Netflixonomics the Rise of Netflix Original Programming

Roger Ebert famously said, “No good movie is too long and no bad movie is short enough.” Ebert, the famed movie critic, in this sense was referring to cinema?”the art of moving images. Movies have been a part of humanity’s culture for over a century now and they have been constantly evolving and changing over that long timespan. One significant evolution of cinema has been the marvel of movie and television streaming. No longer do people need to travel outside their homes to enjoy a film or series.

They have an abundance of options to choose from at their fingertips.

There is perhaps no other name more associated with movie and TV streaming than Netflix. Over the past decade, Netflix has grown to be the top streaming service for movie and television lovers alike. Not only has Netflix featured an innumerable amount of movies and television shows, but there have been quite a few that have come from Netflix’s own studio especially in the recent years.

In fact, Netflix’s growing trend has been that of its original programming. In order to understand this shift from being a curating service to producing its own Originals, it is important to know the history of Netflix leading up to its current state of Original programming. Netflix Original’s rise in prominence should also be analyzed and why they are now so immensely popular. Comparing Netflix Originals to other streaming services will aid in understanding how Netflix distinguishes itself and remains the top competitor in the industry. Another important aspect of Netflix Original programming is its implications for the film industry and how it has impacted movie and television watching overall.

In 2017, half of Americans aged 22-45 did not watch a single hour of cable television. In the past five years, at least seven million households have “cut the cord” on their cable service (McBride, “The Market is Dead…”). Today, streaming services are inserting themselves into an industry previously thought untouchable.

With the modern internet connections available today, it is difficult to justify paying $100/month for cable television when you can pay significantly less for just as high a quality of video on a streaming service like Netflix. Netflix is without a doubt one of the biggest competitors”if not the biggest”in the streaming industry today. However, many people would probably be surprised to find that the gargantuan streaming service initially started out as a company that offered online movie rentals.

In 1998, Reed Hastings and Marc Randolph co-founded Netflix as it launched its first DVD rental and sales site, Netflix.com, which only had 30 employees and 925 titles available. The company used a pay-per-rent model not unlike other rental services like the late Blockbuster. However, back then when DVDs were relatively new, there were not many video stores that sold them which made it hard to find physical locations where they could be purchased. This is the niche that Netflix hoped to fill with its commercial presence online, while being able to ship these small and light compact discs cheaply (“Netflix, Inc. History”).

By 1999, Netflix had a total inventory of more than 250,000 discs with a staff of 110. Initially, consumers were able to purchase a rented DVD from Netflix for its retail price, but Netflix ceased sales of DVDs during this time and ironically enough directed consumers interested in buying DVDs to Amazon. There is no doubt that in today’s world of giant media conglomerates, a move like that would immensely hurt Netflix being that it aided an enormous company like Amazon.

But, back then both were not nearly as large as they are now. So, in return, Amazon would heavily promote Netflix on its site. In September of the same year, Netflix introduced its first subscription service. Branded the “Marquee Program”, the service allowed consumers to rent four DVDs for $15.95 per month (“Netflix, Inc. History”). The first main transition of the company to its modern subscription model, however, was in 2001 when subscribers could rent an unlimited number of movies for $20 a month. This shifted to a tiered pricing system where consumers could rent up to eight DVDs at a time (Tryon).

Fast forward to 2007”Netflix had been shipping over one million DVDs by mail per day for two years and had developed recommendations to viewers based on their viewing habits and ratings. This is when Netflix began their online streaming service from a personal computer. This transition was also when Netflix would start to hone in on its recommendation algorithm. For the next few years, Netflix would enjoy steady growth and increased subscriber-base and revenue.

In 2011, CEO Reed Hastings announced that Netflix would split up its DVD rental and streaming services into two separate costs. After much protest and alarming drops in its stock, this plan was cancelled later in the year. However, despite that people claimed this to be Netflix’s biggest hiccup in its earlier years, the company continued to grow. In January 2013, Netflix had 29.4 million streaming customers (“Netflix, Inc. History”).

Not only did Netflix essentially break 30 million streaming customers in 2013, but it had also begun to dip its toes in original programming. Back in 2011, Netflix had begun to budget for original content. This would allow the company to have increased leverage over competitors as well as becoming less dependent on movie and television studios. The first Netflix Original to premiere on the service was the House of Cards series in 2013 which was produced by filmmaker David Fincher and starred Kevin Spacey.

How Netflix decided to launch this series is an example of their superior analytics, algorithm, and marketing teams. Netflix used the data on the number of people who rented the UK television series House of Cards DVDs and the number of people who watched political dramas like The West Wing. They also did the same analysis for those who showed preference for David Fincher films and films Kevin Spacey starred in. The following result was a successful political series which Netflix commissioned two seasons right off the bat (“The Netflix Revolution”).

This data usage was not something that they just started using out of nowhere. Ever since Netflix had started its DVD rental service, part of what the company did to allure more consumers was its recommendations to people that were based off their prior DVD rentals cross-matched with other data like actors, genres, directors, etc.

