Why Netflix Should Cancel House of Cards

Joel Anderson |

House_of_Cards_Netflix.jpgThe only thing that’s risen faster than Netflix (NFLX) stock in the last few years has been the Washington D.C.-cache of President Frank Underwood on the streaming network’s flagship series House of Cards.
Things have been pretty great for Netflix, a company that really defined the nature of the market for online streaming video. Revenue is up 71.8% since the end of 2010, and the stock’s up almost 150% in that same period, despite its massive decline in the second half of 2011.

And it owes a lot of that to House of Cards. The combination of 22 Emmy nominations and Golden Globes for both Robin Wright and Kevin Spacey created an air of legitimacy about Netflix’s original programming that helped permanently alter the perception of both Netflix and online streaming.

That said, I’m here to tell you that much the way Underwood is willing to bump off his closest allies in order to get ahead, it’s time for Netflix to push House of Cards into an oncoming subway train.

Why Cancel House of Cards?

Let’s get this out of the way up top – this last season was pretty lousy. Full disclosure, I liked, but didn’t love the show through the first two seasons. It was good, but I wasn’t over the moon for it.* Regardless, I was clearly in the minority in that opinion, and it’s not hard to see why. The writing, acting, and directing were all very strong, even if the plot featured some logical holes.

The disdain for the third season, however, has been a much more consensus opinion. The specifics of why aren’t as important (Though the show’s abandoning of the backroom dealing that loyal fans loved in favor of a fairly generic story of Frank struggling with the burden of his new office sure didn’t help), all you need to know is that reviewers and fans alike generally agreed that season 3 was a real dud. This might not be a big deal for a crowd-pleaser like NCIS, but if your show is sold as a critically-acclaimed prestige drama, it’s a bit of a problem if your show is no longer critically acclaimed.

The issues with the show’s quality are just one part of why Netflix should consider parting ways with the series, though. There’s still plenty of loyal fans who will keep binge-watching on release day no matter how weak season 3 was. It’s just that with so many more options in the streaming space, the margin for error for Netflix is a lot smaller these days, meaning another weak season of their flagship program could be a much bigger issue than it was a year ago.

Must-See Internet

Netflix’s success has demonstrated the incredible potential of its business model. They’ve demonstrated it so well, in fact, that Netflix is now sitting atop a space that is rapidly becoming extremely competitive. Two television shows from the 1990s, forever joined in people’s mind after sharing the same night for years, are now illustrating just how fierce the fight has gotten in the streaming landscape. Friends and Seinfeld and the bidding war for their streaming rights really reveals just how much things have changed.

Netflix inked a deal for four years of exclusive streaming rights to Friends last year. The price tag? About $500,000 an episode, according to The Wall Street Journal. That would mean Netflix had to shell out almost $120 million, or $30 million a year for the length of the deal. And that deal could, apparently, be dwarfed by the one coming down the pike for Seinfeld, which is rumored to be asking an even higher price tag.

In fact, the price is high enough that Netflix is reportedly out of the running for Seinfeld. That should, in and of itself, raise some eyebrows. Until recently, if Netflix wasn’t bidding on the streaming rights for your show, that was a sign that there wasn’t much demand out there. Now? There’s plenty of well-monied players fighting for their share of the streaming space.

Among the bidders reportedly still in the running for Seinfeld are Hulu, Amazon (AMZN) , and Yahoo (YHOO) . Amazon may have had its own House of Cards moment when its original drama Transparent won a Golden Globe last year, and Yahoo also started getting some real press after it signed on to pay for the sixth season of popular former-NBC comedy Community. If either can grab the rights to stream Seinfeld, it would be a real coup for their video services. Something that would clearly demonstrate their place in the same peer group as Netflix.

Pork Barrel Politics

What does this have to do with House of Cards? Namely that Netflix may have to be a lot smarter in how it spends its money, moving forward. The size of the streaming business pie is rapidly increasing, but the fight for each piece is getting fiercer just as fast. Netflix spent about $3 billion on content last year, and that figure doesn’t seem likely to decrease any time soon.

The cost of House of Cards, at least according to one CAA agent in 2013, is in excess of $4.5 million per episode. That would mean a full, 13-episode season, runs about $60 million, and Netflix is apparently picking up a large chunk of that. Clearly, the initial two-season order was more than worth every penny Netflix paid. But now? Times have changed.

