proprietary content

Netflix and the golden era of couch potatoes

March 14, 2013: 9:31 AM ET

TV is clearly outshining the movies. But when will we know if original content from companies like Netflix is a workable business?

By Kevin Kelleher, contributor

130131064038-house-of-cards-netflix-kevin-spacey-gallery-horizontalFORTUNE -- Television is enjoying something of a golden age. With shows like The Walking Dead, Breaking Bad, and Game of Thrones drawing praise as well as rabidly loyal viewers, it's often remarked that TV is better than the movies. And, because golden ages can create gold rushes, companies that might have scoffed at the idea of creating their own TV shows are finding themselves doing just that.

The most nobable example is Netflix (NFLX).Early in 2012, Netflix began streaming episodes of its first proprietary series Lillyhammer, which also ran on Norway's NRK network. Lillyhammer set a ratings record for NRK and drew somewhat positive reviews on Metacritic, but it made only a modest cultural splash in the U.S. Netflix was tightfisted with its own ratings data for the series, but the point of Lillyhammer was to do a safe, low-key test in proprietary content.

As anyone with a Netflix account knows by now, phase two in the great Netflix content experiment was House of Cards, a 13-episode political series that debuted all at once on Netflix's site last month. Critics noted the series was engaging if hardly groundbreaking, but again that was the point: Not to push TV's boundaries but to be safely appealing to couch potatoes: a series based on a proven BBC hit, with a solid cast led by well-known actors, with a plot somewhere between edgy and cliched.

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Anecdotal evidence from Netflix suggests House of Cards was a hit. (The chattering classes certainly talked about it.) Next up: the return of Arrested Development -- again, a safe bet given the show's loyal fan base -- as well as Derek, a Ricky Gervais comedy-drama imported from the U.K.'s Channel 4. Other comedies include Orange is the New Black and Bad Samaritans.

Judging from Netflix CEO Reed Hasting's comments in recent conference calls, the company is finding its way in the proprietary-content game as it goes along. Will Netflix advertise heavily in certain cities? Will it push DVD and digital sales as HBO has? Will it syndicate its shows? All that remains to be seen. In fact, Netflix may be single-handedly inventing a new market for its style of original programming.

What's clearer right now is that Netflix is betting heavily that a critical mass of quality programs will not only keep its 33 million subscribers paying month after month, it will expand that customer base. Netflix's $7.99-a-month subscription to these shows doesn't seem onerous weighed against the cost of cable TV plus HBO, or buying digital episodes on Apple's (AAPL) iTunes for $2.99 a pop. Throw in the rest of Netflix's film and TV library, and it's looking pretty attractive.

Netflix is rolling out its proprietary-content strategy at a time when the stock -- spurred by surprisingly strong earnings and a scramble to cover short positions -- has been surging higher. While some skeptics still believe Netflix is ready for another decline, one major cloud hanging over Netflix is clearing. Customers who were angry about missteps Hastings made in 2011 are returning to the site. It's easy to forgive when a bargain is on offer, and people are talking about your programming.

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It may not be until this summer until it's clear whether House of Cards prompted more subscribers into the Netflix fold. If so, others may be quick to pounce. Last month, a Microsoft (MSFT) executive said the company had set up a production studio in Santa Monica where 150 people are developing "cable-quality" proprietary content for the Xbox.

This is hardly Microsoft's first foray into original content. In 2009, the company talked with talent agencies and production companies about creating programs that would enhance sales of its ill-fated Zune player. In the mid-1990s, Microsoft spent $100 million on comedies and programs about UFOs to draw people to its MSN site.

Last Friday, Variety reported on comments that Peter Micelli, an agent at Creative Artists Agency, made at a UCLA Symposium. In addition to Microsoft, Micelli mentioned Amazon Studios (AMZN), which is focusing on comedy series for proprietary content, as well as RedBox Instant By Verizon (VZ).

While these companies may follow Netflix's model of releasing all episodes of a series at once to save on heavy promotional costs for a competitive time slot, they may also take a page from Netflix and spend more money on the programs themselves. The trend could spur more demand among cable channels for original programming if eyeballs are migrating to streaming services like Netflix.

Micelli said he believed Netflix was spending at least $3.8 million per episode for its cheaper series and considerably more for House of Cards. Amazon, meanwhile, is spending $1 million an episode. (By comparison, AMC's Mad Men reportedly costs $2.5 million an episode, while HBO shows like Deadwood and Game of Thrones are believed to cost $4.5 million to $5 million.)

If there is a rush to capitalize on the growing appetite for quality new programs on TV, whether those programs are delivered through cable channels or web streaming, the golden era for couch potatoes may be only beginning. Netflix is poised to be an early beneficiary -- but only, of course, as long as the supply or original programming doesn't outpace the demand for them.

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