Netflix's Ted Sarandos Explains Original Content Strategy

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With a growing library of viewer options, the company's chief content officer explains why they will never rival cable television.

Netflix entered the original content business because it saw the prime programming that drove its streaming service becoming less available. The company was faced with a DVD market in decline and fewer serialized TV shows being made by traditional producers because they are tough to sell in the syndication aftermarket.

“I looked at that and realized we were faced with a supply source that wasn’t reliable,” said Ted Sarandos, chief content officer of Netflix, at the closing session of the UCLA Pulse Conference 2012 on Friday.

Netflix didn’t want to spend money developing programming itself and didn’t see a need to spend a lot on marketing. So it invested a sizable sum in the content itself, with an eye on shows that mirror what has been popular on its streaming service.

“People need a longer relationship with a show than one or two or three weeks,” said Sarandos. “What we do is provide a longer time for shows to come to life for the audience.”

The important thing is that people like what they see. “If they like it they watch more,” he explained. “If they watch more, they will value the service more.”

So far that plan for content has led to five show commitments in the U.S., including Lillehammer, starring Steve Van Zandt, which has already premiered; and the upcoming House of Cards, directed by David Fincher and starring Kevin Spacey; and a new season of the cult series Arrested Development. They also have coming Hemlock Grove from horror director Eli Roth, which Sarandos described as Vampire Diaries meets True Blood.

Netflix pays for content based on how many people its executives think will watch. The company then measure success not by Nielsen, but with its own internal data that shows what people watched and how much. It doesn’t have to be on one night, either, so the company doesn't have to market it as appointment TV. It also does not release viewership numbers to the outside world. 

While serialized dramas don’t work as well on broadcast TV, that was exactly what Netflix wanted, said Sarandos. That is why it premiered all eight episodes of Lillehammer at once, even though traditional TV marketers told executives that was a mistake. They wanted to give the audience what it wanted and then let them watch as much as they want.

“What we do is try to find the perfect show for an audience,” he said.

The audience then rates the show on a Netflix system of one to five stars. That data is used to determine if the show is a success in the Netflix world, what kind of show that person wants to see (which is used to choose other shows), and to give the customers exactly the programs they want.

“I don’t just want to get them hooked,” said Sarandos. “I want to get them strung out,” meaning watching over a long period.

What little advertising it did, said Sarandos, included some billboards in Los Angeles. Those were not meant to draw customers, although they might, but to let the entertainment industry know that Netflix was now in the original content business. It was a way to entice talent.

Sarandos recalled talking to Fincher while they were negotiating for House of Cards. Fincher had already developed most of the concept, had three episodes scripted and a bible for the whole series. He also was ready to use his regular movie industry crew, and was receptive to doing a deal for not one but for two seasons at once.

“I said to David Fincher, ‘If this turns out to be the best work you ever do, it’s not going to qualify for an Emmy award,’” said Sarandos. “And he said, ‘I’ve got a lot of awards already.’”

Sarandos took issue with those who call Netflix a cable killer. He said it doesn't compete for first run movies and doesn't provide a service that gives viewers sports, big event programs, reality shows or news that need to be seen immediately. He said people will continue to watch free TV and cable TV for those tentpole and event shows.

Sarandos agreed that Netflix does compete with a service like HBO Go, where viewers can watch what they want when they want and where they want. “We are definitely becoming like each other,” he added. “Are we becoming a cable channel? No. But cable channels are becoming more like Netflix.”

He feels HBO is the gold standard of premium programming but said most of its best shows appeal to the viewers on the coasts and not to the rest of America. He sees Netflix, with its vast offering of old TV shows and movies, as well as the original content, as a service that will appeal to a larger audience ultimately.

“Because we are direct to the consumer and cheaper,” said Sarandos, “we can be much broader.”

He said he doesn’t consider Amazon’s download service or Hulu Plus competitors “because we don’t do VOD,” adding: “We co-exist with all of these things.”

He also said it is a myth that the company will suffer from escalating cost of content. Originally it bought what was available after it had played out in theaters, on cable and free TV, which was often nine years or more after it was made.

He said now the company has turned to TV shows instead of movies because it could get episodes to run shortly after they aired on a network. That mix has created a huge pool of choices that in itself is appealing to consumers who want a lot of programs from which to choose.

Netflix is spending more because it is buying more content than before, but Sarandos said the value is in locking up premium content now.

“The thing that costs me a dollar this year doesn’t cost me two dollars next year,” said Sarandos. “But I am buying more dollar things.”

Now that Netflix is rolling out in international markets, the company is mixing American content with local content in each market. But Netflix’s strength is still the Hollywood product that the whole world wants to see, so the formula is about 80 percent American shows and 20 percent local.

Sarandos said many of the older American shows are being rediscovered. A serial drama that hasn’t produced a new episode in more than five years could become a huge hit for Netflix in Latin America.