Netflix had years of this data stored with much more data forthcoming on a consistent basis. This data culminated to give Netflix a better idea of what people wanted to watch, when they wanted to watch, and how they watched. Not only that, but they could use this data to make their own content that they could distribute to their consumers (McCoy).

Netflix Originals also changed the game of how a television series could be made. Prior mainstream cable television networks have been notorious for giving shows only a chance or two based off a show’s pilot and its audience/demographic engagement. With Netflix, showrunners and producers had the chance to create a full season or two of a show. On top of that, most were allowed to have a creative freedom that otherwise surely would not have been allowed. And thus, it has been Netflix that has been known for popular and critically acclaimed series (“How Netflix Is Changing”).

Netflix Originals have since exploded and are all over the service’s viewing platforms. It is impossible to browse through the collection of movies and shows and not see majority of them stamped with the Netflix logo on the corner of the title’s splash art. Many of these Originals are targeted toward a specific audience”an audience that continues to eat up anything that Netflix dishes out. Netflix’s target audience is the 18-49 age demographic. With their target audience in mind and knowing their preferences, that creates a recipe for a highly-viewed movie or show. As of 2018, it is estimated that more than 90% of Netflix’s consumers regularly watch original programming (McCoy).

Knowing your audience is sometimes not enough in order to have a large repertoire of Original content. It also helps to have huge funding toward producing such content. In 2017, it was estimated that Netflix would spend about $8 billion on its content in 2018. However, halfway through the year that estimation was updated to project approximately $13 billion on a cash basis for its content, with 85% of that money going toward its original programming. This would further help satisfy that 90% of customers that enjoy such original content (Feldman).

With this much money being invested in to its original programming, audiences will get 82 feature films in a year, whereas big Hollywood studios such as Warner Brothers will only send 23 to theaters. They are also producing more than 100 scripted dramas, comedies, documentaries, and unscripted reality and talk shows. Netflix is even operating an a large global scale, producing programs in 21 countries worldwide.

Goldman Sachs, an American multinational investment bank and financial services company headquartered in New York City, speculates that as soon as 2022 Netflix could be spending $22.5 billion a year on content”a number not too far off from the current amount spent on entertainment by all America’s networks and cable companies combined. In a journal article by The Economist, they describe the strategy of “winner-takes-most” as “Netflixonomics” (“Television”). Still, there has been called into question the matter of its sustainability.

Such strategic thought has worked for Netflix. But it is not a process taken lightly. Netflix has about 2,000 “taste clusters” by seeing what its users watch. The amount of money needed to make its programs are based on analysis of these taste clusters to see just how well the reach, draw, and retaining rate of customers will be.

It uses this to its advantage and does not have to focus on targeting broad demographic groups; rather, it can target more specific audiences for its programs that Netflix is more than willing to bet will succeed. Once the analysis takes place, there are about 20 people whose jobs are “greenlighting” projects. Once the projects are green-lit, executives figure out how to deliver them to the appropriate users and have to take into account even seemingly small factors like the poster art, which Netflix changes according to its algorithms and what it thinks the viewer will like (“Television”).

Another reason why the strategy of Netflixonomics has worked for its namesake is because failures on the service do not cost as much as it does to other networks. For example, if a show on network television is in a primetime slot, and it fails, well then that would affect other shows on the same day because now that day is ruined and will not perform well. But for Netflix, a service in which other shows and movies are not affected by poor performers, they can simply do away with them (“Television”).

Another aspect of Netflix Originals that allow the company to continue to grow leaps and bounds are the names and faces it is bringing to the service. In May of 2018, Netflix announced a deal with former President and First Lady, Barack and Michelle Obama, who will be producing multiple projects to be shown on the streaming service. Never before has a past president had such an active post-White House role in media as the Obamas are about to do with Netflix (Gonzalez).

Netflix also has signed deals with Shonda Rhimes and Ryan Murphy, two showrunners well-known in the cable universe for famous shows like Grey’s Anatomy and Scandal, Glee and American Horror Story respectively. This is just another example of how Netflix seeks to add more to its repertoire of talent. This in turn will bring in more money, more shows, and more binge-worthy episodes for its users.

An article by Alan Sepinwall from Rolling Stones says that Netflix’s “strategy of releasing entire seasons at once was a deft acknowledgment of the way many viewers were already learning to consume television, and it has driven both fellow streamers and more traditional outlets to at least experiment with a bigger, bolder binge-release model” (Sepinwall 130).

In addition to this model, users get to instantaneously experience a variety of shows that might not be as popular on a weekly basis and/or on cable television: women’s-prison dramedy, Orange is the New Black, and the animated Hollywood satirical show featuring a hilarious yet sad depiction of depression, BoJack Horseman. Netflix has wasted no time (and money) in casting as wide a net as possible to ensure users have “their” show to watch on its service (Sepinwall 130).

Even with such an outpouring of resources into its own movies and shows however, there are many consumers and critics that have voiced their concerns on the quality of what Netflix has available for its users. This is a fair point after all; with so many Netflix Original shows and movies debuting on the service, one might wonder if quality is being sacrificed for quantity. Patrick Seitz of Investor’s Business Daily reported that the quality of Netflix shows have decreased in the last two years (Seitz).

