In this excerpt, Sarandos characterizes original content as a strategic bet against his competition.
Who are your key competitors?
It’s a little bit of everybody, honestly. We compete for consumers’ attention and time. Comcast wants to make us obsolete by improving TV Everywhere. That’s fine. They just shouldn’t be able to do it for free. We pay a very large fee for those rights, and if they’re willing to pay for them too, then we’re just straight competitors. That’s OK. I’ll still bet on us over them.
Obviously, we also compete with HBO for content and subscribers. They’re probably our closest competitor because their product is so similar to our own. People say our investment in original content makes us more and more like HBO. I think it’s the other way around. HBO is becoming more and more like us by making their content available on-demand and on mobile platforms. Our current challenge is to make better originals quicker than they can perfect what we already do so well.
Actually, there’s a flaw in that logic. Bundling constrains the market for premium television. You can’t have HBO if you don’t have $125 worth of cable. Netflix is direct to consumer. For eight bucks a month, you can have the content you want when and where you want it. I would argue that makes us far superior. We’re not behind a big, expensive cable wall. How many more people would have HBO today if bundling wasn’t part of the equation? Of course, there’s the argument that bundling actually works in HBO’s favor, but I really don’t believe that’s true.
I don’t know what to think of Amazon as a competitor. We’re real competition in the U.K. where they own LoveFilm, and so we compete for content and subscribers. But they have this funky product here where they are adding streaming to freight, which risks contradicting their core business. I wonder if they’re just trying something new? I wonder if they’re dabbling? I wonder if they’re thinking about the loss of revenue from physical media over time? Maybe they are thinking about it as a way to feed content into the Kindle. They are hard to read in that way. They do a lot of things. But they also are really smart about e-commerce and Web design. If they are going to push this product, it has got to make more money than something else in that space. We have set the bar very high for future competitors in terms of content costs. I don’t think you can get in on the cheap anymore.
Why venture into original programming?
There are a few reasons. If services like TV Everywhere and HBO GO gain traction, then they will start to attack us on the things that we believe we still do better than anybody else. Subscription. Personalization. Encoding. Multi-platform delivery. We need to differentiate ourselves on all fronts.
Our data and algorithms help us perfect personalization. Likewise, we manage that data, including credit cards, more safely than anyone else. We deliver content on more devices than anyone else. We give access to full seasons. TV Everywhere only provides the last five episodes. Hulu is completely random and differs from show to show.
Ultimately, we wanted to produce original content because it’s time we have more control over the shows that matter most to our costumers. We’ve really come to appreciate the value serialized shows provide. So many people watch them and love them. Our data supports the trend, and that’s why you see such an explicit investment in television on Netflix. We’ve been able to grow the audience for serialized content by recognizing the behavior and securing more and more highly serialized, well-produced, one-hour dramas.
Yet you discover pretty quickly that networks don’t make very many of these shows anymore because they’re expensive and they’re perceived as difficult to monetize. HBO, Showtime, and Starz are making them, but they’re also the people who least want to sell to us in the season-after model because we are direct competitors. So, at a certain point I said, “Are we going to remain dependent on everybody else making good shows or are we going to try to develop some of them ourselves?”
It would be much easier for us if HBO, Showtime, and Starz would sell us previous seasons of their shows because they’re proven and they’re good at it and we would pay for them. But the truth is that they don’t want to open that door. So it’s time to figure out if we can become good at it ourselves.
Also, I think it’s the direction the entire entertainment industry is heading—networks and cable channels will evolve into something like Web channels, just like radio networks evolved into TV networks, and TV networks evolved into cable channels. Look at the widgets on a Samsung Smart TV. You see Netflix. You see Hulu Plus. You see MLB. It gives you a sense of things to come. Currently, the problem is that network brands don’t really mean anything. If they want to survive, broadcasters need to figure out how to make their brands meaningful. Cable is better at this. Comedy Central, for example, will be very powerful in this new world.
When a creative comes in here and pitches a program idea, how is it different, or is it different, from them going to a network or a cable channel?
It’s different today than it will be a couple years from now too. Right now, what I’m trying not to do is build a big development infrastructure. The existing departments in networks and cable channels are typically risk management. If a show doesn’t work out and they invested millions of dollars of development, it’s not because they didn’t invest millions of dollars in development. It’s not a good reason to invest that kind of money, but people do it. It’s the same way they make pilots and test them. They spend 8 to 10 million dollars on a pilot they test to 16 people and decide not to make it because of how it tested. What I said I would do early on is vet the projects better. Let’s shift the development burden to the producer. If they’ll invest a little more in the project and bring it to us better developed, a couple of scripts, talent attached, a bible, then we can make a bigger commitment to them, meaning, I won’t give them anything short of a full-season commitment. The way we got David Fincher to jump in with us on House of Cards was we gave him a two-season commitment. Nobody else would do that, and they all thought we were nuts when we did. The truth of it is I feel much better spending what we did knowing that I’m going to end up with 26 hours of content that at worst is going to be mediocre, and I doubt by the way, that David Fincher would create a mediocre product and put his name on it. So that was the bet. That’s as far as I wanted to bet creatively. It had the stars attached. It had scripts written. It had a showrunner. It had a bible. It had executive producers with great track records. We could have done the same thing as networks and it literally would have been 8 to 14 million dollars to shoot that pilot. This Newsroom show that HBO is doing now had the most expensive pilot in history. I wasn’t going to take the risk of spending all that money and ending up with nothing to watch. How we’re different is if they are willing to develop a little bit more, we’re willing to make a much bigger commitment.