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«With more than 36 million subscribers in forty different countries, Net- flix is one of the leading subscription streaming services in the world, ...»

-- [ Page 1 ] --

Ted Sarandos, Chief Content

Officer, Netflix

With more than 36 million subscribers in forty different countries, Net-

flix is one of the leading subscription streaming services in the world, espe-

cially in the United States (HBO, for comparison’s sake, only boasts 27.8

million subscribers). In the past few years, it’s also emerged as a poten-

tially serious player in the game for original content, shelling out $100

million for its first outing, a two-season commitment for an adaptation of the BBC miniseries House of Cards, which premiered to critical praise on February 1, 2013. Original series Hemlock Grove, Arrested Development, and Orange Is the New Black have followed with equally impressive hype, even if the company remains mum on the exact returns.

Ted Sarandos, who has served as Netflix’s chief content officer since 2000, deserves notice in this context for two reasons. First, he’s the man behind the content, overseeing an acquisition budget reportedly worth nearly $4 billion. This makes him the chief negotiator when it comes to licensing content from major studios whose executives remain leery about the ser vice’s potential to cannibalize more lucrative revenue streams. Sec- ond, Sarandos has an unabashed disregard for the traditional television business model. He says audience content development is flawed, metrics are outdated, marketing is too costly, and the future of television is one made up of taste-based algorithms. He mapped out some alternatives for us when we met with him at his office in Netflix’s Los Angeles headquarters.

media industries project: I read that you signed 3.9 billion dollars’ worth of licensing contracts in 2011. Is that true?

ted sarandos: We don’t release public numbers on our individual con- tracts. The number you’re referencing is a cumulative figure over the next 132 Ted Sarandos, Netflix / 133 several years. It is the impact of long-range deals as they continue to flow product through Netflix.

How does that compare to contract totals made by other licensers, such as cable networks?

HBO is at the high end of that number, but we’re still slightly larger on a domestic basis. But, remember, we’re now licensing content for Canada, the United Kingdom, and all of Latin America.

Can you talk about some of the challenges you face when licensing content?

I started with the company almost thirteen years ago when we were fo- cused exclusively on our DVD business. In the United States the “first sale” doctrine enables a company, with little friction, to acquire a large li- brary of movies and television shows and then distribute those titles be- cause the original copyright holder does not have a perpetual license. In other words, a company can buy a DVD from the content provider and rent or resell that DVD until it breaks. As long as the physical media holds up, you don’t have to keep paying for your right to rent or resell it.

As you move to the streaming business, however, the “first sale” doctrine doesn’t apply. Instead, you have to secure a subscription video-ondemand [SVOD] television right to distribute the content. And that license has to be renewed constantly in competition with other SVOD players.

Right now, every network is interested in holding, withholding, buying, or blocking SVOD rights as a way to create an atmosphere for their own VOD ser vices, like the TV Everywhere initiative.

Windowing also posed a challenge to us when we first entered the streaming business. Every major studio had a pay-TV deal, which typically grants premium channels and cable networks exclusive rights to major releases for a period of nine years following the DVD release. For us, that blocked every major movie release from our business for nine years. We were forced to license titles that were in theaters ten years earlier.

So, as classic innovators, we started out with a product— our streaming business—that addressed the needs of only a few consumers. It was just an add-on to our DVD business. It didn’t cost extra; at the time, it wasn’t worth paying extra. But because we offered it, people started developing the habit of watching it. Then the content improved, delivery improved—no more buffering— and the licensing environment opened up. We shared a licensing agreement with Starz, which helped shrink that nine-year window 134 / Upstarts down to six months. We made direct deals with producers like Relativity Media, Open Roads, and New Image. This helped secure some exclusive rights to keep content from going into pay-TV deals with HBO and others.

We also created new markets: acquiring the rights to distribute television content one year after broadcast didn’t exist before we invested in it. It wasn’t the day-after transaction on iTunes. It wasn’t traditional syndication. It was a new window we created with broadcast networks and cable channels to license their shows in a season-after model. It’s an especially great market for cable channels. They can’t really syndicate their shows to other cable channels, and most of the content is so serialized that it’s difficult to syndicate at all. We secured exclusive rights to Mad Men partially because we outbid everybody else, but mostly because nobody else wanted it. Because we can get more viewing for that show than anyone else, we can pay more for it than anyone else.

Simply put, we continued to invest in television, and grow our investment in television, because, as a company, we really believe the digital future of television is the future of television. I don’t think it’s controversial to say that the Internet will replace the cable box as the primary delivery mechanism for television within the next twenty years.

How has your relationship with content providers evolved? Some love you. Others see you as a threat.

I don’t seek to be loved. I seek to be respected. The reason why a network or a studio loves you is because you make them money. If I don’t make them money, then I don’t expect them to love me. But I do make them money, and, more importantly, I make them money in unintuitive ways. We offer a really great economic sweetener: a buyer for highly serialized content, which is very expensive to produce and very hard to monetize. Mad Men is the perfect example: I not only gave AMC a very high license fee for that show, but the ability to binge on seasons 1–4 helped launched the biggest premiere [season 5] in the show’s history. It’s the same for Sons of Anarchy.

People will stream the seasons we have before jumping to the network to watch the latest season premiere. I realize not everyone jumps. Some viewers will just wait for the next season to premiere on Netflix. But on a net basis I think most people migrate to the network after binging on Netflix.

So FX grows their audience, and we derive value from the license fee. And then the network is able to produce more seasons of Sons of Anarchy. It’s win-win for everyone, including viewers.

