Netflix Has Become Enormous, But Is It Too Big To Fail? (Network Series)

Netflix Netflix

And now it’s Netflix’s turn in the crosshairs, which was inevitable, of course. Not to say that the eight previous weeks of the Network Series has been building up to this, but, let’s be real, it sort of has. Netflix, after all, has built itself into a giant in a remarkably short period of time, primarily because it made the decision to spend just about all of its revenue on original programming, in the process making it the largest such provider in the industry.

To think that, less than six years ago, the service known for DVD rentals and, eventually, streaming movies and older TV shows in the burgeoning industry of internet content made an announcement that raised more than a few eyebrows: it was embarking into the world of original content with an Americanized version of the British mini-series House of Cards, to be executive produced by David Fincher and starring Kevin Spacey and Robin Wright. This, we all said, was the height of folly. Who did Netflix think it was, to encroach on the territory of conventional television? Were they insane? This was a sure way to go broke, and in a hurry. That was for darn sure.

This was March of 2011, and we all know what has happened since.

House of Cards Netflix

It’s hard to find someone who doesn’t watch at least one original show on Netflix, forget all the second-run programming it provides. That’s almost a bonus at this point, because there are so many options the service offers, there is literally something for everyone. In fact, while you might be scratching your head about some of the programming decisions the company makes, remember that it is actually putting projects out there for every conceivable demographic. And it’s doing this out of necessity, for one simple and straightforward reason: there is no end to its programming needs.

Think about it. Since Netflix is not on a conventional television network, it is not limited to the standard constraints of time. As an example, take HBO. It has 168 hours in any given week to program, and maybe four or five of those hours are original. Maybe, on a good week, eight or 10. This doesn’t just include the standard Sunday night fare, but also talk shows and documentaries and sports and the like. Netflix, meanwhile, has an infinite number of hours to fill. Any subscriber can access any episode of any show at any time of any day. It’s conceivable, in fact, that one could sit in front of one’s computer — or TV, if it has streaming capacity — all day, every day, for more than 25 consecutive days, and only then consume all of the original content the company has put out thus far.

Thus far, mind you, in 2016.

The CrownNetflix

Of course, there won’t be any let up in 2017, as Netflix is planning to put upwards of 1,000 hours of original television and movies on its site, as part of its grand master plan to have more than half of the content available to be of the original variety. It’s for that reason that it continues to spend billions of dollars developing new series and original films for its subscribers. It’s for that reason the “network” puts out fare as varied as the modern western Longmire and the sitcom sequel Fuller House. From the lowbrow Rob Schneider-led mockumentary Real Rob to the upcoming highbrow, fictionalized look at the life of Queen Elizabeth, The Crown. From the standard style sitcom The Ranch, with Ashton Kutcher and Danny Masterson, to the edgier Marvel Entertainment series Daredevil, Jessica Jones, Luke Cage and Iron Fist. There are award-winning documentaries and movies, comedy specials and kids’ fare, pretty much anything you might want or need to watch, should you have the desire, which is exactly the plan. Show up, start watching, and don’t leave.

It doesn’t hurt, mind you, that Netflix is actually quite good at the programming thing, and it knows it. Here’s an example: Back towards the beginning of the year, the designer of a TV app sat down with Netflix production execs to discuss their various series, and he asked them if they had known that The Making of a Murderer was going to be such a sensation. They confirmed that, yes, they did know, which the designer knew was easy for them to say at the time, after the fact, because of course it was. So, deciding to test them, he said, “Fine, what do you have coming out this year that’s going to really be big?”

There wasn’t any hesitation. One of the execs said, “We have this thing coming out later this year, late summer or early fall, called Stranger Things. It’s sort of a GooniesPoltergeist Spielberg thing and it’s fantastic.”

Stranger ThingsNetflix

What’s interesting about Netflix and its viewership is that, in reality, we really have no idea how many people have watched any given show, just that we generally know whether or not it’s a success by the cultural impact it makes. Stranger Things is a perfect example. It debuted on July 15th and was not immediately a sensation. No, that took about a week, and then suddenly the word of mouth caught on and it was all anyone was talking about. It followed in the footsteps of shows like Orange is the New Black, Master of None, and Unbreakable Kimmy Schmidt, all of which, by the way, have earned multiple Emmy nominations, with both OITNB and Master having won them. It’s also why the service can announce, without much in the way of fanfare, that Fuller House is one of the most watched shows in its history, causing more than a little surprise among industry watchers, who had a bit of a hard time swallowing this notion, perhaps because it seemed to come out of nowhere.

Netflix relies quite a bit on word of mouth and often gives series some room to breathe before it makes a decision about renewal. It’s rare, in fact, that a series doesn’t get a second season, which is part of why it was initially a surprise when word filtered out that the most expensive series it has ever produced, the $120 million The Get Down from director Baz Luhrmann, might not be coming back for more, thanks to extremely low viewer numbers. Netflix has not yet made this official, but the show is clearly on life support, which is unusual enough. Canceling it would be an acknowledgment that a mistake was made, from a company that doesn’t normally make such pronouncements.

Still, misfires like The Get Down, expensive as this one might have been, are rare. The development team under chief content officer Ted Sarandos has a solid track record that has led to tens of millions of subscribers — last count had the number north of 80 million worldwide — and $11 billion in revenue, more than $6 billion of which goes toward the development and creation of original programming, a number that will go even higher in 2017.

