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Prediction: Netflix Will Soon Produce Original Content

by Jeff Steele

In the world of streaming, Netflix is the undisputed king of prime time.

According to the Fall 2010 Global Internet Phenomena report,

In the United States, Netflix represents more than 20 percent of downstream traffic during peak times.

Producers, networks, or anybody in the video space must take notice because these are not people streaming UGC while watching Boardwalk Empire.  These people are streaming movies and TV shows during prime time hours, instead of watching precious advertising.

The report went on to say that,

During the last quarter alone, Netflix added 2 million subscribers to its service, pushing its total to 16.9 million. A year ago, it had just 11 million subscribers.

Those are incredible numbers that any cable channels would kill for.  What makes it more amazing is that their money slips right through the fingers of cable providers like Comcast because they’re coming in through the ISP side, not the TV side, even though they’re usually the same company.  That’s a tremendous competitive advantage against traditional cable channels because it provids Netfilx with extra cash to acquire more content, improve their technology, and expand their reach.  In addition, because they’re technically a video company, their window comes before pay TV.

Netflix is becoming a full fledged premium channel that has created a backdoor into your living room via set top boxes, game consoles, and DVD players.  It won’t be long until Netflix starts producing their own original series and content.

27 Responses leave one →
  1. Vikram permalink
    October 26, 2010

    Great point – and I would add Apple could eventually be positioned to do similar things if they get real penetration with Apple TV because they have iTunes as a distribution mechanism. Whether they do so or not is a matter of focus and the success of Apple TV.

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    • Jeff Steele permalink
      October 27, 2010

      Then thearetically, you could add Google TV to that list as well.

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      • Vikram permalink
        October 27, 2010

        True…except I’m not sure if anyone would by Google TV once they see the monstrous remotes.

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      • November 6, 2010

        THAT had to be a Freudian-slip.

        Theatrical + Theoretical = Thearetically

        I agree with you, Jeff. If Netflix isn’t at least considering a content creation business model, they might be considering a joint venture with a content creator to handle that part of the biz?

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  2. James permalink
    October 26, 2010

    Netflix actually gave that a shot through their Red Envelope division. I think they closed it down in 2008

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    • Jeff Steele permalink
      October 27, 2010

      Red Envelope was an acquisitions division for acquiring completed/festival films, not for generating original content.

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  3. October 26, 2010

    Jeff, I think you are 100% right. That 20% figure is an amazing number, akin to those very early days of when we dreamt of the tipping point when VCRs would exceed 50% penetration in homes. As soon as that tipping point was hit, the direct-to-video market boomed.

    Anybody who can account for 1/5 of all Internet transfer traffic has got to be near a tipping point that we had not yet been dreaming of. (Damn metrics; they can pop up before we anticipate describing them.)

    Netflix is in a similar position to the pay cable channels a couple decades ago. When HBO and SHOWTIME and others were only sending out studio’s movies to their subscribers (sounds like Netflix now, right?), they found their competitive advantage and growth opportunity was stagnant. They had great access, but no content ownership. That is where Netflix is today.

    Further, as a producer, it will be very exciting to have a new 800 lb. gorilla in the marketplace.

    So, yeah, I agree: Netflix is inevitably going to become the next HBO.

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    • Jeff Steele permalink
      October 27, 2010

      I completely agree and you’ve basically recited my upcoming post almost verbatim.

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  4. Shawn permalink
    October 26, 2010

    James, that’s kind of true and a good point. But the position they hold today almost 2011 is far different than the one they held in 2008.

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    • Jeff Steele permalink
      October 27, 2010

      In 2008 they were a DVD-by-mail company that also had minimal streaming. Now (in their own words) they are a video streaming company that also delivers DVD-by-mail.

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      • November 6, 2010

        You know what really pisses me off about Netflix’s original business model of ‘DVD-by-mail?’

        Why the hell DIDN’T I THINK OF THAT!?

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  5. innocent bystander permalink
    October 26, 2010

    For a different perspective, http://tinyurl.com/27gzjat

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  6. BenL permalink
    October 26, 2010

    A few comments:

    I am a big fan of Netfix. Like many others the appeal of ad-free on demand content at a reasonable price is a perfect formula. From my personal experience, Netflix needs to focus on quality content to keep their top spot.

    As Netfilx matures and their market share plateaus, what do you think will happen to the traditional cable producers that will have been loosing the battle for viewers? Will content be threatened?
    It will be interesting to see if Netflix tries to produce content. (I’m thinking core competencies here.) They may be in a good position to form partnerships but it may be risky to think they can have similar success in production as they have in distribution.

    Regarding content, the old argument I hear is that the revenue from flagship cable/network shows support new shows who have yet to find a following. A la carte viewing will threaten (or at least weaken) this model. Where will the new proving grounds be?

    Regarding film, an increase ability to distribute product to the general public via streaming should benefit some to film production as the marginal distribution cost (via dvd) is greatly reduced. Do you think smaller films should be able to ride (to some degree) on the success of Netflix?

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    • Jeff Steele permalink
      October 27, 2010

      HBO and Showtime are flat rate subscription services just like Netflix. They produce original content using the $1.5 billion in revenue they derive from their $40m subscribers. Whether a show is a hit or not has no direct inpact on the their revenues. HBO didn’t start out in the content production business either, but in order to retain customers they started creating content designed to appeal directly to the heads of household, because that’s who pays the bill. Not having to worry about advertisers, ratings, or subject matter is a definite cherry on top. Obviously video sales of their series (DVD or streaming) is an additional cherry on top.

