House of cards (I)

For the creative industries – music, film, and publishing – these are the best of times and the worst of times. New technologies have provided self-published authors, independent musicians, and other previously disenfranchised creators with powerful new ways of doing their work and reaching their audiences, and have provided consumers with a wealth of new entertainment options.

Together these changes have produced a new golden age of creativity. But the same technologies also have changed the competitive landscape, weakened the control that established players can exert over both content and consumers, and forced business leaders to make difficult tradeoffs between old business models and new business opportunities. In the face of these changes, many powerful firms have stumbled and lost ground in markets they used to dominate.

One of the most profound examples of this shift in market power occurred when Netflix began to offer original programming. It’s a fascinating case that illustrates many ways in which technology is changing the entertainment marketplace.

The story begins in February of 2011, when Mordecai Wiczyk and Asif Satchu, the co-founders of Media Rights Capital (MRC), were pitching a new television series, House of Cards, to several major television networks. Inspired by a BBC miniseries of the same name, the proposed series – a political drama – had attracted top talent, including the acclaimed director David Fincher, the Academy Award-nominated writer Beau Willimon, and the Academy Award-winning actor Kevin Spacey. While shopping the broadcast rights to HBO, Showtime, and AMC, Wiczyk and Satchu approached Netflix about securing streaming rights to the show after it had finished its television run.

In its pitches to the television networks, MRC had focused almost exclusively on the draft script for the pilot episode and on the show’s overall story arc. The goal of these meetings was to secure a commitment from a network to fund a pilot episode. The challenge involved rising above the hundreds of other creators who were pitching their own ideas, competing for the small number of programming slots owned by the major networks. But that’s just how the business worked – the networks called the shots. “We had a monopoly,” Kevin Reilly, a former chairman of entertainment at the Fox network, has said. “If you wanted to do television, you were coming to network television first.”

Pilot episodes are the standard tool that television networks use to determine whether there is an audience for a show. Creating a pilot episode requires the writers to introduce and develop the show’s characters, plot elements, and story arc in a 30- or 60-minute broadcast time slot. That’s difficult under the best of circumstances, but it was particularly difficult in the case of House of Cards. “We wanted to start to tell a story that would take a long time to tell,” Kevin Spacey said in 2013. “We were creating a sophisticated, multi-layered story with complex characters who would reveal themselves over time, and relationships that would take space to play out.”

Even if a proposed show receives funding for a pilot episode, the funding comes with no guarantees to the show’s creator – the network is still in complete control. If the network likes the pilot, it might initially order from six to twelve episodes, but that’s rare. Usually the network decides to pass after seeing the pilot, and the creators have to start over.

For the networks, pilot episodes are an expensive way to gauge audience interest. Making a pilot episode for a drama series can cost between $5 million and $6 million, and some in the industry estimate that $800 million is spent annually on failed pilots – that is, pilot episodes that never lead to series.

Before their meeting with Netflix executives, Wiczyk and Satchu had gotten a mixed reaction from the television networks to their pitches for House of Cards. The networks had liked the concept and the talent attached to the project, but no network had been willing to fund a pilot episode, in part because the conventional wisdom in the industry – since no political drama had succeeded since the final episode of The West Wing, in 2006 – was that political dramas wouldn’t “sell.”

The reception at Netflix was different, however. Ted Sarandos, Netflix’s then Chief Content Officer, wasn’t primarily interested in critiquing the show’s story arc or invoking the conventional wisdom about the market’s taste for political dramas. Instead, he came to the meeting primarily interested in data – his data – on the individual viewing habits of Netflix’s 33 million subscribers. His analysis showed that a large number of subscribers were fans of movies directed by David Fincher and movies starring Spacey. The data also revealed that a large number of customers had rented DVD copies of the original BBC series. In short, the data showed Sarandos that the show would work and convinced him to make an offer to license the show directly to Netflix, bypassing the television broadcast window entirely.

But Netflix’s innovative approach didn’t stop there. Netflix didn’t make the typical offer of $5 million or $6 million to produce a pilot episode that it might option into a half-season or full-season order. Instead, Netflix offered $100 million for an up-front commitment to a full two-season slate of 26 episodes. Netflix argued that it didn’t have to go through the standard pilot process, because it already knew from its data that there was an audience for House of Cards – and that it had a way to target potential members of that audience as individuals.

Netflix’s decision not to use a pilot episode to test the House of Cards concept garnered a skeptical response from the television industry. In March of 2011, shortly after the House of Cards deal was announced, Maureen Ryan, writing for the online service AOL TV, made a list of reasons to doubt that House of Cards would be successful if delivered by Netflix. Her article closed with the following observation:

The other red flags here? Netflix and MRC are going forward with this project without stopping to make a pilot first, and Fincher’s never worked on a scripted drama before. We all like to make fun of TV suits, but sometimes those suits know what they’re talking about. Many pilots in TV history have been tweaked quite a bit to make them better – in some cases, a lot better.