The pilot episode of a new television series can send it rocketing toward ratings success, renewal, and eventual syndication, or plummeting toward cancellation. But in the world of Internet TV, says Netflix, "don't expect overnight results."
That's the message the company sent yesterday while announcing its quarterly financial results. On Monday, the company released its first-quarter financial earnings, and beyond the immediate results (26 million global streaming users, $870 million in revenue, a $0.08 loss per share), Netflix spent time qualifying the benefits of its original programming efforts. In a letter to shareholders, CEO Reed Hastings and CFO David Wells acknowledged the company is making a big bet on originals, but attempted to manage expectations regarding how and when it envisions that bet to pay off—a strategy that's far more tortoise than hare, and one that might frustrate investors eager to see a company turnaround sooner rather than later.
Hastings and Wells made clear original programming was far from a short-term goal. The two said it's moved from a "strategic experiment" to a "strategic expansion" that is now part of its "long-term ambitions." Netflix will "take it year by year" to measure the effort's success. One central benefit, the company said, would be the "brand halo" effect, the idea that if its original series are a critical success, they will drive up brand perception and incremental subscriptions. However, "that took HBO nearly a decade to accomplish, so we don't expect overnight results," Hastings and Wells wrote.
In other words, after years of investing in its own content, HBO has become a powerhouse of original TV series, which has led to network acclaim, big ratings, Emmys dominance, and boosted engagement online. Can Netflix mimic that success with shows like Lilyhammer and House of Cards?
On the one hand, Netflix doesn't really have a choice but to try to. The company suggests thinking about original programming as a "hedge" against other networks in case they decide to follow HBO's strategy. Imagine if FX someday launches "FX Go" to exclusively show new seasons of Sons of Anarchy, or AMC launches "AMC Go" for future episodes of Mad Men. Netflix would be in a terrible position without its own original content.
On the other hand, the company has a very long way to go before it catches up to HBO, which as Hastings and Wells write, "is strategically motivated to impede [Netflix's] growth." HBO has been in the original programming game for not one but two decades. After popular series in the early to mid-1990s like The Larry Sanders Show and Arliss, the network produced critically acclaimed miniseries (Band of Brothers, John Adams, Generation Kills), TV shows cemented in pop culture (Sex and the CIty, The Sopranos, The Wire), and movies that dominated entire press cycles (Game Change).
Netflix hopes to do the same one day. Lilyhammer, the company's first foray into the originals space, has yet to generate many tangible benefits, though. The "early results" of the show provided by Netflix are vague at best. "We exceeded our targets in terms of PR, viewing, and critical acclaim," the company said. "The show has driven millions of hours viewed, is rated highly (4 out of 5 stars on average), and generated hundreds of millions of consumer impressions." Was 4 out of 5 stars the target? How many actual members tuned into watch the show? And most importantly, has it translated into new subscribers? Unclear.
Netflix did say that in terms of cost per viewing hour, Lilyhammer is performing in line with "similar premium exclusive content" that it currently licenses, which is how it evaluates "content efficiency"—not the most resounding endorsement of a show's success.
The company is not releasing traditional ratings metrics partly because the metrics are no longer applicable in the online world. Because Netflix's series will be available all at once and are all on-demand, there is no need to win a time slot. "We don't have to assemble a mass audience at say, 8 p.m. on Sunday," the company said. "Instead, we can...build demand over time, with members discovering these new franchises much in the same way they've discovered and come to love shows like Mad Men and Breaking Bad."
Again, this is another aspect of Netflix's long-term, year-by-year strategy, which will see the company spend hundreds of millions of dollars betting on original programming. And its success all depends on whether viewers and critics do indeed come to love Netflix's series in the same way they love Mad Men and Breaking Bad. With big-budget series such as the David Fincher-Kevin Spacey-produced House of Cards and surefire hits like Arrested Development in the pipeline, Netflix has a good shot.
But as Hastings and Wells wrote in their letter to shareholders, "We know we have a lot to learn in the originals area."