A growing Netflix makes bid for its first original TV drama

Posted: March 18, 2011

The Hollywood insider website Deadline.com disclosed this week that Netflix Inc., the DVD mail-order house and Internet streaming service, was negotiating to obtain its first original TV drama, House of Cards.

The drama, an HBO-like series based on a novel about a British politician, although it takes place in the United States, could recast Netflix as a full-fledged network that not only streams thousands of movies and TV shows from an extensive catalog for $7.99 a month, but also carries its own content.

That sort of Netflix service could pose a more potent threat to cable giant Comcast Corp. and other pay-TV operators, which watched warily as Netflix added more than seven million subscribers in 2010 and its stock price boomed.

Though few think Netflix could completely replace cable, some experts say the Los Gatos, Calif., company is a possible spoiler for future industry growth. The issue is whether TV viewers will increasingly turn to Netflix for movies and TV shows and cancel premium-cable services.

"The reason the Street is euphoric about Netflix is that there is very fast [subscriber] growth and there is a potential for savings as they move from packaged media to digital," said Tony Wible, media and entertainment equity analyst with Janney Montgomery Scott in Philadelphia. "They're thinking this is the next-generation cable company. It's a potential alternative."

Netflix's stock price has quadrupled in the last 15 months to more than $200 a share. On Thursday, its shares rose 68 cents to $214.52.

Meanwhile, Netflix's subscriber base was 20 million in late 2010 in the United States and Canada and could expand to 28 million to 30 million by the end of 2011, analysts project. Comcast has about 23 million cable TV subscribers.

Netflix doesn't separate digital customers from its traditional mail-order users, but Wible estimates that 55 percent of subscribers are "streaming-centric," meaning they use mostly the Internet service. Because Netflix doesn't have to pay mail costs when it sends a movie or TV show to a subscriber over the Internet, the growth of the streaming service boosts profits, he said.

"What we like is that it's a really good consumer-value proposition," Andy Hargreaves, a digital-media analyst with Pacific Crest Securities Inc. in Portland, Ore., said. "It's a scale business. The bigger you are, the bigger your brand is . . . and the more absolute content you can buy."

In other words, Netflix's service is relatively cheap when compared to cable, which costs about $60 a month or more. And, because Netflix is big and getting bigger, it's now a powerful force at the negotiating table for Hollywood content.

So far, it's been an incredible transformation for Netflix, which floods the Internet with its distinctive red pop-up advertisements. But there are challenges that could knock it off its game.

The company will have to renegotiate content-rights contracts with Hollywood, which could dramatically increase costs. The first of those could be with the movie channel Starz. Some believe Netflix's new deal could be 10 times more expensive - $300 million to $400 million a year - than the one negotiated several years ago when it had a smaller subscriber base.

Netflix executives Reed Hastings and David Wells chalked up some of the negative talk to sour grapes.

"Netflix is good for consumers, good for content producers, and is one more competitor for existing aggregators," the executives wrote in a letter to shareholders in late January. "Many of the major media companies are part content producer, and part aggregator, which leads to Netflix being a frequent topic of discussion."

Perhaps one of the bigger longer-term threats to Netflix's business is the potential for broadband operators to move toward "usage-based billing." In this scenario, those who watch many movies and TV shows online with Netflix could pay more for their broadband service.

Comcast, the nation's largest residential Internet provider, says it hasn't decided on usage-based billing, but AT&T has said it will charge extra for heavy Internet use.

Some in Washington believe Comcast and other broadband providers could discriminate against Netflix because it threatens their profitable pay-TV businesses.

Netflix doesn't perceive itself as a cable-killer. "Netflix is a complement to cable," spokesman Steve Swasey said. "There is a lot that cable does that Netflix does not."

Contact staff writer Bob Fernandez at 215-854-5897 or bob.fernandez@phillynews.com.


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