But what happens to the value of your content once a viewer makes the jump back to the network?

Ted Sarandos, Netflix / 135 We think about the value of content differently. I think marketing has way too much influence in the current entertainment economy. It’s the biggest item in this town on anyone’s profit and loss statement. Fill the seats in the theater on opening night. Make sure everyone gathers at the same time on the same night in front of the television. And let’s just hope everyone likes it so numbers don’t drop 80 percent the next night or the next week.

For me, I’m doing the exact opposite. I want everyone who watches something to love it. And I’m willing to let the content take a lot longer to resonate with audiences because there is long-term value in doing so: you can’t get as much content that really matters to you from anyone else for just eight bucks per month.

During the early days of the Internet, when everybody else was spending big money on Super Bowl ads, we were investing instead in technology, on taste-based algorithms, to make sure every single user had a personalized, highly effective matching tool to use when they visited our site. For us, that’s why breadth matters. We are trying to match tastes, and tastes are really specific— even in your own household. So imagine trying to do it across the country. We have to have a lot of titles to produce the results our customers want.

But to answer your question, we’ve had Mad Men for a couple of years now. Last night, what was the most watched episode? Episode 1, season 1.

There are new people coming to our shows every day. Plus we have thousands of titles. If you start watching Mad Men on AMC, you’ll find something else on Netflix to watch. Our website, which is so personalized, will help you find something that you’re going to love. What I really want you to do is find a show in which you’ll just get lost, a show that makes you want to watch “just one more episode,” even though you know you have to get up early tomorrow morning.

We are uniquely able to build our business model around that sort of behavior. If we pick the shows right and we invest heavily in the right kind of content, we’ll make the viewers’ dreams come true. We connect people to media in a way filmed entertainment has lost to video games and the web. We are restoring a sense of connection between consumers and content. I think audiences have lost that emotional investment in content because television can no longer provide them access in the way they want it, or in a way that matches current lifestyles. Restoring that sense of connection is the biggest shift in the economy of entertainment.

How have your metrics evolved with the launch of your streaming service?

136 / Upstarts Here is what the data from our DVD business tells us: We know what we shipped to you, and we know when you returned it. I have no idea if you watched it. I have no idea if you watched it twenty times.

With streaming, we have insight into every second of the viewing experience. I know what you have tried and what you have turned off. I know at what point you turned it off. If there’s a glitch in the soundtrack or something wrong in the code, the data is so refined that it can detect mass quantities of people stopping at the same point and signal a red flag within hours of the content going live. That’s a much more efficient quality assurance process. We don’t have to wait for someone to complain. We don’t have to go back to the file and watch every second of it to find and correct the problem. It’s very sophisticated.

How do you use this data when negotiating licensing deals? Do you share any numbers with content providers?

We share some high-level viewing data—how many viewers and how frequently do subscribers view content. We don’t really use the data to tell us what we should and shouldn’t have on the site. We use it to indicate how much I should or shouldn’t pay. In other words, if I can get an enormous amount of viewing, I’ll pay an enormous amount of money.

We invest in a lot of content for really small audiences too, because it’s still valuable for subscribers who are really engaged fans of a particular program, and, therefore, it’s a valuable investment for us. We’re fortunate because we have unlimited inventory space. It allows us to value content in more ways than just mass numbers.

For a lot of other buyers, the threshold is very high for what makes it on the air because they only have so much space they can allocate to programming—there are a finite number of hours in their schedules.

In that world, new series usually succeed or fail because of marketing— did they get enough viewers in the right window to make it a success?

Again, those windows are way too small. It has little to do with the actual quality of the content.

Our data draws from viewer behavior to bring a bit more science to that calculation. So, really, we can bring some equilibrium to a business that otherwise doesn’t have it.

Does this logic apply to your original shows too?

–  –  –

you to watch their shows at a particular time than they’ll spend on the show itself. For us, we pick the shows by intuitive, data-driven hunches.

The good example is our production House of Cards. David Fincher is directing. Beau Willimon is the showrunner. Kevin Spacey and Robin Wright are starring in it. It’s based on a piece of intellectual property that we know very well. We can draw real data pools of people who love Kevin Spacey movies, David Fincher movies, the original House of Cards, political thrillers, and on and on. You wind up with a very predictable pool of viewers. If the show is executed well, we know how many people will watch it.

Does all this data make the current ratings system look suspect?

The current ratings model makes no sense whatsoever. It doesn’t reflect human behavior at all. By design, I’m sure. If people really wanted to know who is watching what when, it’s completely knowable. Digital cable boxes capture the data. It’s all there. It’s much better business for people not to know.

Can you elaborate on that critique?

My kids watch absolutely nothing on the linear grid. They watch everything on our DVR or on-demand. And there is no ratings credit for that behavior because they don’t watch it live and they don’t watch it three days after or even seven days after the original broadcast. Yet my daughter is the most engaged Gossip Girl fan on the planet. She should count for four viewers! But she doesn’t count at all because she doesn’t watch it in a way the current measurement system values. She likes to stack—to marathon on a Saturday afternoon— and that’s the way the entire CW audience watches content.

Our own data supports this trend. For people watching television, especially younger viewers, they’re no longer connected to a linear grid. They very much consume television on-demand: when they want it, where they want it, and how they want it. Also, the shows that work well for us, like Mad Men, don’t necessarily draw the highest television ratings. Yet we know viewers of Mad Men on Netflix are much more engaged than viewers of the show on AMC. It’s ridiculous to base the value of content on such a flawed measurement system.

What’s your window to determine success?

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