HBO and Netflix – Getting Back to the Future
Thomas Schatz / University of Texas

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Media Companies Netflix and HBO

One of the most significant and disruptive forces in contemporary television is of course Netflix, which steadily pivoted from “flix” to TV series as its primary online product in recent years, changing the ways we access and watch TV, and then barged into the high-stakes original series programming derby in 2013 with House of Cards and Orange Is the New Black. In the wake of those series hits, Netflix’ co-founder and CEO Reed Hastings began referring to it as a “web-based TV network,” while television critics and media pundits are heralding it as “the next HBO.” The fact that Netflix could be mentioned in the same breath – and the same context – as HBO is not all that unreasonable. The entertainment providers boast roughly the same number of subscribers in the U.S., just under 30 million each, with the Netflix numbers continuing to climb while HBO’s have long since leveled off. And Netflix’ revenues (if not its profits) are approaching HBO’s as well. “If Netflix were a cable channel,” The Economist recently reported, “its subscriber revenues in 2013 would put it third in America behind ESPN and HBO.” ((“Thinking outside the set-top box,” The Economist, December 14, 2013, p. 69.))

House of Cards

Viewing Versatility of Netflix Original Series House of Cards

Orange is the New Black

Netflix Original Series Orange is the New Black

A delicious irony here is that HBO spent all those years (and marketing dollars) insisting that “It’s not TV,” while Netflix has been equally insistent that indeed it is a TV network. The fact is that both HBO and Netflix represent significant variations on the ancient broadcast television model – and especially the business model of conventional commercial television – but both are also staking their futures on that most traditional of television products: series programming. Thus the success of both HBO and Netflix speaks volumes about where “television” seems to be headed in the new millennium, while signaling the persistence of the medium’s most fundamental characteristics. And while there’s some validity to the notion of Netflix as the next HBO, the differences between the two dominant “new networks” are illuminating as well.

One key difference, of course, is the relationship of each company to conglomerate Hollywood and the mainstream movie industry. HBO began, like Netflix, as a movie delivery service (owned by Time, Inc.), launching the first nationwide pay-cable movie channel in 1976. That wildly successful was a key factor in the 1989 Time-Warner merger, although it would be another decade before HBO really came into its own – in 1999, to be precise, with its breakout success of its original series, The Sopranos. That was not HBO’s first original series, but it was its first bona fide hit (on DVD as well as cable), prompting the network’s rapid, aggressive shift to original series as its principal and defining product. That move transformed HBO and assured its eventual stature as the crown jewel in the Time Warner empire. It is now far more profitable than Warner Bros., despite the studio’s leading market share in the movie industry, and HBO is far more profitable than the major television networks as well.

So HBO did provide a template of sorts for Netflix, both in its shift from movies to TV series as a programming staple and its venture into original series production. The two share another key characteristic as well, in that both operate as “premium” subscription services. The two companies reinforces the well-established equation in commercial television between quality programming and quality demographics, but in this case the key concern is not CPMs (cost-per-thousand viewers) – i.e., how much sponsors are willing to pay a network for the audiences delivered to its commercials – but rather how much money discerning, upmarket viewers are willing to pay for content (minus those pesky commercials). It’s worth noting that nearly all TV viewers (86%) are subscribers in the form of cable fees, but less than a third are paying premium prices for HBO or Netflix. An intriguing question is the extent to which the two audiences overlap; I assume that I’m one of millions who subscribe to both services, which I consider distinct, complementary, and indispensable.

An obvious difference between the two companies of course is Netflix’ online streaming operation, which is proving to be better suited to TV series than movie content. As Tim Wu aptly notes in a recent article on Netflix in the New Republic, “Nearly all scripted shows become streaming shows, whether they are produced or aggregated by Netflix or Amazon, CBS or a (finally unbundled) HBO – or even on unexpected entrants such as Target, which recently launched a Netflix competitor.” Wu argues that the key to success for these “new networks” is their ability to “make the right original programming decisions and secure the best old shows.” These two objectives go hand-in-hand for HBO and Netflix – indeed, they are one and the same for HBO, which is precisely why it is not likely to “unbundle” its service anytime soon. And it also explains why the two stand alone atop the throng of new networks in the digital age. HBO and Netflix have staked out the high ground with their original series, and both have cultivated a reputation for “prestige programming” that is essential to their network identities and their popular and commercial success. HBO’s original series track record has been astonishing, at it remains to be seen whether Netflix can sustain the momentum created by House of Cards and Orange Is the New Black.

