Reed Hastings, the chief executive of the Web's top video-streaming service Netflix, has some mighty ambitions for his company's marquee original series, political thriller "House of Cards."
"Hopefully, by the time we get to season three, four, five, if we're fortunate enough to get there, then we turn it into a Harry Potter-esque global massive phenomena," with the world anticipating season after season much like J.K. Rowling's fantastically popular books and the films based upon them, he said during a discussion of Netflix latest quarterly results Monday night.
Hastings has raised the Harry Potter analogy before, but he previously used it as an example of how an audience builds over time. A "global massive phenomena" puts Netflix's ambitions in a new league.
"House of Cards" has only one season under its belt, and though Netflix is tight-lipped about audience numbers, it's safe to estimate that viewership has a long way to go before reaching that level. The Harry Potter film franchise alone has drawn more than $7 billion in global box office receipts. Netflix only this year started booking $1 billion in revenue a quarter, and that is for its full breadth of services and content.
Yet the goal underscores how Netflix, in its evolution into an online television outfit, is creating programs that look like traditional TV but aren't viewed like traditional television at all. Because it releases all episodes of every show's season at once, popular attention paid to the programs isn't spread over a period of 10 weeks or 23 weeks like traditional television, it's concentrated at a season's unveiling.
Netflix's subscription business model allows it the luxury of taking a longer-term view on its programming. Because it doesn't depend on increasing ratings to increase the advertising revenue a show can draw in, it can afford to keep a tight lid on its viewership numbers and incubate shows that could generate a loyal following over time. But with the strategy still in an infancy, there's no telling if releasing full seasons at once will pay off by actually increasing a show's audience year to year.It's a key, fundamental way Netflix differs from the rest of television. If Hastings wants "House of Cards" to succeed in the same way "Harry Potter" did, the commercial payoff in subscribers will be felt season to season. That means the commercial value of a series is fallow in between, and years may need to pass for a show's trajectory of popularity to be clear.
Early peek at how originals are faring
Netflix released earnings for its second quarter of the year on Monday night. It was also the second quarter to include the impact of its dedicated push to become a top-tier creator of TV shows. By all its most-watched gauges of performance, Netflix is doing as expected, or better. Revenue is up, subscribers are up, and profit jumped nearly five fold.
But shares fell after the results were released and are down again Tuesday, as the company fell short of Wall Street's anticipation of an impressive level of new domestic streaming subscribers. Netflix added 630,000 domestic streaming customers in the second quarter -- that's slower than in the previous three periods, which never dropped below a million and were often well above. It was within the company's target range, but watchers had been excited for something higher.
Netflix predicted a little more than 1 million U.S. subscriber additions in the current quarter at the midpoint of its targets. That's below the midpoint projection by analysts, despite more originals, better overall content and more accessibility through tablets, JPMorgan analyst Doug Anmuth noted.
As for how originals themselves were doing, executives continued to hold their cards close to the vest about viewing, but they provided a few peeks.
Ted Sarandos -- Netflix's head of content -- said every one of the original shows is drawing "TV-size audience numbers." Netflix's latest original, "Orange Is the New Black" released earlier this month, drew as much viewing in the first week after it debuted as any other series, and both the viewing audience and total hours in the first seven days after every premiere have grown sequentially with each series that has been released, Sarandos said. Netflix said one of two originals released during the period -- "Arrested Development" -- produced "a small but noticeable bump in membership" when it came out.
Comparing apples to oranges
But "Arrested Development" is unusual among Netflix's slate of originals thus far. It was a revival of a series with an installed fan base. The rest of its endeavors, though based on existing content like a book or a program overseas, are building up a following from scratch. The "small but noticeable bump" of "Arrested Development" isn't much to go on, but it's more than the "nice impact but a gentle impact" that Hastings used to describe "House of Cards" effect after it premiered.
Jason Bateman in a promo clip for Netflix's "Arrested Development."
That executives compare one series to the next to describe originals' momentum stresses the unusual way Netflix releases its content. Because all episodes of each show are available in one big clump, Netflix can't compare the momentum of like-for-like shows. When the time comes that Netflix can compare seasons of the same show, it will follow many months of that series laying dormant in the public eye.
