The Economics of Netflix's $100 Million New Show
The Atlantic Wire. FEB 1, 2013
With Netflix's foray into original, high quality programming today, the streaming TV network wants to turn into the HBO of Internet TV, but can the network afford it? Putting together a big production with famous actors like House of Cards costs a lot of money—$100 million for two 13 episode seasons, to be exact—and Netflix CEO Reid Hastings says he plans on making five new shows like that per year, he told GQ's Nancy Hass. How can that make economic sense for a company makes all of its money off $7.99 per month subscription fees? Netflix doesn't run any ads, nor does it benefit from a relationship with a big media conglomerate like HBO and its parent company Time Warner. But while $100 million sounds jaw-dropping, a little math shows that, if the shows are good — a big if, admittedly — spending that kind of money could be good business for the company.
Breaking Even Won't Be That Hard: With Netflix spending a reported $100 million to produce two 13-episode seasons of House of Cards, they need 520,834 people to sign up for a $7.99 subscription for two years to break even. To do that five times every year, then, the streaming TV site would have to sign up more 2.6 million subscribers than they would have. That sounds daunting, but at the moment, Netflix has 33.3 million subscribers, so this is an increase of less than 10 percent on their current customer base. Of course, looking at Netflix's past growth, that represents pretty reasonable growth for the company that saw 65 percent growth from 20 million to over 33 million world-wide streaming customers. Much of that growth, however, comes from new overseas markets. But, even in the U.S., from one year ago, Netflix saw about 13 percent streaming viewer growth jumping from 24 million to 27 million.
Exclusive Content Is King: Like HBO, Netflix is moving away from buying content because it would rather draw addicts, who have just one just-for-Netflix show that prevents them from canceling. (To start that addiction, the first episode of House of Cards is available to non-subscribers.) With the HBO model it only takes one really good show to hook one new subscriber. The idea is that at least 520,834 someones will start paying $8 per month because they want to watch House of Cards, because it is that good. HBO already plays a similar game: all of it shows don't have to be monster successes (Girls doesn't draw that many viewers) but they do need to have an answer pop into their customer's head whenever they look at their bill and ask themselves "Why am I still paying $15 a month for HBO?"
Can Netflix Afford the Gamble? That's Unclear. Unlike HBO, Netflix doesn't have a big rich cable company owner with lots of cash on hand. In fact, the company is scrambling for money to pay for its current investments, according to last quarter's earnings report even though it did report a surprise profit. Basically, House of Cards has to bring in subscribers, it has to be decent enough to get people to pay. Some early reviews suggest that's the case. The Los Angeles Times called the show "deliciously spiteful." We'll defer to resident Atlantic Wire TV expert Richard Lawson for the final verdict. Even if the critics like it, though, the results of this business scheme will be hard to dicipher at first, since no Nielsen for Netflix exists. We'll be watching those subscriber numbers, though.