Can Netflix Sell U.S. Users on Foreign Shows?

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To all Netflix users: get ready for Norwegian gangsters, British vampires and Roman degenerates.

The online video giant went on a spending spree at international television market MIPCOM last week and returns with its bags stuffed with foreign-made series that Netflix hopes will appeal to its 25 million subscribers.

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They include Lilyhammer, a bilingual gangster drama starring Sopranos alumnus Steven Van Zandt as an ex-mobster sent to Norway via the witness protection program and the French/German co-production Borgia – a historic drama centered, like Showtime’s The Borgias, on Medieval Rome’s most nefarious family created by Tom Fontana(Oz) and starring John Doman(The Wire). Netflix has also licensed British supernatural drama Being Human, which follows three housemates who happen to be a ghost, a werewolf and a vampire.

Being Human, both the British original and Syfy’s U.S. remake, have appeared on American screens before, but Lilyhammer and Borgia will be Netflix premieres.Together with House of Cards, Netflix’ upcoming remake of the BBC drama starring Kevin Spacey and directed by David Fincher, they mark the company’s push into original, first-run drama series. Netflix has already committed to a second season of both Borgia and Lilyhammer, suggesting its taste for original and foreign-made fare is no passing fancy.

At the moment, the company is also in a bidding war with Showtime and Hulu for the rights for the relaunch of cult comedy series Arrested Development. The series, cancelled after three seasons on Fox, will return for a limited run series intended to set up a feature film version of the show.

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"Netflix can go after non-exclusive content, which is more of a commodity, or they can try to pursue exclusives and originals, which bring a higher risk," said Janney Montgomery Scott analyst Tony Wible in explaining the pros and cons of original fare. "The problem is there is no more exclusive content to be had. They have to make the exclusive content now" - or find it overseas.

That is moving the company into new territory though. "Netflix is used to buying stuff based on previous release information and data collected from their users," said Wible. "They can try to use that here, but that's not a guarantee for success."

Speaking at MIPCOM, Netflix chief content officer Ted Sarandos said the company’s shift to original series was in part a reaction to customer demand. He pointed out TV shows account for 50-60 percent of total viewing on Netflix.

With Netflix’ high-profile content deal with Starz set to expire in February, the company needs new, fresh shows to feed user demand, and analysts say it has started to redeploy money it would have spent on a Starz renewal. The Starz deal cost Netflix $30 million a year, but a renewal was expected to cost multiples of that.

“We’ve moved very aggressively into this space,” Sarandos said. “The growing audience for these 1 hour serialized dramas is typically on pay TV: Showtime, HBO or Starz, those ones who are least likely to want to sell their shows to me on our (second-run) season-after model. So we have to develop the muscle to create and distributing these shows ourselves.”

Sarandos said the company would not be spending much on traditional marketing and promotion for its first-run series, instead relying on its patented algorithms to put Borgia and Lilyhammer in front of users most likely to want them. So Lilyhammer might be recommended, say, to fans of the Sopranos. Netflix used that tech-driven strategy successfully with Starz’ Spartacus, pitching the series first to fans of the movie 300.

“It’s kind of the opposite of launching a movie where you try to get it into as many theaters as possible and get as many people in the seats the first week and you have 50 percent fall off the second week,” said Sarandos. “We’re doing the opposite – building it on the basis of people who love the show. And then they’ll tell their friends and the algorithms will also influence and put the show in front of more people.”

Analysts said they expect Netflix to stay focused on its recommendation feature, even though it could experiment with additional approaches. "There is no appointment viewing on Netflix now," said Lazard Capital Markets analyst Barton Crockett. "So, the customized view you get right now will be the main way to promote new series as well. And they'll probably send you an email when an original series that you may be interested in is online."

Added Michael Pachter, analyst at Wedbush Securities: "I don't think they will market much differently than they do now." But he expects viral marketing of original or exclusive fare to "drive more loyalty to Netflix."

No one expects Netflix to launch a special section or channel for its original fare online.

“I think with this ability to zero in on people’s taste you can get around all of the pre-conceived prejudice about what works in terms of TV content,” said Sarandos. “Like can content be subtitled, does it have to be in English, can they have accents? Lilyhammer is a great example of a show that would be very difficult to break into the U.S. market because of the pre-conceived of buyers. And I think it is going to be very successful… It’s been proven that selling Hollywood to the world is a big business. But I think the world to the world is an even bigger business.”

Sarandos added that Netflix can also afford to be more flexible in how it releases a show, suggesting the service could premiere several episodes at once, allowing fans to “binge” on their favorite series, much like buyers of DVD box sets.

“The Netflix approach is ideal for a show like Lilyhammer,” says Jens Richter, MD at SevenOne International, which handles international rights for the series. “In the traditional broadcast space it’s always about the short-term ratings. If the ratings aren’t right, the show’s canned after 4 or 5 episodes. Netflix is more about brand building, building a subscriber base.”

Adding original or exclusive series also puts on notice other online content providers, according to analysts.

"Content still is king and the best way to maintain a content distribution franchise is to ensure that it delivers content no one else can," said Forrester Research analyst James McQuivey. "You can either shoot for blockbusters a la HBO and Showtime -- which Netflix is doing with Spacey's $100 million deal -- or you can shoot for broad selection that means something in aggregate, which the company also appears willing to do."

While he said he "can't really explain what Netflix sees in its data to suggest Lilyhammer will succeed," he and other analysts said the investment in foreign fare could be a low-cost play with potential upside. "Netflix needs content, period," explained Pachter. "I can't say that two shows will make a meaningful difference, especially U.S. rights to foreign shows, but they probably didn't spend much on them."

All of this puts Amazon and Google on alert: Netflix intends to stay relevant in the video business even as its original strengths become commonplace strategies. If I were Apple, I would just buy Netflix right now before its stock gets any higher!

And indeed Sarandos calls Lilyhammer, Borgia and House of Cards experiments to test what Netflix users want. “At the moment this (budget for first-run series) is a very large commitment but it is very small relative to our content spend…if the take up is good we will increase the spend,” he said.

But Lazard Capital Markets analyst Barton Crockett sees challenges for Netflix's push into original series, including ones from abroad. "There is a big question whether they can gather an audience for new shows," he said. "It's different from what the service has been, which has been focused on movies and TV shows people recognize. It's another thing to log in and see a promotion for House of Cards, which you have never heard of or seen before."

Sarandos seems to have anticipated this problem. For their original series, Netflix’ focus is more on access than exclusivity, he says. Sarandos points to Australian tween mermaids series H20: Just Add Water– a Netflix hit – as an example of an international show “that just wasn’t getting distributed under the old method.”

Even with Borgia, a $35 million production, Netflix will only have exclusive streaming rights for North America, meaning the Tom Fontana series could still be aired on a traditional pay TV or cable broadcaster.

“It’s non-exclusive, which at first seems strange but it could make sense for Netflix,” says Eric Welbers, managing director of Borgia’s sales outfit, Beta Film. “Having the show on another channel could drive more users to it on Netflix, if they missed an episode or want to catch up.”

Observers have in recent months often compared Netflix's push into original fare to premium channels, such as HBO, Showtime and Starz. But Crocket said the comparison isn't quite fair. "Netflix's investment in originals is so far from HBO - like Pluto from the sun," he said. "It's a different orbit. It's a totally different zip code. It's something that's not at a level that's meaningful yet."

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