The New Netflix Strategy: Gambling on House of Cards

NetflixGamblingOne week ago Netflix introduced its first original series, House of Cards. The series details the life and crimes of (fictional) US Congressman Francis Underwood and his wife Claire who runs a nonprofit. What is unique about the series is that the entire season–13 episodes–was released all at once. Netflix and streaming services like it have acclimated us to watching shows in bulk like this. Is the new model sustainable?

I hope so, and Atlantic Wire reporter Rebecca Greenfield thinks the answer is yes:

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.

The five times per year figure comes from a plan that Netflix CEO Reid Hastings revealed in an interview with GQ. Paying for subscription television like this is not a new idea–it’s a similar business model to HBO. But Netflix seems to have the execution right, at least with this first foray.

Perhaps the biggest difference with convention television is that it doesn’t matter how many people watched House of Cards during its debut week. As Hastings said in a letter to investors two weeks ago:

Linear channels must aggregate a large audience at a given time of day and hope the show programmed will actually attract enough viewers despite this constraint. With Netflix, members can enjoy a show anytime, and over time, we can effectively put the right show in front of members based on their viewing habits. Thus we can spend less on marketing while generating higher viewership.

For linear TV, the fixed number of prime-time slots mean that only shows that hit it big and fast survive, thus requiring an extensive and expensive pilot system to keep on deck potential replacement shows. In contrast, Internet TV is an environment where smaller or quirkier shows can prosper because they can find a big enough audience over time. In baseball terms, linear TV only scores with home runs. We score with home runs too, but also with singles, doubles and triples.

Because of our unique strengths, we can commit to producing and publishing “books” rather than “chapters”, so the creators can concentrate on multi-episode story arcs, rather than pilots. Creators can work on episode 11 confident that viewers have recently enjoyed episodes 1 to 10. Creators can develop episodes that are not all exactly 22 or 44 minutes in length. The constraints of the linear TV grid will fall, one by one.

I look forward to seeing more of this strategy, and as I proceed with House of Cards you may even get a post on its politics.