For Netflix, “True Detective” wouldn’t have been worth the risk

April 22, 2014
April 22, 2014

Netflix’s earnings call last night was filled with fascinating tidbits.

There was CEO Reed Hastings’ candid criticism of Comcast’s proposed Time Warner Cable acquisition. And there was his assertion that Amazon, which has recently ramped up its efforts in television, is not a competitor but a complimentary service.

But the company also provided an insight into its evolving content strategy, which is only going to become more important in its next phase of growth. (Remember, yesterday it also confirmed that it will soon raise prices for new users, in part to pay for more original shows.) High-quality television is an increasingly competitive space, with Netflix, HBO, Amazon, AMC and even Yahoo now fighting to capture the best shows, which are generally conceived and created by independent production companies but funded and distributed by broadcast, cable, or internet networks.

So far, Netflix has commissioned a handful of original shows, of which at least two (House of Cards and Orange is the New Black) have been bona fide hits. During that period, HBO, which Netflix considers its main rival, has continued to churn out new hits, including this year’s True Detective and Silicon Valley, to name just two.

Netflix’s chief content officer, Ted Sarandos, was asked whether the company had been outbid for shows such as True Detective. His response was telling:

BTIG analyst Rich Greenfield: Ted, are deals that you’re not getting purely based on price, meaning you just don’t have enough dollars that you can allocate to original programming and so you couldn’t bid to win something like True Detective?….

Ted Sarandos: No. I’d say that a lot of the programming that we’re seeing premiere are shows that have passed through these doors. And it’s not that we couldn’t afford them, it’s just that relative to what we believe the audience is, the deal didn’t make sense. So you either want to make a deal at the price that you want or one that you’d be happy to see your competitor pay. And so a lot of that is at play.

The finale for True Detective actually achieved record ratings for HBO, by some measures. As we have pointed out, while Netflix now has more subscribers in the US, HBO still has more globally, and makes far more money, mainly because its service costs nearly twice as much per user. Given that, Sarandos’s comments make sense: They suggest that Netflix needs much bigger audiences than HBO does to monetize original programming.

So some deals that might be a worthwhile risk for HBO wouldn’t make sense for Netflix. It remains to be seen whether a price hike of one to two dollars a month for new customers will change that math.

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