Economics of Netflix "House of Cards"

I just watched the first episode of Season 1 last night. I have an unlimited streaming subscription for something like $8 a month. There is no advertising before, after, or during the show. So there is no marginal revenue for providing this content. There is no driver to sign up long-term subscribers; they provide the whole season all at once so if that’s all I wanted to watch I could subscribe for a month or two, watch the whole season, then drop it.

What is their revenue model for in-house content?

It gets people talking about Netflix, it gets people to try Netflix, it’s a pilot project to see if/how digital distribution services can also be content providers.
Also, there is no marginal revenue for such services in providing any one piece of content. E.g.: AMC doesn’t make any marginal revenue from Mad Men or Breaking Bad. Yet without them, they’d have a lot less subscribers.

Plus for subscription services, once signed up some sizable percentage don’t remember to cancel even if they don’t use the service.

This article mentions that Netflix does sell the series in international markets where it airs as a traditional TV series.

So while I assume the primary drive is getting people to subscribe to Netflix, they get revenue from the series itself.

This article from E! Online says that a drama series like Grey’s Anatomy costs about a million dollars per episode while something like Spartacus is more like two million per episode. House of Cards is probably closer to a million per episode or about thirteen million for each season. They make some money from the subscriptions, some from DVD sales and some from overseas sales. But I doubt that they’re trying to make money on the show itself.

I suspect that Netflix treats House of Cards much as HBO treats The Sopranos; it’s a prestige program that has everyone talking about it and some people subscribe just to watch the one show.

If someone signs up for Netflix to see House of Cards (and other original programming), they will stick with Netflix as long as they can see something they like.

As for the numbers, a new customer who stays a year makes them $88 in income (the first month is free). If 100,000 viewers sign up to see it and remain for a year, that’s $8.8 million. Assuming a $14 million cost, the loss is just over $5 million. But that doesn’t count the number of people who sign up for more than a month – three months, for instance. This can easily make up most of their costs. And House of Cards now becomes part of their stable of shows: If they come out with, say, a renewed Firefly, people will say “Wow, we can see both Firefly and House of Cards!. It’s time to sign up.”

Netflix also know who is watching what. They can easily find ways to aggregate that data so they know what shows are drawing in new subscribers and what old subscribers have watched. They can see that you saw the original HoC in a binge when it first came out, then watched it in a binge when the second series came out. That would show that doing a third series would most likely keep you subscribing.

We discussed this here (I think) and I was in several discussions elsewhere about this when the first season premiered.

The only revenue Netflix will see for House of Cards is (1) people who sign up just to get it and (2) don’t cancel their subscription within the first month or so, and (3) disc sales/rentals.

The real prize and goal will be (4) continuing subscribers, new and old, who are drawn by such quality programming.

But with no advertising and the ability of some viewers to binge on the whole product within a week of release (easily within trial periods and a single rental month), there’s certainly some risk in the model.

What I heard is that Netflix’s membership research told them that people like: a) Kevin Spacey movies, b) movies directed by David Fincher, c) political dramas and d) the original UK House of Cards. So remaking House of Cards, set in the US, starring Kevin Spacey and directed by David Fincher was a sure bet.

It also helps retain customers.

I’ve subscribed to Netflix streaming for several years now. Every few months I stop and try to determine if it’s worth it. After this long I can’t find many movies in their catalog that I want to watch, so for the most part I use Netflix to watch older TV series in the background.

Regular infusions of original content make me happy to keep subscribing.

In addition to the above, consider market share. Some people will subscribe to Hulu and Amazon Prime and all the other places now streaming video including Netflix. Some people will choose one of them to concentrate their money on. That number of people is likely to provide far more money in the long term than might be lost by the relatively few people who will try to game the system with a single binge-watch.

Amazon has done this for years, successfully, in an attempt to get everybody to think of Amazon as their first place to shop for anything. Stock analysts keep complaining that Amazon doesn’t net enormous amounts of money but Jeff Bezos cares only about market domination. And its stock price keeps going up long-term, quadrupling over 5 years. Netflix has done even better. Seems to be a strategy that works.

It’s also completely wrong to say that there is no advertising in House of Cards. Not five minutes goes by in that show without a long loving close up shot of a character’s Ipad or the cup of Green Mountain Coffee the character is drinking. Kevin Spacey has two separate speeches in season one where he expounds on his love for Sony video games. If you took a shot every time there was blatant product placement in House of Cards you’d have alcohol poisoning half way through the second episode.

Challenge accepted.

(I’m proud of you for making this point. Seriously. Excellent observation.)

The difference is that surrounding advertising is a continuing revenue stream, and product placement is typically a one-time payment. Being able to collect ad revenue for every showing goes a long ways towards paying for a $100M series; collecting placement fees once, not so much.

Apparently, HoC costs close to $4mm/episode, or $100mm for 26 episodes.

Plus selling international and domestic rights to other networks. That may add up to a lot of money.

I think Netflix banks on their data being predictive enough to make the risks minimal. Given that HoC was basically designed in part due to their use of past data to predict what their subscribers want to see, I think they are probably right. The other important thing is that Netflix is looking diversify their content as to not be too dependent on any outside content maker. In some ways, having successful in-house shows like HoC means companies like Starz have less leverage over you when you want to license their content.