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Why Netflix can’t afford to chill

Netflix has increasingly more competition than it did when it first began. While still a common household staple, it's difficult to tell whether they'll survive the battle
Netflix has increasingly more competition than it did when it first began. While still a common household staple, it's difficult to tell whether they'll survive the battle Credit: Photomontage by Sam Moppett /Disney Enterprises Inc, Getty Images, BBC, Netflix

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 Netflix weather the storm?

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, she said, was Emperial, and she was protesting against the decision of Netflix to drop a programme called The OA after two series. The OA is a sci-fi/fantasy drama series, particularly popular among millenials. 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 comedies, 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, buried in the recesses of its search engine. 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 are reluctant to release viewing figures, 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 server and does not talk about ‘viewers’) the service inspires a passionate, almost obsessive, involvement. To not be watching Netflix is to somehow absent oneself from the cultural conversation. 

The Netflix offices, a 14-storey building resembling a Jenga game, stands 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. 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 in 190 countries - almost everywhere except Syria, North Korea and China. Valued at $120 billion (£98 billion), the company is number two in the list of the top 100 digital companies, second only to Amazon.

For years Netflix had the world of internet streaming all to itself, but that is about to change. Amazon already has its own direct-to-consumer service, and will shortly be joined in Britain by Apple TV, DisneyPlus and Britbox, a collaboration between the BBC and ITV streaming ‘best of British’ programming, and in America by Warner Media’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, further driving the company towards the most expensive commissioning project in television history.

Olivia Colman as the Queen in The Crown Credit: Netflix

The battle is on - and for some it will be a battle to the death. The lobby of the Netflix building - all 4,780-square-ft of it - has been described as ‘the town hall of Hollywood’ - a magnet for a producers, directors and talent pitching their wares.

On one wall an 80ft by 12ft video screen is projecting clips from a new 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, like museum exhibits. Another wall is covered with 3,500 living plants. A coffee bar offers free drinks and snacks. You could spend all day here. 

Netflix employs some 6,500 people around the world, themselves subscribers to a ‘Netflix culture’, enshrined in an extensive company value statement - ‘‘We want to entertain everyone, and make the world smile’ - that at times  resembles a cult handbook. Employees are enjoined to ‘care intensely about our members and Netflix’s success.’ ‘You say what you think, when it’s in the best interest of Netflix, even if it is uncomfortable’. ‘You are quietly confident and openly humble.’ ‘You only say things about fellow employees you say to their face.’

There is no place for ‘brilliant jerks’. ‘Average’ is not good enough. ‘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.’

‘Our version of the great workplace,’ it goes on, ‘is not sushi lunches, great gyms, fancy offices, or frequent parties. Our version of the great workplace is a dream team in pursuit of ambitious common goals, for which we spend heavily.’

No sushi lunches or gym perhaps, but light and airy offices, hung with posters of Netflix productions, food and drink stations at every corner (help yourself!), with 11 kinds of milk for your tea or coffee, a ‘mindfulness’ room and a ‘lactation room’ for nursing mothers. 

The co-founder, chairman and CEO of Netflix is Reed Hastings. A quietly spoken man in his late fifties, dressed in a sports jacket and open-necked shirt that gives no hint of his estimated $3 billion 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, he says, would be Bob Iger, the Chairman and CEO of The Walt Disney Company. ‘Disney has $80 billion in revenue. We have $20 billion.’ 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 in late fees by his local Blockbuster store for a late return on Apollo 13. It wasn’t quite like that, he says.

It was two years later that Hastings, a tech entrepreneur, and Netflix’s co-founder Marc Randolph, a marketing executive, were kicking around ideas 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 compact disc from a music store, stripped it of its packaging and dispatched it in a greetings card envelope to Hastings’ home to see if it would arrive undamaged.  It did. 

It was the beginning of a long and bitter battle with Blockbuster that culminated in the arrival of technology that allowed content to be streamed directly to computers and, eventually television. In 2007 Netflix launched its service, streaming content licensed from film and TV companies. (The video sharing service YouTube had launched two years earlier.)  

In 2010 Blockbuster filed for bankruptcy. Hastings admits that when the Blockbuster store in his home town closed 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 on line in one fell-swoop, obviating the need to wait to watch the next episode of a favourite show. ‘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 makes The Crown for Netflix. ‘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. They all just thought it was an opportunity to make a bit more money by letting their catalogues go on contracts that were tying them to Netflix for three, five years, whatever it was.’ 

 In 2013 Netflix took its first steps into producing its own original content, paying $100 million for two 13-episode series of House of Cards, the political drama starring Kevin Stacey and initially directed by the multi-award winner David Fincher. 

Robin Wright plays Claire Underwood in House of Cards Credit: David Giesbrecht/Netflix

‘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 vice-president for original content. ‘At some point you either have to make your own content because others won’t sell to you, or because prices are getting high enough that you might as well be investing in your own.’ At the same time, the company launched the women's prison drama Orange Is The New Black.