HBO Go

HBO GO, Streaming Service from HBO

HBO did move into streaming in 2011 with HBO GO, although its library holdings are limited – and are dominated by its own original series – while the service is available through cable providers rather than online. Thus HBO GO seems designed primarily to accommodate series late-comers and binge viewers, two other qualities heavily associated with Netflix. But one could argue that HBO really started both trends back in December 2000, when it released the first season of The Sopranos as a DVD box set just weeks before the rollout of season two. The full-season DVD set was a phenomenal success, intensifying HBO’s commitment to original series and encouraging its programming executives to rethink their assumptions about both series scheduling and patterns of television viewing. Netflix, in turn, has taken binge-viewing practices to another level – and has pushed the term into the popular discourse – in its promotion of series like Breaking Bad and Mad Men, and in the strategic coordination of its full-season streaming releases with AMC’s rollout of new seasons.

The veritable partnership with AMC in the marketing and dual launch (on cable and the Internet) of its hit series has been crucial to Netflix’ climb in recent years. In fact its streaming of Breaking Bad may have been even more important to Netflix’ recent surge than its original series. This also points to a decided advantage that Netflix enjoys over HBO, in that it can acquire programming from literally scores of other networks. The tradeoff for HBO is that it owns its series and its increasingly estimable library, and thus along with AMC is one of Netflix’ most important upscale suppliers. Both HBO and Netflix are buyers of talent as well, in that both are paying top dollar for original programming – a new twist on the “deficit financing” strategies that fueled of the major networks in their heyday. And more than any other networks, HBO and Netflix are cultivating new talent while hastening the migration of established filmmaking talent from movies, particularly the fading indie-film sector, to TV series production.

Filmmakers are migrating to television for the same reasons audiences are: better product and more of it. Hollywood’s ever-intensifying commitment to mindless blockbusters and global movie franchises is steadily disenfranchising both discriminating filmmakers and discriminating viewers, who are finding one another on HBO and Netflix. And both constituencies are hooking up on their own terms – top talent freed from the constraints of high-stakes motion picture (and major network) production, and viewers freed from the constraints of regular programming and commercial interruptions.

This latter point is perhaps the single most disruptive innovation of both HBO and Netflix, and one that may well signal a fundamentally new direction for the medium of commercial television. Each has developed a business model that blatantly rejects the principle of ad-supported programming – along with the obvious assumption that television is first and foremost and by its very nature an advertising medium. The irony here is that Netflix as an online service has developed a more efficient means of measuring its clientele than any other television ratings outfit, and that its routine collection and assessment of “big data” is something that the traditional networks (and ratings services) would pay dearly for. So far Netflix has eschewed the ad-driven paradigm, and thus perhaps comes closer than any other network to giving viewers what they have always been promised but have never been given: what they actually want to watch.

Image Credits:
1. HBO/Netflix
2. Orange is the New Black
3. House of Cards
4. HBO GO

Please feel free to comment.




MGM, DVD, and “TV”

by: Thomas Schatz / University of Texas-Austin

MGM Logo

MGM logo

Among the latest deals in the endless churn of media mergers & acquisitions was Sony Corp.’s purchase of MGM a few weeks ago for $5 billion. In the overall scheme of things, this scarcely qualifies as a “big deal” – not when TV networks and movie studios are being bought and sold for tens, even hundreds (in the case of AOL-Time Warner) of billions of dollars. But the Sony-MGM deal speaks volumes about the vastly rising stakes and the radically changing structure of “the media” in recent years, and the enormous changes in media culture and media experience as well.

And paradoxically enough, the purchase of the once-glorious, now-struggling MGM movie studio by the global media giant Sony – the only media conglom without its own television network(s) – speaks volumes about the changing state of “television” as well.

One measure of how much the stakes have changed is that Sony paid nearly as much for MGM last month as it paid for Columbia-TriStar some 15 years ago. In buying Columbia-TriStar, Sony acquired a huge, active, successful motion picture and television production-distribution company. In buying MGM, conversely, Sony acquired an anemic production company – one that’s expected to produce only three or four movies a year, most of them sequels from its handful of brand-name movie franchises (most notably the Bond series) – along with a movie library that is most distinguished for hits produced over a half-century ago.

Back in 1989, Sony was accused of overpaying for Columbia-TriStar, and it may have paid too much for MGM as well, due mainly to a bidding war with Time Warner, which until the eleventh hour was expected to acquire MGM for $4.5 billion. So what gives? Why were these two media giants willing to pay so much for MGM, when its key assets are 4,100 movie titles, most of them decades old?

The answer, of course, is the booming DVD market and the rapidly evolving digital home-video arena. The MGM purchase gives Sony the world’s largest movie library, totaling over 7,000 titles, and some estimates put the DVD-related value of MGM’s titles at over $1 billion per year. This is a truly staggering figure, and one that would have been inconceivable even five years ago, when the home-video value of MGM’s library was widely considered to be tapped out.

