Netflix has a success problem. Some 42 percent of households in the U.S. are subscribers, and nearly 40 percent of global Internet traffic can be attributed to the streaming service. The majority of Netflix's TV library comes from broadcast and basic cable networks, which are realizing they may have sown the seeds of their own destruction: Many media company CEOs spent their third-quarter earnings calls vowing to throttle back on their sales to streaming services that are competitors for viewing time.
So what's a streaming service to do? Netflix Chief Content Officer Ted Sarandos, speaking at the UBS Global Media & Communications Conference in New York City on Monday morning, told investors that these media companies simply need to accept Netflix as just another buyer of content.
" 'We shouldn't have sold to Netflix' is a foolish thing to say," Sarandos said, citing the example of a studio like 20th Century Fox producing "Modern Family" for Fox competitor ABC. "Selling to Netflix is no different. You're better off selling to the highest bidder."
At the start of 2015, Netflix was set to shell out $9.4 billion for original and acquired content.
There are more bidders than ever these days. In addition to Netflix, streaming services Amazon Prime and Hulu are hungry for content. Hulu, in particular, has ramped up its spending on content, both original (family dramedy "Casual") and syndicated (this summer's high-profile purchase of "Seinfeld"). But Sarandos said Netflix's two main streaming competitors are mostly driving up prices for themselves by being more indiscriminate in their spending: "We're disciplined enough to pass when prices get irrational."
Sarandos also downplayed concerns about any future reluctance to sell to his company, saying that no single acquired show is responsible for the growth of their business. "Some of the content is remarkably interchangeable," he said. And, Sarandos pointed out that reluctance is sometimes mutual, as when his company and Discovery didn't renew their program licensing agreement in January of 2015.
Who Needs Ratings?
While a network like Discovery sees a lot of revenue from subscriber fees from pay-TV providers based on how many viewers want those channels, Netflix's model is dependent upon viewer engagement, i.e., how much time they spend watching stuff on Netflix. "If you have a premium brand, you better deliver the viewing, too," Sarandos said.
Netflix's future lies in international markets, according to Sarandos. "Remember, we're a global company," he said, defending the company's much-derided four-movie deal with Adam Sandler. A Sandler movie may bomb domestically, but countries like Venezuela are still very much fans of Sandler, and so investing in that kind of international moneymaker makes more sense than it might originally seem. The same goes for the difficult task of acquiring global rights to TV series, as opposed to merely buying those rights from studios and networks in a piecemeal fashion based on countries or regions.
Even in developing original content, Sarandos said the company is looking to series that appeal to more than just American audiences, citing the global success of the largely Spanish-language Pablo Escobar series "Narcos." (A cautionary reminder, though: Netflix does not release viewing statistics for its content, so any claims about performance should be taken with a nice big container of Morton salt.)
The company isn't giving up on acquired content, merely being more selective, à la its deal with Disney that gave it several original Marvel series and rights to a big portion of the Disney library, including the "Star Wars" and Marvel films. "When you say, 'We have the "Star Wars" movies,' that means something to our customers," Sarandos said. "When you say, 'We have the Paramount movies,' that means nothing to our customers. No offense, Philippe [Dauman, CEO of Paramount parent Viacom]."