‘House of Cards was basically Richard the Third,’ Hastings says. ‘Think of it that the people who like Shakespeare loved House of Cards. But Orange Is The New Black was actually many times more popular. That was totally original.’ 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 £100 million. ‘Frankly, it was not a hard decision,’ Holland says. ‘When it’s Peter Morgan and Steven 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.’

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. ‘Literally, until the day House of Cards launched,’ Holland says, ‘people were writing, “why is David Fincher making webisodes?” They couldn’t understand it.’ Eighty per cent of Netflix content continues to be licensed from other companies, but it is pouring huge amounts of money into developing original programming. It has been reported that of the $12 billion spent on total content in 2018, $3 billion was on original programming - up from $1.6 billion in 2017. Overall, Netflix is expected to spend around $15 billion on content this year. By comparison, the BBC spends around £3.7 billion, 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, actors and content that one would not normally expect to find on a streaming service. The film Roma cost $15 million to make, but Netflix were then able to spend a reported $25 million on what has been called the most expensive Oscar campaign ever, which led to the picture winning three Academy Awards, including best director for Alfonso Cuaron. 

‘I suspect a traditional studio would have been reluctant to make a black and white film in Spanish at $15 million. And then to spend another $25 million promoting it - nobody would have done that,’ says one industry watcher. ‘But it’s about prestige projects that win prizes, and making relationships and trying to create an environment where the best talent feels important and wants to come to. 

‘They came to us; we loved the film,’ Hastings says. ‘But I’m sure Bob Iger loved the film too. But it wasn’t his business. Our business is more flexible.’

Peaky Blinders was a powerful gang run by returning war hero Thomas Shelby (played by Cillian Murphy in the BBC series) and his family Credit: BBC/Robert Viglask

Martin Scorsese took his new film The Irishman, with Robert De Niro in the lead role, to Netflix after Paramount, who had produced his films in recent years, reportedly balked at the budget of  $159 million - and its proposed running time of three and a half hours.  ‘It’s not just a question of the purchasing power,’ Cindy Holland says. ‘All the conventional studios have the ability to invest in that. They were just scared to. 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 Heavens Gate [legendarily, 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, were in...’

All of this, I say to Hastings, it’s like a spending spree.

‘It is. And this is what makes our competitors crazy, that we have that money to spend and we’re doing this in a big way. But it makes our customers happy, because there’s variety today, and more variety coming.’ He smiles. ‘We’re definitely shaking things up.’   Netflix does not release figures on how many films, series, documentaries, reality shows - and so on - can be accessed at any given time; the number varies day by day according to countries and licensing rights. But the company released an estimated 1,500 hours of new programming last year. 

Scroll through the interface and you experience a growing feeling of paralysis about what to watch - what Reed Hastings calls ‘the paradox of choice. It’s the same with mobile phones, shoes... You walk into a shoe store and think “oh my gosh”.’ He laughs. ‘And yet we still go to the shoe store.’

Penn Badgley (who is known for his role as Dan Humphrey in Gossip Girl) plays Joe Goldberg in the Netflix thriller series You Credit: Netflix

It is a Netflix maxim that it does not  have a ‘brand identity’, in the way that Disney, HBO, or indeed the BBC do.  Rather its brand identity lies in personalising the bewilderingly large range of content for the each individual viewer, based on an algorithm that has acquired an almost mystical significance in broadcasting. 

Logging on to Netflix, no two viewers see the same home page - what you see is, theoretically, exclusively tailored to you, 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 and based on what other people with similar tastes to you have also liked.

‘There’s no broader shop window for a piece of television content than the Netflix interface,’ says Andy Harries. ‘If they want to make you watch something they can really push it at you.’

Hastings admits that the algorithms are ‘very imperfect’ - which might be why a quick glance at my Netflix page shows Peppa Pig in the list of ‘Top Picks for Mick’ - but the accumulation of data - who’s watching what and where, how quickly viewers are moving through episodes to the end of the season (‘completion’) -  is crucial in Netflix predicting how audiences around the world will respond to any given programme, ‘and that allows us to be more aggressive and more ambitious in our programming choices,’ Cindy Holland says.

Shows that fail to make the figures - like The OA - are ruthlessly culled.

The sheer volume and range of programmes Netflix produces has both revolutionised and universalised our viewing habits. A friend of mine was surprised recently to come across her ageing father watching a historical drama, Resurrection, described as ‘the Turkish Game of Thrones’, which had popped up in his personalised feed. A reported 34 million people watched the premiere of the new series of Money Heist, a Spanish-made drama (La Casa de Papel) 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.

The front of the Netflix headquarters Credit: Netflix

One of Netflix’s more surprising successes has been Mighty Little Bheem, a computer-animated children’s series, originating from India, about a mischievous child’s adventures. ‘We made it hoping it would be impactful in India, and it ended up being one of our top shows all over the world,’ says Melissa Cobb, vice-president of original animation. 

Animation and ‘family films’ - genres historically dominated by Disney and Dreamworks - is another area where Netflix are investing heavily. The company has recruited staff from both those companies, including Cobb herself, who worked at Dreamworks until being hired to set up Netflix’s animation department two years ago, and Glen Keane, an award-wining character animator for Disney films including The Little Mermaid, Beauty and the Beast and Pocahontas.

