On the night of the Golden Globes ceremony last month, Netflix and HBO
held dueling parties at the Beverly Hilton hotel. Bono and Julia
Roberts mingled underneath a bejeweled tent as Netflix, the upstart
streaming service, joined forces for the party with the Weinstein
Company and celebrated a small piece of history — its first Globe, for
“House of Cards,” its splashy entrant into original programming. At
HBO’s party, Matt Damon and Lady Gaga sipped drinks by the pool as the
cable network toasted its two awards, pushing its total to 101.
If
there is a rivalry between the two companies, it is by many measures a
mismatch — certainly in terms of creative achievement (HBO has also won
463 Emmys, to three for Netflix). But that hasn’t stopped Wall Street
and the entertainment media from salivating at the story line: Netflix,
the brash Silicon Valley interloper, driven by metrics and technology,
not to mention a checkbook that makes seasoned Hollywood players blush
like teenagers, taking on HBO, the East Coast establishment player, in
the rarefied and profitable world of quality television.
Nipping at HBO’s Heels
Netflix takes in almost as much revenue as HBO, but its
earnings are much lower, in part because of investments in expansion and
programming acquisition.
The
competition is energizing the medium. Cable networks like HBO and
Showtime, and streaming services like Netflix and Amazon Prime, are
spending lavishly on programming and embracing new technologies, giving
producers incentives to take creative and financial risks and generating
an upward spiral in quality.
The
result, said Mike Vorhaus of Magid Advisors, a research and consulting
firm, is “an arms race in programming.” Both Netflix and HBO are “seeing
the best pitches from the best people,” said Rick Rosen, head of the
television division at William Morris Endeavor.
As
a business, Netflix is gaining momentum and blowing through the stock
market’s expectations. It has a market value of $26 billion, a share
price that has more than doubled in the last year, and it now has 33.4
million subscribers in the United States, five million more than HBO has
domestically. Early this month, Netflix borrowed $400 million to
finance an aggressive expansion in Europe. “House of Cards” was one of
the big stories in television last year, and its highly anticipated
second season was released with much fanfare on Friday.
HBO
broke out its operating income for the first time earlier this month — a
move it says was a coincidence — and showed its own very profitable
muscles. It made $1.8 billion in operating profits in 2013, compared
with Netflix’s $228 million. It has a huge international presence, with
an estimated 100 million subscribers worldwide, and a trove of
remarkable content that is the envy of the entire industry, not just
Netflix.
Jeffrey
Katzenberg, the chief executive and co-founder of DreamWorks Animation
SKG and a former chairman of Walt Disney Studios, played down the idea
of a rivalry, calling it “a media invention.”
“The
fact is that Netflix has exploded in its success, achieved what really
three or four years ago people would have said was an impossible level
of subscription, and HBO has gone up, too,” Mr. Katzenberg said. “I
think there’s a fiction here that somehow Netflix gains are HBO losses.”
But
to services like HBO and Netflix that are supported by subscriptions,
and not advertisers, talk means buzz, and buzz draws new customers.
That’s why Netflix is punching up, constantly comparing itself to a more
established brand that for consumers represents high-quality
programming. Ted Sarandos, Netflix’s chief content officer, put it
plainly a year ago: “The goal is to become HBO faster than HBO can
become us.”
Reed Hastings, chief executive of Netflix, has been routinely provocative. In a recent earnings call,
he pointedly tweaked his counterpart at HBO, Richard Plepler. Asked
about HBO’s endorsement of password-sharing for its own streaming
service, HBO Go, Mr. Hastings joked that perhaps Mr. Plepler wouldn’t
“mind me sharing his account information.” He then joked that his
rival’s password was “Netflix” followed by an expletive.
In
private, Mr. Hastings has been known to confide to executives at Time
Warner, HBO’s parent, that the comparison to HBO benefits Netflix, and
that he sees it as harmless mischief.
Mr.
Plepler declined to comment specifically on Netflix, saying that
“competition has been a part of our landscape for many years.” He added:
“And it isn’t a zero-sum game. There is going to be good work done by
our competitors as there has been in the past.”
Mr.
Sarandos said HBO represented more of a North Star to his company, a
rival that can help Netflix elevate its game. “It’s like in sports,
where rivalries make both teams better,” he said.
“The
truth of it is they are a real guiding light,” he said, adding,
“They’ve shown the world that they can grow a premium subscription
content service to 130 million subscribers, and so we’re looking at that
saying that that’s a number that we’re striving for.” The consumer wins
in the end, he said.
Time
Warner executives do not share Netflix’s view of a friendly rivalry,
and privately express frustration at a comparison they believe is
spurious and fueled by Netflix, which they say is more like Amazon or
Hulu than HBO.
