‘Did we build a monster?’: Netflix may be the most feared force in Hollywood

Time Warner chief executive Jeff Bewkes once mockingly likened Netflix to the “Albanian army”. That army now has more than 70 million subscribers in nearly 200 countries – and may well be the most feared force in Hollywood.

The company has moved from its foundation as a US video rental business to become an international entertainment juggernaut generating award-winning content for both its digital streaming service and cinematic releases. Many of Hollywood’s most talented writers and producers take their proposals to Netflix first.

It’s also a Wall Street favourite valued at nearly US$45 billion, giving Netflix financial firepower to go with its impressive subscriber base.

“Every single day in my company, and I know in other companies, there’s a question of: ‘Did we do something … to build a monster that will come back to kill us?’” NBCUniversal research president Alan Wurtzel said last week at the Television Critics Association media tour in Pasadena, California.

The tipping point came last summer when Walt Disney Co. revised profit expectations for its cable channels including ESPN, reflecting an industry-wide shift as more consumers cut their cable offerings in favour of Netflix or other services. The news triggered a sell-off of media stocks, erasing nearly US$50 billion in market value in two days.

Media stocks have not recovered, and executives such as Bewkes have signalled a possible change in their dealings with Netflix and other digital outlets. He said Time Warner was considering holding on to episodes of its shows longer before making them available for video-on-demand services.

“Media companies are saying, ‘We are cutting our own throats here, and we’re bleeding,’” said Doug Creutz, media analyst with Cowen & Co.

But tensions have escalated as Netflix has become the go-to destination for millions of viewers who are attracted by its low cost – US$9.99 a month in the United States, and as little as HK$63 a month in Hong Kong – ease of use and commercial-free programming.

“Netflix has been built on the back of great content from studios like our own,” Fox Television Group co-chairman Dana Walden said in an interview at the Television Critics Association media tour. “It has helped to reinvigorate fan bases of shows. But from the network side, it’s very challenging. They’re a competitor.”

Last year, Netflix chief executive Reed Hastings ribbed the traditional TV networks, likening them to a fax machine – amazing in the 1980s but now outdated. At the CES technology conference this month in Las Vegas, Hastings told attendees they were “witnessing the birth of a new global internet TV network”.

At a pre-Golden Globes party at Ted Sarandos’ home the following night, Netflix’s head of content was still revelling in the achievement.

“Everywhere in the world, your shows are on Netflix and people are enjoying them right now,” Sarandos told the crowd, which included comedians Chelsea Handler and Aziz Ansari and the cast of Orange Is the New Black. A few party-goers whooped and cheered.

Netflix has been ramping up production of shows that will be exclusive to the service. It plans to make 600 hours of original programming in the 2016 US financial year.

Netflix has also been rattling the cinema industry by streaming its own original films on the same day they arrive in cinemas. Fearing a threat to their industry, some cinema chains have refused to distribute Netflix films, including its acclaimed Beasts of No Nation and the sequel to Crouching Tiger, Hidden Dragon, which will premiere next month on Netflix and at selected Imax cinemas.

Once a footnote at the Television Critics Association media tour, where TV networks showcase their upcoming series, Netflix on Sunday presented 14 panels with an all-star lineup of some of its most popular shows. Just outside the main room where Sarandos spoke, a replica of the House of Cards oval office was on display, along with exhibits of costumes for shows such as Jessica Jones and Unbreakable Kimmy Schmidt.

One potential obstacle to Netflix’s global ambitions, however, is that many studios refuse to hand over international rights for the TV shows they sell to Netflix. The studios want to hold onto those lucrative rights for themselves as they expand their own operations in other countries.

Media executives view Netflix with a mix of admiration and fear. The concern is Netflix has been instrumental in encouraging consumers to drop their pay-TV subscriptions in favour of a streaming service. In consumer satisfaction surveys, Netflix wins high marks in contrast to cable TV companies, which have a reputation for poor customer service.

“It started out with Netflix wanting admission to the party. Then they got in and mingled well with the TV guys,” said FBR Capital Markets analyst Barton Crockett. “But now they’ve become so strong and the life of the party that now those TV guys are wondering if maybe they liked Netflix too much, too soon.”

TV networks must fight Netflix for premier projects, and in many cases producers are attracted by Netflix’s talent-friendly culture that allows them to take more creative risks because Netflix is not beholden to ratings or advertisers.

Netflix also ushered in an era of binge-viewing that has helped train viewers to opt for on-demand, commercial-free programming. That culture threatens another pillar of media: advertising revenue. TV companies in the US receive about US$70 billion a year in ad revenue, according to Kantar Media.

Media companies have responded to Netflix’s incursion and the changes in consumer behaviour by launching their own streaming services. NBCUniversal unveiled a comedy outlet called SeeSo, CBS has CBS All Access, and premium channels Showtime and HBO have direct-to-consumer offerings.

Studios are also selling more shows to Amazon.com and building Hulu into a more vibrant competitor to Netflix (Hulu is owned by Disney, NBCUniversal and 21st Century Fox). Hulu last year nabbed streaming rights to the entire Seinfeld library, as well as licensing deals with AMC, Discovery, Turner Broadcasting and FX Networks. Epix began steering its movies to Hulu last summer when its pact with Netflix expired.

Netflix, Sarandos said, appreciates the business challenges that traditional media companies face.

“There’s a lot of chaos in the media space,” Sarandos said. “The emergence of subscription video-on-demand, and what it means to linear television and the value of cable channels – all that stuff – it’s all very complicated for them and they’re trying to manage.”

In fact, media companies have made hundreds of millions of dollars by selling their shows to Netflix, including old product from their libraries whose shelf life on TV had long passed. Netflix has also become a hungry buyer of new originals, and has ordered such shows from traditional studios — including Warner Bros., which produces three originals for Netflix. Disney produces Marvel shows for Netflix, including Jessica Jones and Daredevil, and Sony Pictures Television has two projects in the works.

The small CW television network, owned by CBS and Warner Bros., lost money for years until 2011 when it struck a four-year, US$1 billion deal to provide its programming, including Jane the Virgin and Arrow, to Netflix. The network finally turned a profit. Fox recently announced that it was reviving its cancelled drama Prison Break because audiences were devouring old episodes on Netflix.

Many point to the Breaking Bad effect to illustrate how Netflix can be friend and foe. The AMC drama, about a chemistry teacher-turned-meth dealer, was a middling performer for the cable channel until its fourth season, when many viewers discovered it on Netflix. The show’s audience steadily grew, and by its fifth and final season had shot up in the ratings. Still, some viewers waited to see the episodes on Netflix and they associated Breaking Bad with Netflix, not AMC.

Some TV executives believe the Netflix threat might be overblown.

“The reports of our death have been greatly exaggerated,” NBCUniversal’s Wurtzel said.

Wurtzel cited research from independent firm Symphony Advanced Media that showed that although Netflix makes a pop with its original shows, viewers might binge on episodes for a few days, or even a few weeks, but then return to traditional viewing patterns. Viewers watch an average of 5.43 hours per day of programming, according to Nielsen data, and about 28 minutes of viewing is through services such as Netflix and Hulu.

In contrast, viewers spend more than four hours a day watching broadcast and cable TV.

“People are watching TV the way God intended,” Wurtzel said.

Los Angeles Times