Inside Netflix - how will world's biggest streaming company weather storm of slipping subscriptions and rising rivals?
It pours money into TV and film on an unprecedented scale, winning Oscars and critical acclaim, but with new rivals on the horizon and subscriptions slipping, how will it weather the storm? Mick Brown heads to its LA HQ to find out
Walking into the Los Angeles headquarters of Netflix a few weeks ago, I passed a young woman standing on the street outside holding up a sign: “Netflix Save The OA. Hunger Strike Day 1”. Her name was Emperial, and she was protesting against the decision by Netflix to drop a programme called The OA, a sci-fi/fantasy series, particularly popular among millennials, after two series.
In the weeks that I’d been roaming around the Netflix website prior to my visit, I’d not come across it, but that’s hardly surprising. There are thousands of titles on Netflix: feature films, series, documentaries, stand-up comedy, reality shows. It is one of the characteristics of the site that while there is so much to watch, there is also so much to miss. You could gorge on Netflix for a lifetime and never be satiated.
It’s impossible to tell how many people have watched The OA because Netflix is reluctant to release viewing figures for any of its shows, but it has become enough of a cult to inspire a hunger strike.
That’s the other thing about Netflix. Among its ‘members’ (Netflix is a subscriber service and does not talk about ‘viewers’) it inspires a passionate, almost obsessive, involvement. To not be watching Netflix is to somehow miss out on what everybody else is talking about.
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The Netflix offices, a 14-storey building, stand in the heart of old Hollywood, on the site of the old Warner Bros studios, where the first talking picture, The Jazz Singer, was filmed in 1927. The historic Paramount studios are a short walk away. There could be no more potent a symbol of how tech money is transforming the traditional film and television industries — what we watch, and how and when we watch it.
We have the ambition to serve the needs of the artist and we’re not afraid to commit to budget levels that they need to tell their story properly. Cindy Holland, Netflix’s vicepresident for original content
In the years since its modest beginnings in 1997 as an internet service renting out DVDs by post, Netflix has risen to become one of the most potent forces in broadcasting, the world’s largest film and entertainment streaming service, with 151 million subscribers (158 million since third-quarter figures were released last month) in 190 countries — almost everywhere except Syria, North Korea and China. Valued at $120bn, it’s number two on the list of the top 100 digital companies, second only to Amazon.
The battle is on
For years, Netflix had the world of internet streaming all to itself, but that is changing. Amazon’s rival direct-to-consumer service will shortly be joined in Britain and Ireland by Apple TV+; Disney+; and BritBox, a collaboration between the BBC and ITV, streaming ‘best of British’ programming; and in America by WarnerMedia’s HBO Max and NBCUniversal’s Peacock.
All will not only challenge Netflix for new subscribers, but, crucially, potentially cut off the supply of much of the licensed content that has been the mainstay of Netflix’s output until now, driving the company towards the most expensive commissioning project in television history. The battle is on — and for some, it will be a battle to the death.
The lobby of the Netflix building has been described as “the town hall of Hollywood” — a magnet for producers, directors and talent pitching their wares. On one wall, an 80-feet-by-12-feet screen is projecting clips from a recent Netflix offering, Homecoming — Beyonce’s behind-the-scenes documentary about her performance at the 2018 Coachella music festival. All around are glass display cases containing her costumes from the show. Another wall is covered with 3,500 plants. A coffee bar offers free drinks and snacks.
The company employs some 6,500 people around the world, themselves subscribers to a ‘Netflix culture’, enshrined in an extensive mission statement — “We want to entertain everyone, and make the world smile” - that at times resembles a cult handbook.
Employees are urged to “care intensely about our members and Netflix’s success”, and told, “Succeeding on a dream team is about being effective, not about working hard. Sustained ‘B’ performance, despite an ‘A’ for effort, gets a respectful severance package.”
The co-founder, chairman and CEO of Netflix is Reed Hastings. A quietly spoken man in his late 50s, dressed in a sports jacket and an open-necked shirt that give no hint of his estimated $3bn net worth, Hastings has been described as “the most powerful person in world television”.
He offers a faint smile and a shake of the head. “No.”
That would be Bob Iger, he says, the chairman and CEO of the Walt Disney Company. “Disney has $80bn in revenue. We have $20bn.” Netflix has come a long way - “But we have a long way to go.”
There is an apocryphal story that Hastings was inspired to start the company in 1995 after being charged $40 by his local Blockbuster store for the late return of Apollo 13. It wasn’t quite like that, he says. Hastings, a tech entrepreneur, and Netflix’s co-founder
Marc Randolph, a marketing executive, were kicking around ideas in 1997 and hit on the concept of a business that would avoid the tiresome trip to the video store by renting out DVDs over the internet. Unable to get hold of an actual DVD — then available only in a handful of test markets — they bought a CD, stripped it of its packaging and despatched it in a greetings-card envelope to Hastings’ home to see if it would arrive undamaged.
Netflix killed the video star
It was the beginning of a long battle with Blockbuster that culminated in the arrival of technology that allowed content to be streamed directly to computers and, eventually, televisions. In 2007, Netflix launched its service, streaming content licensed from film and TV companies.