Nonetheless,
it remains a seductive contrast. Mr. Plepler is a suave, politically
connected executive who came up through the corporate ranks, and attends
White House dinners. Mr. Hastings is a Silicon Valley entrepreneur who
has a master’s in computer science from Stanford and the kind of hubris
that can accompany those credentials
Netflix
uses reams of data to make big bets on original content. HBO continues
to follow its gut and experience, and draw on longstanding relationships
with industry stars, to nurture ideas to the screen.
Mr.
Sarandos has said that he does not believe in development, but instead
grants creative freedom to writers and directors. He has become known in
Hollywood for writing enormous checks with few of the traditional
balances.
“They
made the largest single order for original TV content in the history of
the TV business,” Mr. Katzenberg said, referring to a deal struck last
June, “three hundred hours of original content from us, in one order.”
“House
of Cards,” Netflix’s most lauded original production, was delivered
nearly fully formed — with two scripts and a comprehensive outline of
its plot, a staff of writers and the director David Fincher attached —
for about $200 million. Its producers received interest from several
outlets, including HBO, but decided to make it with Netflix — in part
because its financial firepower allowed it to commit to two seasons in
advance, and in part because it left control in the hands of the writer
and director, not development executives.
“I
think they’re very surgical in their approach,” said David Glasser,
president of the Weinstein Company, which will show “Marco Polo,” a
series about the 13th-century explorer, on Netflix this year. “You know
very clearly the vision they have.”
People
familiar with HBO’s process say it reviews a larger quantity of
pitches, with about one in five making it to the pilot stage, and
usually only after close consultation with development executives. Of
the pilots, about 60 percent will be broadcast. That model, one person
said, allows it to find and develop lesser-known talent like Lena
Dunham, the creator of “Girls.”
The
channel’s relationship with the creative community ensures it will
continue to prosper, Mr. Plepler said. He cited “the line at the door of
people who want to do things with HBO,” and pointed to coming projects
with Mr. Fincher, J.J. Abrams, Martin Scorsese and others. “That is our
greatest advantage and one we intend to press on,” he said. It is not
alone in the premium cable space. Showtime has almost doubled its
audience in the past 10 years and has a bona fide hit in “Homeland.”
As
Netflix moved aggressively to present original content, however, it
became a threat to some of the very media companies it relied on for its
movie library. The studios toughened their negotiations, and a deal
that it had with Starz expired in 2012, stripping out many of its
movies. Netflix now has its own deals with some studios for movies.
HBO
has deals with four Hollywood studios locked in for several years, Mr.
Plepler said, and about 78 percent of HBO viewing is in movies. A
visitor to HBO is often greeted with more familiar contemporary titles
than one browsing Netflix.
That
contrast explains the enormous marketing push behind “House of Cards.”
To Netflix, it is much more than just a television show; it is also a
way to build a business and a brand. Other entertainment companies
complain that Netflix does not release viewer figures and has been able
to simply declare the show a hit. The press has gone along, they say,
romanced by its status as an insurgent.
Mr.
Sarandos said the company had no reason to release its numbers,
especially since its programming is all on-demand with no specific time
slot, and he has no advertisers or cable partners to please.
Some
of Netflix’s strengths are also potential weaknesses, too. Signing up
for Netflix requires only an email address, a credit card and $8. But
what is easy to get into is also easy to get out of, and the company has
significant churn. It does not have to negotiate with cable companies
to carry its content, but that has made it vulnerable to a recent
slowdown in streaming speeds, which means
low-quality playback and longer load time for viewers. And Netflix’s
vulnerability would only increase if Comcast succeeds in buying Time
Warner Cable.
While
Netflix has used a good portion of its revenue to build scale and
secure enough programming to dominate television over the Internet,
other players are seeking their share. Amazon has its own streaming
service, Amazon Prime; its new pilots have been well-received, it has
money to spend and it recently signed a streaming deal with 21st Century
Fox. Disney’s chief executive, Robert A. Iger, recently voiced a
determination to “out-Netflix Netflix” by creating its own binge-ready
programming. And Hulu is owned by the television networks themselves.
For
all their differences, though, HBO and Netflix seem to be learning from
each other. HBO’s new drama, “True Detective,” was delivered with eight
scripts written, and a director and stars attached. Netflix, said a
person familiar with its processes, has hired more production executives
and is taking a keener interest in the development of the shows it
buys.
“These
companies are morphing into the middle,” said Jeremy Zimmer, head of
United Talent Agency. “The technology companies are working hard to
develop good content and the smart content companies are embracing
innovative technologies. The idea that one has to cannibalize the other
is counterproductive.”
That
sentiment was echoed from the White House last week. President Obama
stopped Mr. Plepler at a state dinner to ask for advance copies of “True
Detective” and “Game of Thrones” to watch over the holiday weekend.
Then on Thursday, the night before Netflix released the new season of
“House of Cards,” a message appeared on the president’s Twitter account:
“Tomorrow: @HouseOfCards. No spoilers, please.”
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