay more than top dollar for properties that have already been turned down by everybody else and yet Reed Hastings' reputation as a visionary business genius simply grows stronger.

Along similar lines, when Mark Zuckerberg paid an exorbitant amount of money for a company the New York Times simply gushed with enthusiasm, even though it was later revealed that the primary selling point of the company was the fact that the founder threw awesome parties.

Hastings and Zuckerberg may stand out but that doesn't mean they aren't representative. Executives, particularly tech executives, are routinely lauded for big, bold deals, even when those deals make no sense from a traditional business standpoint. Like so much business coverage we see these days, what is presented as rational analysis is a series emotional reactions to charismatic personalities, catchy narratives and the reflected glow of great wealth.


  1. If the numbers are true, which is an if, that's equivalent to 460,000 subscribers a month. I gather they have over 31 million, which means this is about 1.5% or so, but they're also adding - so it's said - 2.25M a quarter or roughly 750,000 per month on average. (Some sources say the number is 40 or 50 million. Beats me.) So they could look at this as a way to keep subscriber growth on path and that means they're chasing marginal revenue in the traditional American way in which getting new business is seen as worth more investment (especially in comparison to cost saving measures, which are often subjected to very high payback requirements).

    This kind of revenue chase is often a way of grabbing share and is seen as signaling competitive intent. I'm not sure what the actual value in that signal is.

    1. I think the question might be "a signal to whom?" It's not much of a signal to competitors. As far as I can tell, the view in the industry is that Netflix is an easy mark. In this case, it paid top dollar for episodes that have already aired on NBC, streamed on Hulu, been released on DVD and, I believe, continue to be available on Amazon.

      The best way to signal competitive intent would be to actually buy the rights to something, but the company has publicly stated that they just want to be a renter, not an owner.

      I suspect that Netflix wants investors and journalists to see it as a disruptive force but it doesn't want the major media companies to see it as a threat (since it depends on them for its content).