Netflix Vision: Original Programming, More Exclusive Distribution Deals

Netflix won’t raise subscription rates to pay for the multi-year Disney distribution deal announced Wednesday, said Netflix Chief Content Officer Ted Sarandos at the UBS conference Wednesday in New York. Sarandos said the company’s focus is on “how great a product can you build for that low subscription price,” while “remaining profitable.”

The Disney-Netflix deal marks the first time a major studio will take premier movies straight to streaming rather than through the traditional cable TV model, and Sarandos called the move “a bold leap forward for Internet television.”

Moderator Harvey Weinstein, producer and co-chairman of The Weinstein Company, referred to the deal as “the biggest content deal in the world” because of the loaded brands involved -- including Marvel, Pixar, Disney and Lucasfilm. Terms of the deal were not disclosed, but Sarandos said Netflix’ growing subscriber base made the deal possible. “The beauty of the business,” is the scale Netflix has achieved, Sarandos said, citing four million streaming subscriber adds this year and 3.5 million new international customers.

Disney and Netflix inked two separate deals, including extending one for catalog titles such as Dumbo, Pocahontas and Alice in Wonderland. The other deal, to take effect in 2016 at the end of Disney’s distribution deal with Starz, includes exclusive U.S. TV rights to theatrically released feature films from Walt Disney Animation Studios, The Disney Channel, Pixar Animation Studios, and Marvel Studios along with Disneynature titles. The Disney content will be made available for Netflix members to watch instantly in the pay TV window on multiple platforms, including television, tablets, computers and mobile phones, the companies said in a news release. Also part of the agreement are Disney direct-to-video new releases, which will be made available on Netflix starting next year, the companies said. In a statement, Janice Marinelli, president, Disney-ABC Domestic Television, said, “Netflix continues to meet the demands of its subscribers in today’s rapidly evolving digital landscape."

During a session at the UBS conference, Jay Rasulo, Disney’s chief financial officer, said the deal with Netflix came about after a “very thorough analysis of the potential value in the different windowing of our products.” A goal of the company is to create “enduring value” across its various business segments, he said. For Disney content “this was the best and highest value creator for the company,” he said, “and we expect great things from it."

On the timing of the deal, Rasulo said Disney by nature doesn’t invest around business cycles. “When we looked at monetizing our content, I don’t think there was a state of the economy timing around the decision” to do the Netflix deal, he said. On the viability of Netflix in a marketplace that “definitely has economic downdraft, there are lots of considerations we made in making this deal,” he said.

On how the Disney deal will impact traditional children’s programming on channels such as Nickelodeon, Sarandos said Netflix streams a billion hours of content every month, which “should be eroding linear TV viewership like crazy.” Instead, he said, TV viewership continues to rise for linear TV and video on demand, as new technology, choice and good value have been leading viewers “to find more time to watch.”

Weinstein compared the Disney deal to Sirius’ exclusive deal with Howard Stern, calling both “game changers.” He asked Sarandos whether Netflix could envision an exclusive deal with a TV personality such as Jon Stewart for nightly viewing on Netflix. “It’s an interesting proposition,” Sarandos said, but the immediacy of current events-related programming lends itself to linear TV and live viewing, he said. Jon Stewart jokes, for instance, lose their freshness four months after a show has aired, he said, and Netflix’ goal is to pursue programming “with a long shelf life.”

At the same time, Netflix is moving toward more exclusive television through original series, Sarandos said. The eight-episode Lilyhammer series that debuted in February was the first original made-for-Netflix series, he said, and the company will make available “House of Cards” in February, an adaption of a BBC series from 1990. But instead of showing “House of Cards” in traditional serial fashion at a particular time slot every week, Netflix will make all 13 episodes available at once for streaming. Viewers often want to watch shows in two or three-program spurts, he noted. “That’s how my daughter who’s 17 years old wants to watch,” Weinstein added.

The evolving on-demand model is the future of TV viewing, Sarandos said. The old linear model of waiting a full week to view 50 minutes of a favorite show has already been changing as “people are manipulating the system by stacking things on their DVR,” he said. Netflix’ philosophy is to “give them what they want,” which enables consumers to watch a program at a scheduled time or to view it via Netflix a week later. Consumers are most satisfied, he said, when “they have control of access."

Weinstein asked how Netflix will generate publicity for the show if there’s no timed showing to drive event programming. Sarandos said Netflix will “punch the show out into the culture,” through Internet advertising, something it hasn’t done in the past, and it will use the Netflix user interface to raise awareness. “The heavy lifting” of the publicity will be handled by the website, he said. And the same tools Netflix uses to put programming in front of viewers who are likely to watch a particular show will work with its original programming as well, he said. With Netflix, he said, “We created a brand from nothing so the next challenge is to create a brand from “nothing but a “House of Cards."

Sarandos downplayed the importance of real-time viewing of popular shows, citing “Mad Men.” On most nights, he said, the most viewed “Mad Men” episode on Netflix is episode one, season one, showing that “people are still discovering that show” even after repeated wins on awards show. Over time, more people watch “Mad Men” on Netflix than on AMC, he said.

As the new model of “stacked viewing” advances, it will change how programs are written, Sarandos said. A third of shows today are crafted to catch viewers up on events that occurred on the previous show the week before, he said. A big chunk of storytelling time is spent on exposition, he said. When people view episodes two or three at a time on demand, it enables more storytelling time because viewers are engaged differently, he said.

On whether Netflix plans to eventually develop its own programming rather than securing exclusive rights for programs developed by outside studios, Sarandos said, “Eventually it makes a lot of sense.” Deals Netflix has put together with outside studios for exclusive programming such as “House of Cards” and “Arrested Development” offered a way to enter the original content space with “less risk,” he said.

"Arrested Development” is an example of a show that can succeed under the Netflix on-demand model versus in a linear slot, Sarandos said. The show was canceled by Fox due to poor ratings resulting from “too many characters and story lines” and not appealing to Middle America, he said. Six years later, though, he said, “it’s bigger than ever. The show needs “a long shelf life,” he said. In the Netflix world overnight ratings don’t matter, he said. “If we were selling advertising, we'd have to talk about ratings, but we don’t,” adding that advertising isn’t in future plans, either. “Commercial-free” is a core part of Netflix’ business proposition to consumers and what’s relevant instead is “subscribers."

Sarandos said Netflix has been in discussions with every studio about pay deals. On whether there could be deals similar to the Disney one, Sarandos said, “Yes, we are looking to program the site with more fresh and relevant major feature films,” but any deal has to come with “accelerated windows and exclusivity,” he said. On Netflix’s view of the lifespan of the DVD, Sarandos said, “We're riding it, we're not driving it.”