Gary R. Edgerton, the dean of the college of communication at Butler University and author of "The Columbia History of American Television," said the fact that Netflix distributes its episodic content all at once works against it economically.
"It's one and done," he said. By serializing, broadcast and cable networks foster audience engagement all along a multiple week airing span, in addition to season to season, according to Edgerton, which works to their economic advantage.
"Each service has its own attraction, and Netflix attraction is there's no delayed gratification," he said. "But it seems to me that Netflix is losing an important marketing component."
A vestige of movie background
In Netflix's transformation from a online DVD rental-house into the Internet's biggest streaming video provider, the big shift occurred in method of delivery. Its third act as a content creator shifts the type of entertainment that viewers come to Netflix to watch. That change is from film to, increasingly, television.
The company's very name was selected to reflect not only its online status but also the type of entertainment it was delivering. HBO, the programming ideal that Netflix is aspiring to eclipse in an online way, had a similar evolution. Originally a purveyor of movies, Home Box Office eventually shifted to dominate the world of edgy serials and specials.
In many ways, Netflix is on the HBO path. It has checked off the box for the original series with critical accolades, including major Emmy nominations. Comedy specials and homegrown documentaries are en route. Netflix executives discussing the company's latest quarterly earnings on Monday said Netflix would be exploring full ownership of its content, like HBO does for its original productions.
But the timing of release -- all at once versus parceled out over time -- is the area where traditional television and Netflix remain at opposite poles.
The cast of Netflix's "House of Cards."
"There's a reason why Netflix is always all available the first day," Michael Pachter, an analyst for Wedbush, said. "Until they made originals, there was nothing on Netflix that wasn't available somewhere else."
Even its originals are available elsewhere. Netflix's investment in creating "House of Cards" got the company an exclusive first shot at streaming the show. But the program's producer, Media Rights Capital, holds other rights and has sold them elsewhere -- DVDs of the first season are now available through the e-commerce arm of Netflix streaming competitor, Amazon.
Consumption of the DVDs will be at the fringes, especially considering they're priced at about $34 for the season versus a $7.99 monthly Netflix subscription fee. But Netflix's originals are hurt by not having a lasting engagement with its audience, said Robert Thompson, a media scholar at Syracuse University. "Having all the episodes available all at once was smart because it made it different," he said. "The problem is, it does take off the time-released buzz about things."
He noted that viewers hitting the climaxes of a series very quickly and at different times hurts the shows popular traction. After initial attention and viewership of a series like "House of Cards" after its debut, it doesn't get much more unless a development arises like Emmy nominations.
And even then, the commercial effects are difficult to pin down.
Last week, "House of Cards" was nominated for outstanding drama series, as were its stars for lead acting, in the first instance of programming that premiered on a digital platform garnering nods in high-profile Emmy categories.
But being nominated for an Emmy isn't as clear-cut catalyst as it is for an Oscar, according to Tuna Amobi, a media and entertainment equity analyst at S&P Capital IQ, who said the effect is more drawn out for television and hard to distinguish.
Netflix's Emmy nominations in attention-grabbing categories are a first in the 65-year history of the awards, so there's no precedence for whether commercial benefits will materialize for a digital platform unlike a traditional one. "There's really no reference point on how much viewership Netflix can drive" from the Emmy recognition, Amobi said. "It's not inconceivable that the buzz that's going to be generated is going to get people to subscribe to Netflix, but the viewership is always going to be far greatest at the onset of the shows."
Jennifer Holt, an associate professor of film and media studies at the University of California Santa Barbara, noted that Netflix being validated on the quality of its shows could have other benefits. It can attract major producers willing to put money into projects and make a commitment of a 13-episode season, she said. It can attract big-name stars that viewers may subscribe to see.
"The more critical acclaim its programming gets, the more valuable it will become as a service, and the more people will be willing to pay for it," she said.
Building a slate of original programming piece by piece, and letting the entirety of the offering be what drives growth, is the long game Netflix is playing. But with the company keeping mum on how much the shows are being viewed, it will be a long time before the world knows if originals can be the superhero in Netflix's story, or mere extras.