DVD changed all that, and it did so very quickly. The studios had learned their lesson with the VCR in the1980s, initially battling but eventually embracing home-video technology. By the time DVD technology emerged in the mid 1990s, the Hollywood powers had long since learned to think in terms of hardware-software synergies. The VCR by then was a ubiquitous home appliance and the studios’ home-video revenues more than doubled their theatrical income. Thus the studios and their parent companies displayed uncharacteristic good sense, fueled of course by enlightened self-interest, and worked together to fully exploit the radical new system of digital home-video delivery. The results of that cooperation, along with the inherent benefits of the technology itself, surpassed even the most optimistic projections for this new home-video system.

Consider for a moment the phenomenal growth of DVD- as a technology, as a media format, and above all as a delivery system for movies to the home. It’s now become commonplace to note that DVD technology has enjoyed the most rapid “diffusion of innovation” in history, and it’s too seldom noted that the DVD boom took off at the very same time that the high-tech, dot-com market collapsed. It’s worth noting, too, that the DVD’s diffusion has been driven primarily by movies. At the end of 1998, the year that DVD became commercially viable, fewer than 2% of US households had DVD players. Five years later nearly half (46.7%, according to the Motion Picture Association) of American homes had at least one DVD player. In 1998-1999, DVD rentals and sales went from virtually nil to nearly 100 million units. In 2003, over one billion DVD’s were sold, most of them directly to consumers as “sell-through” movie titles. Sell-through DVD’s return far more to the studio-distributors than rentals, which accounts for the studios’ current financial viability – not to mention their increasing reliance on effects-driven, franchise-scale blockbusters.

What’s equally remarkable about the DVD boom is the number of movie titles that have become available in just a few years – a total that surpassed 30,000 earlier this year. Hollywood currently releases only a few hundred movies per annum, so the number of DVD titles available obviously means that the studios are digging deep into their libraries for product. This represents a major break from the VHS home-video era, when the market was geared to contemporary films – although it syncs up quite nicely with cable television, which since the early 1990s has relied more and more heavily on classical Hollywood for programming.

Consumer interest in “old” Hollywood movies clearly has been a pleasant surprise for the Hollywood powers. Indeed, along with the DVD explosion in general, it proves yet again how little the entertainment industry understands its audience. This extends well beyond media content to DVD “players” to the mode of display – i.e., to “TV sets,” if that term still applies at all.

When Sony acquired MGM, the trade paper Broadcasting & Cable made this rather curious and illuminating comment about the purchase: “For Sony and its financial group, TV is a small part of the deal. The group is far more interested in the $1.1 billion a year that MGM has been generating by selling its movies on DVD.” Where and how, one might ask, are consumers watching all these DVD’s? “On TV,” of course, but here too consumer behavior and the marketplace at large are rapidly changing. Just as the studios had no clue how interested consumers might be in old(er) movies, they also were clueless about audience interest in screen format, aspect ratio, and the quality of image and sound. In one of the oddest and most unexpected developments in screen history, letter-boxing has become so prevalent that it’s even being used in TV commercials – not that anyone’s watching them, given the TiVo and DVR technology that’s accompanied DVD’s and a new generation of digital television sets.

One wild card in the Sony-MGM deal is Comcast, a true Hollywood outsider that promises to further complicate the evolving movie-television symbiosis. The nation’s largest cable operator, Comcast recently made a serious run at Hollywood via a failed $54 billion bid for Disney. The investment here is far more modest – a mere $300 million to acquire an eventual 20 percent stake in MGM – but the implications are considerable. Comcast is busily acquiring “content” for its burgeoning VOD (video on demand) service, while another division is rolling out a VoIP (voice over Internet protocol) telephone service. Clearly Comcast is leading the cable industry’s three-pronged strategy to provide video, broadband and telephone service – envisioning an America, perhaps, where media-hungry gadget hounds are making phonecalls on their computers and watching movies on their cell phones.

While the Sony-MGM deal gives Comcast access to a vast movie library, it puts Sony on line with 21 million cable subscribers, which is a significant figure in today’s fragmented television universe. This fall, for the first time ever during the first week of the new TV season, basic cable with its hodge-podge of networks and programming services drew more viewers than the six “broadcast” networks (43% versus 41% of TV households, with the balance watching pay-cable or PBS).

But it’s the millions watching their DVD’s that matter most to Sony, particularly with yet another generation of HD (high-definition) DVD technology poised to launch in early 2005. After the recent rush to DVD players and “home theater” audio-video systems, we may be ready at long last, after decades of hype and disappointment, to make the leap to HD – a leap that traditional television simply could not induce. Whether this occurs, and whether it alters the nature of “watching TV,” remains to be seen. But it would be a delicious irony indeed. A half-century ago, the postwar emergence of commercial television left the Hollywood studio system in ruins and decimated its audience; now a resurgent movie industry and a revolutionary home-video technology threaten to exact their revenge.

Links of interest:

1. Sony USA

2. MGM

3. Time Warner

4. MPAA

5. Broadcasting & Cable

6. DVD Verdict

Please feel free to comment.

Image Credits:

MGM Logo