Netflix Bets Big On "House Of Cards" But Swears It’s Not a Strategy Shift: Q&A With Content Boss Ted Sarandos

Netflix has bought its first TV show which doesn’t exist yet. The company has finalized a deal to distribute two seasons of “House Of Cards,” a yet-to-be produced political drama directed by David Fincher, starring Kevin Spacey.

That’s a big change for the video rental company, which has previously made its money on movies and tv shows that someone had already shown somewhere else.

But Netflix content chief Ted Sarandos doesn’t see it that way. His argument is that this is just like the company’s deals to buy other shows — just a bit riskier.

How much risk, exactly? Sarandos wouldn’t discuss the terms of the deal, though people familiar with the company have already batted down the $100 million-plus figure that Deadline.com threw out when they first reported the story.

But Sarandos did say Netflix won’t cover the entire costs of production with its license fees: That’s the responsibility of Media Rights Capital, which will produce and own the show. So even if the show does cost $4 million or more per episode, for 26 episodes, Netflix won’t be on the hook for the entire thing.

No matter what the details are, it’s still a big bet, and a big move. Sarandos walks me through the company’s rationale in an edited Q&A:

Peter Kafka: This is a pretty big move for you guys, right?

Ted Sarandos: It’s not much of a radical departure in what we do every day. There’s an added risk factor, in that this is the first time we’re licensing something that hasn’t been produced, or at least completed.

But there’s no risk factor in terms of delivery, because we’re not investing development money, and we don’t pay for it unless they deliver the show. But it is the first time we’ve made a very large commitment to a series that hasn’t been produced.

It’s just a matter of your philosophy around development. Networks can typically invest tens of millions of dollars in the development of a pilot. And if they put the show on the air and it fails, that’s all lost money. There’s no monetization of a broken series.

We’re betting on the creative team and the source marterial. “House of Cards” is incredble source material–the BBC version is quite popular already on Netflix. David Fincher’s work has all been incredibly well-received on Netflix, and Kevin Spacey’s films have all worked on Netflix. The notion that that team will produce a very good product is a pretty safe bet.

Kafka: You’re not producing the show yourself–Media Rights Capital will do that. Will you cover their costs, or will they deficit finance it?

Sarandos: They’ll deficit finance it. We’re coming in at a percentage of the budget.

Kafka: So where else will can they make their money?

Sarandos: Anywhere in the world. Syndication, DVD. Same as any other show. It’s traditional in the windowing, it’s just that Netflix owns the first window.

Kafka: So what will it cost?

Sarandos: No comment. But I will say this: If the show proves very popular, it won’t be any more expensive than licensing a popular show off of a network. So economically, it’s not a seismic shift, if it’s popular. If it isn’t, then we’ll have paid more for an unpopular show than we normally would have.

Kafka: The TV networks pick shows for a living, with mixed success. But the other thing they do is use their reach to promote their shows. You don’t have a network to promote this stuff, so how do you compensate for that?

Sarandos: The models are radically, radically different. They’re trying to develop a show that will be watched in very big numbers on Wednesday night at 9 pm, so they can sell advertising against it, for that time slot.

I don’t care if people watch it Wednesday night at 9pm. They can watch it anytime in the life of the license, and it’s economically neutral.

The fact that we can algorithmically bring an audience to a show, we’ve proved for 11 years, on DVD. So I have very high confidence that the same methods and algorythms that we’ve used to pre-determine size of audience for a show will work, here. Even if the show doesn’t have a massive external marketing campaign, or even large external awareness.

Kafka: What about the notion of Netflix as a show-picker? The nature of the business is that you could still end up with a bad show, or a good show that people don’t like. Can you really afford to rifle-shot these shows, one at a time? Don’t you need to do a lot of these?

Sarandos: Think of this as a piece of content on the continuum of the shows we acquire. Everything from the Andy Griffith Show to TV shows in the previous seasons. And now just take it to the next level of the continuum, which is the premeire season of a show.

These one-hour serialized dramas have proven incredibly popular on Netflix. So our desire is to have a lot of them, because it really encourages long-term engagement.

Kafka: Will you do more of these deals? Or is it a test?

Sarandos: It’s not a test. It’s a large commitment. If the right properties show up, we’ll do more, but we’re not under any pressure to do it. I don’t look at is a change in our business model, as much as an evolution of our licensing abilities.

