Monday, February 11, 2013

Will Netflix Change TV...Again?

From the very beginning of broadcasting, radio and TV audiences consumed programming based on what the broadcaster decided.  This model has been in place for almost 100 years but a recent announcement by Netflix may usher in a new model.  For most people, even if they have a DVR (digital video recorder) or subscribe to an online video service, if they are watching a series like Downton Abbey or the Sopranos, they must wait for the individual episodes to be released before they can watch.  Netflix is betting that this model needs to change.

Netflix announced in late January that it will make the political thriller, House of Cards starring Kevin Spacey, available to its 33 million streaming subscribers worldwide.  All 13 episodes will be available at the same time to all Netflix subscribers.  They can watch in any order, at any time.  The company used this formula once before with a series called Lilyhammer, but this new series, with a price tag reported to be about $100 million, shows that Netflix is placing big financial bets to secure its future as the dominant video player as more viewers move online.  But will the financial model hold up?

The old TV broadcast model is based on bringing eyeballs to the screen and doing so often.  These eyeballs not only watch the program but also watch the advertising.  Making the programs serial in nature, i.e. one program epidode setting up the next, hooks the audience to come back.  The soap company in downtown Cincinnati wrote the book on this business model.

Today’s digital technologies provide the platforms that allow for “appointment viewing” to join the one hour photo finishing shop and video store on the list of anachonisims. For sure, the new Netflix offering will be mimicked by Hulu and other online services.  The unknown is if the economics work.

Using the reported production costs for House of Cards, some simple math shows that with Netflix subscribers now reported at some 33 million, the company spent just over $3 for each of the subscribers to produce this single program.  This would indicate that in order for this model to work it will require either a significant increase in subscribers or in the monthly subscription fee or, more likely, both.

Netflix and others are betting that society’s “I want it now” mantra will make the traditonal broadcast model obsolete and their new service a success.


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