Netflix Knows How to Make Money Off the New Couch Potato

The Atlantic

Netflix has finally announced a Memorial Day weekend release date for the now 15-episode fourth season of Arrested Development, a beloved sitcom with a devoted audience that the streaming service uncancelled for exactly that purpose: a long weekend of obsessive binge-watching that is now a proven money maker. Indeed, when the show debuts on May 26 as a full season all at once, it could even exceed the success of House of Cards, Netflix's first big experiment with original programming. While the company does not release specific data on the viewing habits of its subscribers, the $100 million gamble on Cards appears to have encouraged the type of behavior Netflix wanted — which is to say, back-to-back-to-back episode sessions that may have sunk couch cushions but likely boosted the Netflix bottom line. 

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During a talk at the AllThingsD conference in February, Netflix Chief Content Officer Ted Sarandos said House of Cards had become the most watched title of anything on Netflix — and that nearly every subscriber who watched one episode went on to watch another. That was for a new series without a cult following like Arrested Development, but other numbers out there seem to confirm that Netflix is onto something. A survey conducted by Cowen and Co. just two weeks after the Cards episode dump in February found that 10 percent of viewers had already seen an average of six of the series' 13 episodes. Third-party Internet traffic monitoring firm Procera also confirmed this addiction: In the first weekend alone, 0.59 percent of Netflix's total North American viewers watched all 13 episodes of House of Cards, according to Variety. That might seem to contradict Netflix's stated goal of luring new subscribers to pay $8 per month for exclusive content, as we explained in this post. It might seem like Netflix would want to string us along with an already beloved show like Arrested Development. But by providing viewers with an entire season, all-new, and all at the same time, Netflix is feeding a machine it built for a reason. Here's why appointment television just got a lot more addictive:

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Binge-Watching Breeds Loyal Viewers

A Loyal Viewer Base Is a More Lucrative Viewer Base

There is every indication that viewers are even more excited about Arrested Development than House of Cards — returning fans were once again fawning over the latest announcement on social media, and there remain two months for new viewers to catch up on the first three seasons. And all indications are that the next few months after the Arrested premiere could be even better for Netflix. "If future original programs are as successful as House Of Cards, it likely leads to a stickier subscriber base over time," Cowen & Co. analyst John Blackledge said in the notes for its February survey. The term "stickier subscriber base" is a reference to Netflix's churn rate — the number of people who quit the service. The higher the churn rate, the more money a company loses. Keeping a subscriber costs a lot less than signing up a new one, so the stickier the audience the better. Or, as Seeking Alpha's David Jackson put it: "It costs a lot to grow your customer base if a large proportion of your current customers cancel their subscriptions each quarter." Paying for original programming is a bid to cut down on quitters.

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Before House of Cards, the streaming service had a pretty high churn rate of 40 to 50 percent annually, according to The Wall Street Journal. Users often sign up and then quit because they feel they have exhausted Netflix's library — especially on Netflix Instant, where new, high-quality movies can be hard to find, and where sometimes you just run out of big, talked about TV shows you're not caught up on yet. But by developing a big new talked about show or two of its own every few months, Netflix has fended that off. (Next up for original programming will be Eli Roth's Hemlock grove in April, followed, eventually, by the Wachowskis with Sense8 in late 2014.) 

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So what happens in between seasons? For that, Netflix can look to HBO as a model. It has a similar churn problem, with users occasionally signing up for their favorite shows, only to cancel when the finale comes along, as detailed in this Economist piece. In order to keep subscribers around longer, HBO launched HBO Go, giving audiences another incentive to stay. Netflix already has that HBO Go service built in with the rest of its Netflix Instant catalog. After the House of Cards finale, Netflix tried to keep people hooked into the service with its magic algorithm. Of course, that may not be enough to sustain the growth over time, which is why Netflix got into the original content game in the first place, but it could help. When HBO launched HBO On Demand, a similar ploy to keep people around between Sunday-night "appointment television," it reduced churn by an estimated 15-20 percent, reported The Baltimore Sun. These kinds of incentives work. 

Okay, but Couldn't Netflix Build this Loyalty Without Binge Viewing?

It's possible. But, the Netflix audience likes the binge, as Netflix's Sarandos recently explained. "All of our subscribers watch multiple episodes," he said. "Nobody watches the way HBO feeds them. Nobody watches Sunday at 9 p.m. Nobody does that. Thats zero." Netflix's internal statistics also show that the people devour shows, time slots be gone, as chronicled in this Wall Street Journal article. Basically, people join Netflix to watch when they want to watch for as long as they want to watch, whenever they want it — the definition of "primetime" to Netflix is, essentially, your free time. If the goal is to build overall loyalty, then why break from the model that works? Plus, it helps to get people addicted to a program in the first place, as our own Richard Lawson wrote after a weekend marathon with House of Cards. To Netflix, that reaction is an indication that they like it and will come back for more. "That's a great sign that people are enjoying it, and getting sucked into it," Sarandos added. 

What About the Race to the Water Cooler?

While Netflix might appeal to its audience of addicts, it could deter others from getting into the show, argued The New York Times's David Carr. People like to talk about shows together. You can't really do that with House of Cards because everyone watches at a different pace. And the water-cooler theory of television will become even more complex with Arrested Development and it's non-linear season-four arc, which centers on a single character for episodes and contains overlapping plot line. That could mean a post-premiere decline in buzz even more steep than House of Cards experience:

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Google Trends showed a similar picture for House of Cards, as Quartz's Christopher Mims pointed out with this chart:

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"By giving up the level of constant social media chatter that accrues to shows that are released episodically, Netflix missed out on the kind of sustained conversations that help a show find its widest possible audience," Mims wrote. And that looked to come true if widest audience correlates social media chatter. But that's the thing about a pressure to keep up — you're still loyal, and you're spending your money and time with Netflix aggressively.

In the end, Netflix wants to get a niche totally hooked with one show — Mad Men and Girls don't do that well in the ratings, at least compared with network TV. And then Netflix wants to get another niche hooked with another show — the overlap between House of Cards DC types and the Arrested Development clever set may not prove to be that high. It's all in the hopes that all these niches, bought with millions in licensing and marketing costs for high-quality original programming, will combine to give millions of users fewer and fewer reasons to cancel, and more and more reason to talk about Netflix — maybe all in a burst, but in one really big burst, with each new big show. Not that many people are crack addicts, but the crack industry is huge. And Netflix wants you to be addicted. So far, it's working.

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