An analysis was done by Streaming Observer of show ratings ranging across different streaming platforms and how Netflix compares to them. They analyzed the quality of original TV shows from services like Netflix, Hulu, Amazon, HBO, and more. They did this by aggregating reviews from esteemed critic sites like Metacritic and Rotten Tomatoes who both have ratings on a 1-100 scale.

They took the average ratings of original shows from both of these sites into one rating. Netflix landed at 70, behind six other popular streaming services including HBO, Hulu, and Amazon. In 2016, Netflix was two positions higher. However, it seems that in the last two years, even with churning out original shows, audiences may not be enjoying them as much (Dodson).

Putting ratings aside too, Netflix has put out many original shows that are more serialized as opposed to shows that have individual distinctive episodes spanning the course of a season. Specifically, many of Netflix’s dramas seem to be 13-hour movies”which is not what people want to sit through. What this essentially means is that there is a tendency for episodes to be “filler” and not as many interesting things happen to keep the audience hooked. The overall story suffers because there are more episodes than arguably necessary to tell it.

However, that will not stop Netflix from continuing to produce lengthier seasons of shows if it means people will watch them regardless. After all, nobody likes to stop a show without seeing how it resolves, and the way it resolves will only make sense if the rest of the show is viewed first. Still, what this is doing is influencing even other cable network shows to follow suit.

A popular example is AMC’s hit zombie show The Walking Dead, which has received a lot of flak over the course of its lifetime for what audiences would call unnecessary filler episodes. But why fix what, Netflix would probably say, isn’t broken? More episodes for shows means that more people will spend time on their service (Sepinwall 130).

Despite ratings taking somewhat of a hit and their quality of shows and movies in question at times, Netflix’s system seems to be working and continues to reel in viewership. Other companies have noticed this, namely HBO, and have expressed their thoughts on their streaming service being more like Netflix in order to continue to be a competitive streaming service. This past summer, HBO’s chief executive, John Stankey, discussed at a town hall meeting that their company would have to be more “like a streaming giant to thrive in the new media landscape” (Lee and Koblin).

Without explicitly referring to Netflix, Stankey said that the network would have to evolve its operations and build itself into something bigger and broader with more content. His goal for the network was to attain more hours of engagement per day, as opposed to hours a week. This is something that HBO “struggles” with as they are known for having a weekly Sunday lineup of episodes that premiere on a weekly basis as opposed to Netflix’s style of debuting shows that include dropping all episodes of a season in one night (Lee and Koblin). Needless to say, content sells”especially if there’s $13 billion worth being invested.

It is not just Netflix’s original shows and movies that have helped increase its popularity over the very recent years”it is its large selection of original stand-up programs. Comedy Central used to be the go-to for stand-up specials. Now, Netflix has risen to the top as it has continued to produce more and more specials with more and more A-list comedians. To cynics who would claim that Netflix just has the money to spend on more comedy specials, there is more to it than that.

Lisa Nishimura is Netflix’s Vice President of Original Documentary and Comedy Programming. Robbie Praw is Netflix’s Director of Original Stand-up Comedy. Together, they are “the most powerful gatekeepers in stand-up” (Zinoman) and have used Netflix’s insanely detailed metrics and algorithms to uproot the traditions of the stand-up industry. The New York Times reported how the two were able to nab Dave Chapelle, a legendary stand-up comedian, but one who had not performed a special in 13 years. He signed to do three specials for Netflix in 2017.

Netflix also has signed deals with another legend in the comedy industry, Jerry Seinfeld. The more stand-up specials that Netflix produces and premiere, the more they hone in on a previously under-tapped market for its users. It is estimated that as of September 2018, half of Netflix’s 130 million subscribers have watched a stand-up special in the last year, and a third of which who have watched three. Netflix’s strategy”and the reason why it has done exceedingly well in the stand-up world”is that they have found a way time and time again to find that balance between how many specials they premiere and the quality of those who perform in them (Zinoman).

Still, with all the efforts that have gone into the abundance of Originals and specials available to subscribers of the service, there remain critiques about the sustainability of the company’s fiscal practices”considering the egregious amount of money that has gone in to all of its content. As of July 2018, Netflix was about $6.5 billion in debt. That is 93% more than the year before. Additionally, last year the announcement was made by The Walt Disney Company would be making its own streaming service.

This means that it will be pulling all of its content off of all other streaming services”including Netflix. Some of Disney’s top movies, including Star Wars and Marvel titles, are huge draws to Netflix for obvious reasons. However, with the eventual launch of the Disney streaming service, Netflix will no longer be the service to go to for those titles. Those popular movies along with numerous other films like Toy Story and Frozen will without a doubt draw a huge crowd.

What is concerning for Netflix is that Disney already has its juggernaut titles from years back that will be ready to go once its service launches. Meanwhile, Netflix continues to spend a lot of money making its own films and television shows in attempts to quell the need to switch to any other service. Some market analyzers have already begun to predict that Netflix will cease to be the number one streaming service within the next few years (McBride, “The Market is Dead”).

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