In 2010, Blockbuster filed for bankruptcy. Hastings admits that when the store closed in his home town, he felt a moment of elation. “But it meant that a lot of people lost their jobs, so there was no joy in that.”
A key to Netflix’s early success was encouraging ‘binge-watching’ by making whole series available online at once. “We get the credit for that,” Hastings says. “But the real credit should go to DVD box sets. My wife and I would sit in bed and watch Entourage, episode after episode...”
“That was the big idea that made Netflix,” says Andy Harries, whose production company, Left Bank Pictures, makes The Crown for the streaming service.
“When they told people what they were going to do, most of the studio heads and TV people told them they were mad. All the giants were sleeping, to be truthful. They were way too slow to realise the danger Netflix was presenting.”
In 2013, it took its first steps into producing its own original content, paying $100m for two 13-episode series of the political drama House of Cards, starring Kevin Spacey and initially directed by multi-award-winner David Fincher.
“We’d realised that the more successful we were in on-demand delivery of content, the existing networks would start to want to keep that content for themselves, or there would be more competition that would be driving up the prices for those programmes,” says Cindy Holland, Netflix’s vicepresident for original content.
The women’s-prison drama Orange Is the New Black would prove another early success. But it was The Crown that was to really project Netflix to a global audience.
The producers of the series, Andy Harries and Stephen Daldry, had originally envisaged the project being commissioned as a joint production between the BBC and an American network, and flew to LA to spend a week in meetings with network chiefs. Their last meeting was with Netflix, who, based on Peter Morgan’s scripts for the first two episodes, immediately committed to 20 episodes at a reported cost of £100m.
“Frankly, it was not a hard decision,” Holland says.
“When it’s Peter Morgan and Stephen Daldry wanting to do something related to the Royal family, you say yes.
We knew it would really build on our initial success in original programming, particularly in the UK, but would also resonate globally.”
I love Netflix, but f*** Netflix. Helen Mirren
The critical success of House of Cards and The Crown not only established an artistic yardstick; it also demonstrated to the rest of Hollywood that big-name directors and actors were prepared to work for a streaming service. “Until House of Cards launched, people were writing, ‘Why is David Fincher making webisodes?’” Holland says. “They couldn’t understand it.”
Eighty per cent of Netflix content continues to be licensed from other companies, but it is pouring huge behind-the-scenes documentary about Beyonce’s performance at Coachella last year, is a recent offering from the streaming service amounts into developing original programming. It has been reported that of the $12bn spent on content in 2018, $3bn was on Netflix Originals — up from $1.6bn in 2017.
Overall, Netflix is expected to spend around $15bn on content this year. By comparison, the BBC spends around £3.7bn (about $4.7bn), including its radio output (“But we make it go further than Netflix,” a BBC source told me).
Netflix’s huge budgets have proved a magnet for directors and actors whom one would not normally expect to find on a streaming service. The film Roma cost $15m to make, but Netflix then spent a reported $25m on what has been called the most expensive Oscar campaign in history, which led to the picture winning three awards, including best director for Alfonso Cuaron.
Martin Scorsese took his latest film, The Irishman, with Robert De Niro in the lead role, to Netflix after Paramount, which had produced his recent films, reportedly baulked at the budget of $159m — and its proposed running time of three-and-a-half hours. “It’s not just a question of the purchasing power,” Holland says.
‘It’s more that we have the ambition to serve the needs of the artist and we’re not afraid to commit to budget levels that they need to tell their story properly.”
“It works if it’s a great film and everyone watches it,” Hastings adds. “The danger is putting that much money in and it turns into Heaven’s Gate [the most expensive flop in Hollywood history]. But Scorsese is a classic film guy, and it’s turned into an amazing epic, incredible.”
He pauses. “It’s back to The Crown story. We saw it, ‘OK, we’re in...’ What makes our competitors crazy is that we have that money to spend, and we’re doing this in a big way.” He laughs. “We’re definitely shaking things up.”
Netflix does not release figures on how many films, series, documentaries and reality shows can be accessed at any given time, but it’s estimated the company released close to 1,500 hours of new programming last year.
Indeed, scroll through the interface and you experience a growing feeling of paralysis about what to watch — which Hastings calls “the paradox of choice”.
Logging into Netflix, no two viewers see the same home page because content is exclusively tailored to each individual, using an algorithm that has attained an almost mystical significance in broadcasting. It is based not only on what you might have watched in the past, but on where you fit into some 2,000 ‘taste clusters’ identified by Netflix data.
“If they want to make you watch something, they can really push it at you,” says Harries.
The sheer volume and range of programmes Netflix produces has both revolutionised and universalised our viewing habits. A reported 34 million people watched Money Heist, a Spanish-made drama based around an Ocean’s Eleven-style bank robbery. The British-made teenage drama Sex Education reached an audience of 40 million in its first four weeks, including in Thailand, France and Spain.
These are figures that would be impossible for any regular TV show to achieve. Boosted by the power of social media, Netflix has become the new source of global watercooler moments.
