Since its inception in 1997, Netflix has redefined an industry formerly dominated by brick and mortar franchises through a series of right-place, right-time innovations. Their monthly flat-rate subscription, unlimited rentals and elimination of shipping, handling and late fees were enough to drive Blockbuster into bankruptcy. The irony probably wasn’t lost on the mom and pop shops that were forced to close their doors when Blockbuster and Hollywood Videos came to town. Netflix stumbled badly in 2011 when they split their streaming and DVD rental divisions and began charging separately for each service. Combined with the attempted spin-off of their DVD rental arm in the Qwikster fiasco in September, the company saw its stock plummet from an all-time high of $304.79 in July to $63.85 by November. Netflix lost over 800,000 subscribers, the Wall Street Journal declared the company’s business model “broken” and CEO Reed Hastings was forced to abort Qwikster. Netflix rebounded in the third quarter with a 63% jump in earnings and 610,000 new subscribers by the end of the fourth quarter as a glut of new players began circling the blood in the water around its 61% marketshare.
Industry sharks like Apple’s iTunes, Sony PlayStation Network, Microsoft Xbox Live, Hulu, Amazon Prime, HBOGo, Barnes & Noble and even Toys ‘R’ Us Movies are now bidding on the same exclusive content arrangements that were once bread and butter for Netflix. Rather than slink off to find a shady porch under which to disappear, Netflix is doubling down on a number of strategies to remain competitive in the exploding market. In April 2012, they established their own political action committee called FLIXPAC to aggressively lobby a pro-intellectual property, anti-video-piracy and net-neutrality agenda. In addition to expanding their streaming service internationally, Netflix is also investing in its own content delivery network called Open Connect to manage the billions of hours per month of streaming media currently handled by third-party commercial networks. Open Connect gives Netflix exclusive control over its own YouTube-sized pipes, effectively cutting out the middleman and reducing long-term overhead.
Most dramatically though, Netflix is putting $3.7 billion over the next five years into an original content strategy that marks another leap forward for the Los Gatos, California-based enterprise. Over the course of its evolution, Netflix has become one of the biggest content buyers in Hollywood and their latest play leverages technology, talent and capital in a way that may eventually change how television programs are financed. Using a proprietary algorithm to mine their vast stores of user data, Netflix is able to predict how a film or TV show will perform in their library. The bulk of Netflix viewers comes from past seasons of popular shows like Mad Men and Breaking Bad rather than vast motion picture archives and the new crop of Netflix programs reflects the change in strategy.
Seeing the popularity of existing series like Arrested Development and Weeds, Netflix picked up a fourth season of Arrested Development and is licensing Weeds’ creator Jenji Kohan’s new women’s prison comedy, Orange Is the New Black. Two seasons of a witness protection dramedy called Lilyhammer starring Sopranos alum Steven Van Zandt and the murder mystery series Hemlock Grove penned by schlock-meister Eli Roth round out their latest acquisitions, the crown jewel of which is the David Fincher-produced House of Cards.
In the type of deal unheard of in the industry, Netflix gave David Fincher $100 million for two seasons of his new political drama. Fincher has become one of the most bankable directors in Hollywood with Academy Award nominations for his last two films and a flair for adapting dense, complex narratives for the screen. He’ll direct the pilot episode of the series which features Kevin Spacey in the role of Representative Frank Underwood, a political operator who after being passed over for Secretary of State begins pulling the strings that will put him back into power at the expense of a newly inaugurated president. The timing of the series premiere 10 days after the actual Presidential Inauguration is probably not a coincidence. Neither is the narrative voiceover in the trailer which harkens back to one of Spacey’s most memorable roles as Lester Bangs in American Beauty. The last bold stroke for Netflix is to release every episode of the series simultaneously. Everything about the show feels big, from the CNN branding to the post-inauguration streets of DC, and the stakes are certainly high enough for the management team back in Los Gatos, but as the trailer cannily indicates, “That’s how you devour a whale, one bite at a time.” For the giant-killing company intent on changing the way we watch television, the cards may be stacked in their favor.