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      • November 6, 2010

        If I recall correctly, the first season DVD release of “The Sopranos” garnered approximately $65MM in sales.

        HBO said that figure paid for all of the costs, including talent, for the entire first season.

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  7. Cotty Chubb permalink
    October 26, 2010

    Even noting the $100+MM that Netflix spent on content acquisition in the third quarter of 2010, content production is quite expensive on a per-title basis. So I’m skeptical, Jeff.

    The possibility that these very low-revenue-to-the-creator streaming rights may undercut and topple the existing cable business model and therefore make content production on the cable end uneconomic does suggest that somebody’s going to have to find a way to make new product and that may turn out to be Netflix.

    But it won’t be fun for the producers. The new 800-pound gorilla won’t pay much for our bananas.

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    • Jeff Steele permalink
      October 27, 2010

      The downward pressure created by low-paying gorillas will in turn force a downward pressure on the cost of producing those bananas, because people need to work (even stars), so the film budgets won’t be able to support any over-inflated costs. It’s similar to what’s happening now in the indie space with so few films being made that actors (and their reps) are having to be flexible and reasonable in their demands. Hopefully, improved technologies will allow for those bananas to be produced for less as well.

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  8. Andrea permalink
    October 27, 2010

    Cotty, your analogy is sweet.

    The new 800-pound gorilla won’t pay much for our bananas.

    I bet your banana will be worth a lot to any 800lb Netflix female gorilla.

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    • Jeff Steele permalink
      October 27, 2010

      Andrea,
      As enticing as Cotty’s bananas may be to Netflix and the unwashed masses, please keep this discourse professional, or at a minimum, discrete.
      – The Management

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  9. October 27, 2010

    I was at a screen digest event titled “future of broadband media” in London. I asked a rep. of saffron digital, what kind of license price they would be paying for a studio film (premium content). A lot of laughs and uneasiness, but he yielded to say “between $3 and $13 Million. That is of course a non exclusive license, and for a company that delivers on hand held devices and tablets….. just wondering how the economics of that works.

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    • Jeff Steele permalink
      October 27, 2010

      Netflix’s biggest advantage over Google TV and other online TV aggregators is that they pay upfront minimum guarantees. MG’s are the lifeblood of film finance.

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  10. Matt permalink
    October 27, 2010

    Anything that forces the cable companies to innovate is nice. Since they are adding so many subscribers with their current mail/streaming licensed content is there any reason to put resources into original content? At least until the subscriber numbers level off.

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    • Jeff Steele permalink
      October 27, 2010

      Depends on whether they want to be ahead of the curve, or behind the curve.

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  11. October 28, 2010

    Cotty:

    If Netflix is *not* the 800 lb gorilla, who is?

    Sydney points out that there are many new distributors popping up. But when I look at the list, I don’t see anything exciting, financially speaking. The “sweet spot” for most top-tier cable networks seems to hover at $200,000-$250,000 an hour. Don’t get me wrong–I’d love to drop a shitty reality show on MTV for a fee like that–but those numbers aren’t so exciting, either.

    HBO broke ground in original content by shooting its own “indie” films in the neighborhood of $2 million–a budget that was, back then, a reasonable indie movie budget, wasn’t it?

    They spent their time and effort on CREATIVE, honing and developing amazing stories, and it paid off. I’m remembering this correctly, right? It was HBO that put James Garner and James Woods together in… what was it? “Promise”? They kicked open some amazing content and deserve their current position as the most award-winning producer (remember when cable wasn’t even a contender for awards?).

    If I were Netflix, I’d follow the same path. For $1 million, and with the same commitment to development and integrity (and for God’s sake, STAY AWAY FROM REALITY!!!), they could succeed at the same level. $1 million a pop will get them a LOT of great indie filmmakers. The cream should rise to the top. They can afford $1 million, can’t they? (That’s a sincere question.)

    I keep looking at the landscape, and what I see is the ’80s all over again. Except for damn REALITY crap.

    By the way, on the competitive side, I think it’s insane that cable networks are still kicking-the-tires on the possibility of maybe someday thinking they might get around to sending HD images as an add-on. Netflix is in a position to go HD out of the box. But what’s more important? I bet that within 3 years, Netflix will be streaming 4K 3-D!

    Wanna take that bet???

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  12. Cotty Chubb permalink
    October 28, 2010

    The editorial function that HBO performed requires staff and overhead. Does Netflix want that overhead? Bob Coopers don’t come cheap and the price of wrong bets mount up.

    Still skeptical, though full of respect for Jeff, Michael and others who may see the future more clearly.

    Let’s put a nickel on it and see who collects in six or twelve months. I would love to be wrong since I would love another buyer in the marketplace and a million dollar license is a million dollars closer to a picture I can finance.

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    • October 29, 2010

      5¢ it is! Within one year, Netflix will be creating original content for $1 million (or thereabouts).

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  13. October 31, 2010

    What happens when internet providers switch to a metered service? (i.e. pay for the bandwidth you use) If you have to pay for streaming video suddenly it doesn’t look as appealing.

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