Sure, $60 million represents just 2% of a $3 billion content budget. But there’s also no shortage of options for Netflix to spend on. Just looking at the deals Netflix has recently inked, that $60 million tab for a full season of House of Cards could easily go to two more years of the rights to Friends, for instance. Or an Adam Sandler movie, based on the recent four-picture deal the comedian signed with the company. The company also paid $12 million for Beasts of No Nation, a war drama set in Africa directed by Cary Fukunaga and starring Idris Elba, and $17 million for Jadotville, a yet-to-be-made Irish war drama starring Jamie Dornan of 50 Shades of Grey fame, meaning Netflix could arguably snatch up another eight films in a similar price range for the cost of a single season of House of Cards.

Push comes to shove, Netflix has options. It also has needs. Every dollar it spends on content needs to increase its appeal with people who aren’t currently subscribers, or keep the subscribers it currently has. With House of Cards, the show’s appeal is already baked in, in a sense. Sure, no new episodes of the show would potentially mean the loss of some current subscribers who are huge fans, but that cliff’s approaching in the new few years one way or another. The question may be whether Netflix wants to take the $120 million that could buy a few years of the rights to Seinfeld or a new series that would be a shot at a new blockbuster and instead spend it on two potentially lackluster seasons of House of Cards.

If the show’s downward trajectory continues, passing on Seinfeld (or the potential “next” Seinfeld) will start to look like a huge mistake. And even if the show rebounds and puts up two more seasons just as good as the first two, it seems unlikely that it captures many more fans than it already has. After all, the appeal of catching up on the first two seasons may be enough to entice new subscribers for a number of years to come, and running the show into the ground with a few more lackluster seasons may actually decrease the appeal for Underwood-curious potential Netflix subscribers.

Staying Swift to Survive in the Digital Age

Netflix is still a big fish – bigger than ever, in fact – but the pond has expanded around it. In this market, a lot of deals where Netflix used to be one of the only companies in play are now going to have a number of interested buyers making bids. And, that being the case, Netflix needs to be smart about where it spends its content budget.

So, while pulling the plug after one subpar season may seem incredibly abrupt, that may also be the nature of the new streaming business. A couple good seasons of a new show may be all it takes to create the hype necessary to get value for the production budget. New seasons of House of Cards is arguably a scenario with rapidly diminishing returns. Unlike traditional television, where selling ads for each show meant that established shows with a built-in fan base represented a huge cash cow, the subscriber model of streaming services may argue for a constant stream of fresh new titles to attract more people to sign up.

If you believe that a significant number of subscribers will drop your service without the potential of new episodes of the shows they already love, you should certainly keep making them. However, if you believe that existing subscribers actually tend not to actively cancel their service just because you stop making their favorite show, especially if the last season was disappointing, that’s a different situation. In the latter scenario, it’s clearly smarter to spend dollars on new shows, taking more shots at that next blockbuster that could draw in fresh blood.

Netflix remains coy about sharing viewing data from its streaming platform, so it’s hard to say for sure what’s going on. However, if they really aren’t seeing many subscribers dropping their service after the sign up, creating more shows with shorter runs becomes the better strategy. This, ironically, would make House of Cards an expensive dinosaur that no longer provides ROI…which would be funny given that just two years ago people were lauding House of Cards for exposing network dramas as expensive dinosaurs.

Push comes to shove, though, the margin of error is a lot smaller than it was, and it’s possible that Netflix doesn’t have the leeway to pay for another bad season of House of Cards. Unless Netflix is really certain that having four seasons of House of Cards on its platform rather than three is worth more than $50 million, it just seems to make more sense to channel those resources into something else. Sure, it may be hard to say goodbye to Underwood and his Washington cronies, but in today’s golden age of television, I’m sure we’ll make due. Now, when does the new season of Orange is the New Black premiere, again?




* Not to go on a tangent here, but Frank Underwood sets in motion his plan to become President because he felt slighted when he was passed over for Secretary of State? Isn’t that a little backwards? He’s angry about not getting the one job so he decides to strike back by getting a better job? Isn’t the takeaway here that getting named Secretary of State would have actually crippled his career? The inciting incident of the entire series was essentially turned into a red herring retroactively without offering any sort of explanation. Seems like at some point, during one his signature monologues to the camera, Frank might have mentioned something about why he initially lied to us about his desire for revenge when it was really naked ambition motivating him all along.


DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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