CANCELLED

Spending $6 billion a year on content, Netflix admits each show now needs an actual audience

Obsession
Glass
Obsession
Glass

In its two seasons, Netflix’s Sense8, a global sci-fi thriller about eight strangers who found themselves mysteriously connected, amassed a passionate fanbase. Sadly, those loyal viewers weren’t enough to sustain the show.

At an estimated $9 million an episode, or $108 million for a 12-episode season, Sense8 was one of the most expensive original shows on the streaming service, lagging only 70s hip-hop drama The Get Down and Asian adventure series Marco Polo. And just like those big-budget originals, it was cancelled by Netflix. Netflix expects to have to cancel more shows as it ramps up production.

“We love when there is a deep, passionate fan base for a show,” Ted Sarandos, Netflix’s chief content officer, said yesterday in a post-earnings interview it holds with analysts at the end of each quarter. “We just need it to be big enough to support the economics of that show.”

The company—which is now self-producing originals like Stranger Things, licensing originals, such as House of Cards and Orange Is the New Black from production companies like MRC and Lionsgate, and acquiring the rights to stream other shows and movies like Shameless and Captain America: Civil Warplans to spend $6 billion on content in 2017—20% more than last year—and add 1,000 hours of original programming.

“The more shows we add, the more likely in absolute numbers that you’ll see cancellations, of course,” Sarandos said. “But that’s only novel on Netflix.” Sarandos said 93% of Netflix’s shows have been renewed; on network TV, he said, only about 70% of programming is renewed after its first season.

Netflix has only dropped a few shows, including The Get Down and Girlboss, after one season. Both of those cancellations were announced within the last two months, a sign that the service is getting more aggressive in how it evaluates its programming. Chief executive Reed Hastings told CNBC in May that he wants Netflix to “try more crazy things” because it “should have a higher cancel-rate overall.”

As of March 2017, the net value of the programming on Netflix was estimated to be worth $11 billion, Variety reported in July, citing a Morgan Stanley study. That was more than other media companies like Time Warner, Viacom, Discovery Communications, AMC Networks, and Scripps Networks Interactive, the research estimated.

But Netflix is burning through cash and taking on tremendous debt to finance those programs. It’s currently on the hook for $15.7 billion in streaming content obligations that it will pay out over several years.

That’s partly why Netflix is getting more ruthless about renewing shows.

Netflix amortizes 90% of its original content assets within the first four years they’re available on the service, which suggests that’s when the majority of viewing occurs, Netflix said in a content-accounting overview (pdf) that accompanied its latest earnings. (The company’s schedule for amortization (pdf), or the paying off of debt on a fixed schedule over a period of time, for its content gives insight into the life span of Netflix’s programming, since its based on historical and estimated viewing patterns.)

“Some of that viewing is concentrated, as our amortization methodology reflects, upfront in the sort of first release, the first month of release of that content on the site,” David Wells, Netflix’s chief financial officer, said on the earnings interview. He added that those shows “may still have steady viewing over the life.”

The average window of availability and/or maximum useful life for a program on Netflix, be it licensed TV and film or Netflix originals, is between six months and five years, the document said. Some topical programming, such as talk shows like Chelsea, are expensed upon airing, as they have a much shorter life span.

That’s the window Netflix shows have to pay for themselves. And, as the streaming-service starts to make wilder and crazier bets, those that aren’t measuring up won’t stick around long. Netflix seems okay with that, even if it ruffles a few fans. “If you’re not failing,” Sarandos said, “maybe you’re not trying hard enough.”


Read next: In a Netflix world, it’s the second season of a TV show that matters most

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