The Atlantic Wire recently ran a great post on the economics behind the Netflix original drama House of Cards.
The article is thoughtful and well written, and clearly lays out the main issue facing the Los Gatos company: the cost of creating high-quality content requires additional subscribers to join up.
Quoting from the piece:
The real problem for Netflix is that their subscription revenue is not growing as fast as their content costs. Michael Pachter, an analyst with Wedbush Securities, told Bloomberg News' Cliff Edwards
. "Netflix will continue to generate negative cash flow going forward, driven by the company’s ever-increasing streaming commitments," he said, a sentiment also reflected in this chart:
Can a company that charges a $7.99 subscription fee with no ad-revenue or rev-share programs with media conglomerates afford to spend $100 million for original content?
Only subscriptions will tell. In order to support the costs of House of Cards, The Atlantic reports that Netflix needs 520,834 new subscriptions for two consecutive years just to break even.
When you consider that Netflix CEO Reed Hastings intends to produce 5 more shows with similar price tags in the near future, the number of new subscriptions required to turn a profit only increases.
GQ recently noted that Netflix is on a mission to become the next HBO
(another interesting article worth reading in full). Whether or not Netflix can trump the cable giant is a separate conversation, but it is clear that the goal of Netflix is to rival cable offerings with OTT original programming.
And Netflix does have another advantage: binge viewing
. The entire season of House of Cards was released all at once, meaning viewers don’t have to wait for the season finale to air months after the premier.
We’ll have to wait and see if more people sign up to watch their original offerings. But at the end of the day, I believe that House of Cards is good for viewers, good for TV and good for the entertainment industry.
By creating top-tier shows with A-list Hollywood talent that can only be viewed on their service, Netflix is giving people a reason to sign up while fundamentally altering the way TV is created, delivered and consumed. They are also directly attacking the common (though unfounded) complaint about not having enough new content to watch on their streaming service.
With more people watching more content on more devices, expect more tech companies to invest in original content in the coming quarters.
Have you started watching House of Cards? Let us know in the comments, or tweet us @VideoMind