Yesterday, Netflix took out $US400 million in new debt to begin expanding in Europe and investing in more original series. Both of these factors are crucial for Netflix’s continued evolution.
Content costs can be so high they derail otherwise reasonable web TV projects. Intel abandoned its experiment OnCue after failing to make headway in content acquisition, and ended up selling the unit to Verizon for $US200 million.
Apple has been rumoured to have a TV in the works for a while now. But there are rumours it is now delayed to 2015 because content deals take so long.
A recent New York Times profile of “House Of Cards” show-runner Beau Willimon shows how Netflix believes it has unlocked this puzzle. The story explains that Netflix had two big flaws in its early business model. Content was expensive, and the best syndicated TV shows kept getting snapped up by cable channels:
Around three years ago, Netflix realised it had a problem: It was paying large sums to licence other people’s content — TV shows and movies produced by other companies — in order to then show them to you, the Netflix subscriber, at home. This initially proved successful, but there were two troubling aspects to this model: 1) It left Netflix very vulnerable to competition, since the shows and movies it licensed could, theoretically, be licensed by anyone willing to outbid them, and 2) the most popular TV shows, episodic dramas like “CSI” and sitcoms like “The Big Bang Theory,” were already being sold for huge deals into syndication at basic cable channels like TBS and USA.
The content Netflix could afford to buy was long-form serialized drama:
What was left to Netflix were the kind of serialized shows that don’t typically play well in syndication, like “Lost” and “Breaking Bad,” which have complicated story arcs that compel a viewer to watch all the episodes in order. Traditionally, while these kinds of serialized shows could be big hits in their initial broadcast runs, they proved tough sells to aftermarkets, precisely because of the demands they placed on the audience.
Syndicated serial dramas are a tough sell for cable channels because viewers need to watch them from the beginning or they won’t understand them. Lose the audience in the first couple of episodes, and you’ve lost them for good.
Netflix also noticed that its own viewer data showed that people would binge-watch serial dramas in a way that they would not do for sitcoms.
That’s why Netflix launched “House of Cards” and “Orange Is the New Black” — they’re both the type of show that people will watch on-demand when they have a free day, but cannot dip in and out of if they were syndicated in fixed timeslots on cable TV.
Here’s where the $US400 million comes in: if Netflix can create for itself the shows it would normally have bought in syndication, and create shows that lend themselves to binge-watching rather than a dip-in/dip-out cable format, then it will end up with the same (or more) content but be able to control the price.
And with interest rates near zero, the money is cheap to borrow. Given the returns — Netflix revenue rose 24% to $US1.2 billion — it would almost be more expensive not to borrow it.
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