There was a time where we wouldn’t have been able to attract a show like this, because we were too small, and perceived as too low-profile for such a high-profile product. I think it speaks volumes to the perception of Netflix as a distribution channel among content creators that we could even be in the competition for a show like that.

Kafka: I’ve previously suggested that part of your motiviation is here is about perception–specifically, that your ability to get shows like this increases your negotiating leverage with distributors like Starz. Does that play into your thinking?

Sarandos: To the extent that I would prefer to license previous seasons of HBO, Showtime, Starz’ shows? Sure. And if those shows are not going to be made widely available in decent windows, then my other alternative would be to compete with those guys for those shows.

Kafka:You’ve been adamant about saying you’re not interested in getting into the “next-day” window for TV shows, like Hulu does–where a show airs on a Tuesday and you can stream it on a Wednesday. Is that still the case?

Sarandos: Our value proposition to consumers is so much more about completeness than freshness. Having the complete season is so much more valuable, in our business model, than having last night’s episode.

That is demand fulfilment more than demand creation, and demand fulfillment tends to be a much lower-margin busienss. And I look at the series that we have today: The most watched episode of almost any given series on any given day, is episode one, season one.

So we have new people coming to these shows constantly. So there’s much more value in having the entire series experience, than it is having last night’s episode, or some kind of convoluted, rolling 5-episode model [like Hulu does].

Kafka: And the fact that you’re getting an exclusive window with this show doesn’t change that?

Sarandos: Not at all. Because remember that we’ll have the show, in its complete form, all the time.

(And yes, that image above has nothing to do with House of Cards, Fincher or Spacey. But finding an image from a yet-to-be produced TV is too challenging for me today.)

David Fincher’s “House of Cards” Starring Kevin Spacey to Be Streamed Instantly in North America Exclusively from Netflix

New television series from Media Rights Capital brings
the highly anticipated adaptation of the award-winning BBC political thriller
to Netflix members in late 2012

Beverly Hills, CA (March 18, 2011) – “House of Cards,” the much-anticipated television series and political thriller from Executive Producer David Fincher and starring two time Academy Award-winning actor Kevin Spacey, will debut exclusively in the United States and Canada from Netflix, the world’s leading Internet subscription service for enjoying movies and TV shows.

Netflix has committed to a minimum of 26 episodes of the Media Rights Capital drama, which is expected to be available to the more than 20 million Netflix members, beginning in late 2012. Fincher, the Oscar-nominated director of The Social Network and The Curious Case of Benjamin Button, will direct the pilot written by Beau Willimon (Farragut North and film adaptation, The Ides of March). A satirical tale of power, corruption and lies, “House of Cards” is based on the book and acclaimed BBC mini-series of the same name.

“The gripping, serialized one hour drama has become a very important part of the Netflix experience,” said Netflix Chief Content Officer Ted Sarandos. “David Fincher’s unique vision, the indelible performances of Kevin Spacey and the original version of “House of Cards,” all have a big following among our members, giving the series a very good chance of becoming a fan favorite. We are thrilled to be working with this amazing team.”

Originally written as a novel by former U.K. Conservative Party Chief of Staff Michael Dobbs, “House of Cards” explores the ruthless underside of British politics at the end of the Thatcher era. Reset against the backdrop of modern-day U.S. electoral politics, the new one-hour drama follows an ambitious politician (Spacey) with his eye on the top job.

Scripts for 13 episodes will be delivered before production on the “House of Cards” pilot begins in the spring of 2012. Production on subsequent episodes of “House of Cards” will commence several months later, allowing producers time to carefully develop the series.

Media Rights Capital’s “House of Cards” stars Kevin Spacey (Casino Jack, American Beauty, Seven) and was developed by Beau Willimon (The Ides of March). David Fincher (The Social Network, The Curious Case of Benjamin Button, Seven), Josh Donen (Spartacus: Blood and Sand), Academy Award-winner Eric Roth (Forrest Gump, The Curious Case of Benjamin Button), along with Kevin Spacey and Dana Brunetti of Trigger Street Productions (The Social Network, 21) are Executive Producers for the series. Emmy Award-winner Andrew Davies and Michael Dobbs, who produced the original BBC series, also serve as Executive Producers, with Willimon as Co-Executive Producer. The “House of Cards” pilot is written by Willimon and will be directed by Fincher.