This is nowhere more true than in documentaries — a field in which Netflix excels, applying the principle of multi-part series to a form customarily restricted to a feature-length format. One of Netflix’s biggest successes has been Making a Murderer — the story of Steven Avery, who served 18 years in prison following a wrongful conviction for sexual assault and attempted murder — which was first released in 2015, and ran for 20 episodes.
Another is this year’s Fyre, about a disastrous music festival in the Bahamas.
“Social media has completely eradicated geographical borders and time zones,” says Lisa Nishimura, vice-president of independent film and documentary features.
“You saw people connecting with each other in the four corners of the world saying, ‘Did you watch Fyre?’ It’s very difficult to generate a mass of a community that is watching something together, and that I think has been transformative of Netflix — people can instantaneously be part of that conversation.”
Netflix has grown on the simple premise of pouring in huge investment to provide more programmes to lure new subscribers. That means accruing huge debt — $12.5bn in Netflix’s case, although Hastings maintains that’s “a tiny amount” set against the company’s worth of $120bn.
In July, Netflix announced that for the first time since 2011 subscriptions in the US were falling, with 126,000 subscribers cancelling their membership. The company had forecast adding five million subscribers globally in the second quarter of 2019, but ended up bringing in only 2.8 million (Third-quarter figures forecasted seven million new subscribers; the actual amount of new subscribers came in at an investor-confidence-recovering 6.8 million). The Netflix share price immediately dropped by nearly 20pc.
Hastings shrugs off the figures as a minor blip.
“There’s a lot of confidence in the business because the internet is growing. That doesn’t mean the competition is not going to be a big threat and we’re not going to have challenges, because we will. What we represent to customers is great variety, so we’ll continue to focus on that, and then other services will do other things.”
But not everyone agrees with Hastings’ suggestion that there’s room for everybody. “Given the choice of five or six services, few people will subscribe to all of them,” says Tom Harrington of media analysts Enders.
“If, at the end of the month, you look at your bank statement and realise you haven’t used Amazon or whatever, you’re going to eventually unsubscribe.
“Netflix have 151 million subscribers worldwide. They make more new programming than anyone else. Everyone else is coming from a standing start. They are by far the dominant player; but the question is, ‘How do they maintain that?’”
Hastings believes the answer is to offer subscribers more programmes made in their own countries, with a view to becoming what Holland describes as “a new-age global version of the traditional Hollywood studio.”
Netflix has development offices in 19 countries, including Mexico, France and Germany. But by far the largest presence outside America is in the UK, where over the coming year the plan is to invest $500m in developing home-grown programmes — including taking a long lease on Shepperton Studios for film production.
The new head of content in Britain is Anne Mensah, the former head of drama at Sky, who talks of empowering young
British talent like Laurie Nunn, whose teen comedy-drama Sex Education failed to find a home anywhere else, but has proved a huge success for Netflix.
Critics worry that the huge spending power available to Netflix, and other streaming services, has the effect of sucking talent away from traditional broadcasters such as the BBC. One example of this is the exclusive deal, reportedly worth $20m a year, that Phoebe Waller-Bridge has recently signed to make programmes for Amazon (which co-produced Fleabag with the BBC).
“We’ve been really mindful of not wanting to upset the ecosystem here [UK],” says Mensah. “It’s about offering creatives more opportunity, not us versus anybody else. And surely that’s only good for the UK economy.”
Nonetheless, the inexorable rise of Netflix, and the imminent arrival of other streaming services, makes some people nervous.
In April of this year, Helen Mirren expressed fears that making movies that go direct to streaming is depriving audiences of the singular experience of seeing films in a cinema, saying, “I love Netflix, but f*** Netflix.”
But Cindy Holland insists it’s not the end of Hollywood, or television, as we know it.
“The entertainment business is large, and there are many options that consumers have, and we’re just one small part of that landscape. People thought the stage experience would die when radio came in; then people thought radio would die when television came in. But all these forms still exist and are quite healthy. The audiences are the ones who will win,” she said.
“I’m sure terrestrial TV is good for another five, 10, 15 years, but ultimately it’s a declining business,” adds Andy Harries. “Virtually no one under 30 even thinks of watching scheduled news on TV.
It’s all through social media. In five years’ time there may be only two or three players dominating global television. It will be Netflix, possibly Disney+; it may well be Apple or Amazon. But it certainly won’t be all of them.”
The question is, how big can Netflix get?
Despite the recent dip, Hastings believes that subscriber numbers in the US alone can grow from the present 60 million to 90 million, while analysts have predicted that the company could reach 200 million subscribers around the world by the end of next year.
“India, Brazil, Africa...” Hastings waves a hand. “We’ve been at it for 20 years, and we’re in it for the long term. Look at it this way: YouTube has two billion active users.” He pauses to let this sink in. “The internet is big.”
PS: And what of Emperial? Reader, she survived. After 13 days without eating, and four weeks standing on the corner outside the Netflix office, she abandoned her protest. She posted a message on Twitter. “No one’s done that for a show before. That sends the message, ‘This show is important’. People will remember this cancellation for years to come. It will be news when it returns.”
It probably won’t.
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