The Get DownNetflix

Subscription numbers continue to rise, but not as quickly as the company would like. Second quarter subscriptions did not reach target numbers, which might be part of why, just last week, the company added a billion dollars to the $2.37 billion already on its books. In announcing the offering, the company issued a standard, boilerplate statement, saying it intends to use the money “for general corporate purposes,” which may include content acquisitions, investments, working capital and potential acquisitions and strategic transactions. That is all well and good, but a large portion of that money will actually be used for more content, to help the company toward that goal of having more than half of its programming being original productions.

But there is the issue of all that debt. The thing is, Netflix has a business model that relies on subscribers fees to pay for its content and the licensing fees it pays to stream previously aired television shows and movies. Those obligations, at the end of the third quarter of this year, totaled $14.4 billion which, in case your math is faulty, is a higher number than that of the company’s revenue, which means that the company is not, in fact, making any money. The discrepancy will only rise as the licensing fees increase, reflecting both new original and non-original content to its considerable library.

In fact, just last week, as the announcement about AT&T’s intended $85 billion acquisition of Time Warner came down, there was a lot of speculation about what AT&T’s competitor Verizon might do in response, and one of those suggestions was that, perhaps, it should pick up Netflix. However, the fact that Netflix does not actually make any money threw a rather large monkey wrench into that idea. On top of that, up until recently, there was a distinct lack of confidence from Wall Street. The company’s stock, as high as $130.93 per share at the end of last year, cratered to 85 in July after those disappointing subscription numbers came out.

Concerns centered around increased competition and content production costs, a slowdown in international markets and the overall decline of the domestic DVD business. Remember, this is still a key part of the company’s raison d’être, even if many of its customers no longer utilize it. But the Chicken Littles who declared that Netflix was in trouble have been shouted down by the stock’s performance in the three months since. Slowly but surely, the stock price rose through the end of summer and beginning of fall, hitting 106 on October 6th, before falling off slightly, and then once again rallying to 127 last week, after the third quarter numbers revealed that subscriber growth had re-accelerated. It closed at just under 125 on Monday, leaving it with a current market cap of $53.6 billion after its stock rose in value by 50 percent in the span of just 15 weeks.

Netflix dvdsThe Huffington Post

Only last month, a leading internet Wall Street analyst speculated that the company’s stock would continue to rise as high as 200 within the next three years. Obviously, this is just speculation, but the fact that the company has rebounded from its mid-summer nadir to within striking distance of the stock’s all-time high price can’t just be dismissed pell-mell or willy-nilly. There is no question that confidence in the company has risen, though it is worth noting that the stock price has fallen several points in the week-plus since the added debt announcement dropped. It’s not enough of a drop to be alarming, and certainly nowhere near the enormous drop that occurred earlier in the year and over the summer, but it is notable.

Netflix’s ultimate goal is to reach 250 million subscribers worldwide, which would essentially put it in one of every four homes on the planet. That number would effectively allow the company to keep doing what it’s doing, but allow it to actually make money while doing so. To that end, it continues to spend a lot of money — some might say too much money — creating new content so as to draw more subscribers. That’s why there’s a second season of Stranger Things coming, on top of dozens of other shows that have yet to see the light of day, but are designed to appeal to every part of every demographic that exists out there.

There is a reboot of the famed ‘60s series Lost in Space, the epic nature documentary series Our Planet, a drama called Gypsy starring Naomi Watts and Billy Crudup, a kids animated series called Robozuna, a live action one called The Hollow, one based on Dr. Seuss’ Green Eggs and Ham (from Ellen DeGeneress), an untitled show from Simpsons creator Matt Groening, the drama Surviving Pablo Escobar, a new mini-series based on the legendary novel Watership Down, the Daredevil spinoff The Punisher starring Jon Bernthal, the historical dark comedy about women professional wrestlers G.L.O.W. from Jenji Kohan, the western Godless from Steven Soderbergh and screenwriter Scott Frank, and lots more, all to go along with a two-season renewal of Narcos, another season of Bojack Horseman, two different stand-up specials from Chris Rock (for which he is apparently being paid $40-$50 million), a new season of Grace and Frankie, the third and final season of Bloodline, a second season of The Wachowskis’ Sense8, and the epic team-up Marvel’s Defenders, all of which are coming in 2017 and 2018.

BloodlineNetflix

That’s an incredible amount of content to produce, and not all of it is going to work, but with so many different viewers, in so many different demographics, with so many different tastes and interests, the net that must be cast has to be, by definition, wider and larger than that of anyone else’s. For that reason, Netflix almost has to do what it’s doing if it wants to be successful, a point that it obviously understands on a muscular level. That’s why it continues to carry billions of dollars worth of debt, and continues to throw so much money at the content on its service. It’s possible, of course, that Netflix could eventually fail, but it would take a lot for that to happen, and the likeliness of it happening in the foreseeable future is close to nil. It simply has too many subscribers and too strong a base for that kind of cataclysm to occur.

Netflix is not flawless, far from it, but it has established itself as a monster in its particular field, and one without any real competition. There are others who would take issue with this — which we will cover in the next two weeks — but for now, it’s probably safe to say that Netflix stands alone. There was a time, not so long ago, when Netflix declared its intention to release a new original series every other week. This seemed absurd at the time, but quaint now.

Now, Netflix is producing more content each year than every other broadcast and pay cable network, and there’s no end in sight.

For more entries in our network series, click here.


ProfilePic adjusted 2 is a filmmaker and journalist who has spent close to two decades working in and writing about Hollywood. Feel free to send him a tweet at @neilturitz. He’ll more than likely respond.

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One Response to Netflix Has Become Enormous, But Is It Too Big To Fail? (Network Series)

  1. Neil,
    You are the most thorough show biz journalist and I appreciate your keeping me informed.
    Thanks!
    Dee Brantlinger

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