‘One of the things we observed is that 60 per cent of our members watch some animation every month, and a lot of that is family friendly animation,’ Cobb says. ‘It’s a form of storytelling that tends to work really well for audiences globally; it’s often telling universal stories, and it’s timeless. You’re building a library of titles that is not only exciting to an audience now, but to an audience ten or twenty years from now.’

All of Netflix’s original content goes out at exactly the same moment across the world (dubbed or subtitled in 29 languages, according to the territory). 

Boosted by the power of social media, Netflix has become the new global water cooler, This is nowhere more true than in documentaries  - a field in which Netflix excels, applying the principal of multi-part series - and the binge-watching that comes with it - 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 first aired in 2015, and which ran for 20 episodes. Wild, Wild Country, a series about the controversial Indian guru Rajneesh that ran for almost six hours, and Fyre, about a disastrous music festival in the Bahamas, both dealt with subjects that might have been deemed of only marginal interest, but found huge audiences around the world.

‘Social media has completely eradicated geographical borders and time zones when it comes to wanting to commune about a story,’ says Lisa Nishimura, vice-president of original documentary and independent features. ‘You saw people connecting with each other in the four corners of the world saying “did you see Wild, Wild Country?”, “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 - feature films, series, documentaries... people can instantaneously connect and be part of that conversation.’

Orange Is The New Black is a story of a middle-class woman sent to prison for drug smuggling Credit: Cara Howe / Netflix

Netflix has grown on the simple premise of pouring in huge investments to provide more programmes to lure new subscribers - to make more programmes, to lure more subscribers... That means accruing huge debt - $12.5 billion in Netflix’s case, although Hastings maintains that’s ‘a tiny amount’ set against the company’s worth of $120 billion. 

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 5 million subscribers globally in the second quarter of 2019, but ended up bringing in only 2.8 million. 

But Hastings shrugs off the figures as minor blip. ‘We make predictions as best we can and we’re going to be above them sometimes and below them sometimes. That’s just part of the beast.

‘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.’

That threat, of course, comes from the proliferation of new streaming services - ‘So many services!’ Hastings says with a laugh - competing with Netflix in attracting talent and subscribers. 

‘What we represent to customers is great variety, so we’ll continue to focus on that, and then other services will do other things.’ 

The reception area of Netflix’s headquarters Credit: Netflix 

But not everyone agrees with Hastings’ suggestion that there is room for everybody. 

‘Given the choice of five or six services few people will subscribe to all of them,’ says Tom Harrington of the 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. Everyone else is coming from a standing start. They make more new programming than anyone else. They are by far the dominant player; but the question is how do they maintain that?’

 Hastings believes the answer is to offer subscribers around the world more programmes made in their own countries, with a view to becoming what Cindy 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 the plan is to invest $500 million over the coming year 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 Charlie Cavell, who wrote End Of The Fucking World, and Laurie Nunn, whose teen comedy-drama Sex Education failed to find a home anywhere else, but has proved a huge success for Netflix. 

‘We’ve definitely broadened the available creative possibilities for talent based in the UK to the point that we can be more flexible in the different forms that we can offer.’ 

Critics worry that the huge spending power available to Netflix, and other streaming services, has had the effect of sucking talent away from traditional broadcasters such as the BBC. (Tony Hall, the chairman of the BBC, employs the analogy of the solar system, in which the BBC is a tiny ‘Earth’, compared to the ‘gas giants, the Jupiters and Saturns of California.’

One example of this is the exclusive deal, reportedly worth $20 million a year, that Phoebe Waller Bridge has recently signed to make programmes for Amazon (which co-produced Fleabag wth the BBC). 

‘We’ve been really mindful of not wanting to upset the eco-system here,’ Anne Mensah says. ‘We’re not the biggest player in the UK by any stretch of the imagination, and I don’t believe that all creatives want to work with us. It’s about offering creatives more opportunity, not us versus anybody else. If you’ve got a project and we don’t like it, there are 1000 other places to take it; equally, if 1,000 other people say no, it might be right for us. 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 was depriving audiences of the singular experience of seeing films in a cinema, saying ‘I love Netflix, but f- Netflix.’

But Cindy Holland insists streaming does not mark the end of Hollywood, or television, as we know it. 

‘It’s not a zero sum game. 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.’

‘I’m sure terrestial TV is good for another five, 10, 15 years, but ultimately it’s a declining business,’ adds Andy Harries.

The OA An American mystery-drama which proved hugely popular. Despite this, Netflix cancelled the series earlier this year Credit: Getty images

‘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 DisneyPlus; it may well be Apple or Amazon. But it certainly won’t be all of them.’

The question is, how big can Netflix can get? Despite the recent dip, Hastings believes that subscriber numbers in the US alone can grow from its 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’re growing everywhere. We’ve been at it for 20 years, and we’re in it for the long term. Look at it this way. YouTube have 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.’ Emperial, it probably won’t.