By Ben Fritz and Joe Flint, Los Angeles Times –
LOS ANGELES — Like most fresh faces that arrive in Hollywood, Netflix wanted to be a movie star.
But now it’s learning what many in Tinseltown have known for decades: Movies are sexy, but the real money is in television.
Launched in 1997 with a goal of eliminating the drive to the video store, Netflix Inc. became a hit with consumers and helped push the movie rental chain Blockbuster into bankruptcy. By charging customers a small monthly fee for unlimited DVDs by mail, then expanding into Internet streaming in 2007, it amassed almost 25 million subscribers in the U.S. and in 2011 had revenue of $3.2 billion.
For most of that time, Netflix was all about flicks. More than 80 percent of the discs it shipped and virtually all of its streaming content when that service began consisted of movies.
Not anymore. More than 60 percent of the 2 billion-plus hours of video streamed by Netflix subscribers during the fourth quarter of 2011 originated on the small screen.
In a sign of just how far it has come as a television powerhouse, Netflix this week premiered its first original series, a crime comedy called “Lilyhammer,” starring Steven Van Zandt of “The Sopranos.”
“It’s been a fundamental shift in our business, but it wasn’t by design,” said Ted Sarandos, Netflix’s chief content officer. “The rise of TV viewing has happened in a really organic way.”
The company’s transformation has been driven in part by a fundamental change in the way people consume television in an on-demand, digital age. Watching a movie via Netflix streaming isn’t much different from renting a DVD, but for TV it offers fans a unique way to view one episode after another of addictive series such as “Gossip Girl” and “Mad Men.”
“We have found that what differentiates our service is the ability to sit down, pick a show and dig in,” Sarandos said. “People will watch six or eight episodes in one sitting.”
To fuel that demand, Netflix has in the past few years become one of the entertainment industry’s largest buyers of television reruns, committing billions of dollars to multi-year deals. Many of its most popular shows, such as “Breaking Bad” and “24,” are serialized dramas.
That’s been a big boost to the television industry, as those types of programs typically make less money in reruns than sitcoms such as “The Big Bang Theory” and police dramas such as “Law and Order.” Most channel surfers won’t stop on a random episode of “Lost” because they can’t follow the story. But a Netflix user can easily watch the whole series in order.
“This is all great news,” said Bruce Rosenblum, president of Warner Bros. Television Group. “Netflix gives studios a bigger appetite to take risks because we know now there is more upside for these shows.”
As it moves into original programming, the Los Gatos, Calif., company is becoming more than one of Hollywood’s top buyers. It’s also becoming a direct competitor to cable channels.
Along with “Lilyhammer,” a popular Norwegian show to which it bought the exclusive U.S. rights, Netflix has committed to “House of Cards,” a pricey political drama starring Oscar winner Kevin Spacey; a new comedy from the creator of “Weeds”; and new episodes of “Arrested Development,” the critically acclaimed comedy that Fox canceled six years ago. The company is also negotiating to pick up at least two other shows that it has not publicly identified.
Sarandos said Netflix is “dabbling in original programming” in part because he expects traditional networks to make fewer serialized programs. “We need to develop the muscle in case it becomes necessary to produce more ourselves,” he said.
Refocusing its core business is essential for Netflix as it tries to recover from a brutal 2011. Last summer, Netflix lost 800,000 subscribers and its stock plummeted more than 75 percent after an unpopular price hike and an aborted attempt to separate its DVD business into a new brand dubbed Qwikster. It has since regained some ground with subscribers and on Wall Street. Netflix shares closed Tuesday at $127.88, up 85 percent since the start of the year but far below a high of $295.14 last July.
Amid rapid changes in the way consumers watch movies and new threats from competitors including Amazon.com Inc., Hulu and HBO, Netflix is trying to transition its customer base away from DVDs by mail and make them loyal users of its Internet streaming service, which is now available on more than 700 different digital devices including Internet connected TVs, iPads and smartphones.
And as it faces concerns that the number of customers in the U.S. may be reaching a plateau, Netflix has expanded into Canada, Britain and Latin America and is considering moves into other markets such as Spain and South Korea. To pay for its overseas launches, the company in the current quarter expects to report its first net loss since 2005.
To prosper, Netflix has to give TV-hungry consumers what they want. It also must cope with divergent views in Hollywood on its desirability as a partner. TV executives are almost universally thrilled at the fat new wallet Netflix has opened to them.
“Netflix is a new buyer that’s adding value that didn’t exist before in the television business,” said Steve Beeks, president of independent studio Lionsgate.