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Netflix may be getting into original programming

The Internet video company is in advanced talks with independent production company Media Rights Capital to distribute online 'House of Cards,' a series starring Oscar winner Kevin Spacey, sources say.

March 17, 2011|By Ben Fritz and Joe Flint, Los Angeles Times

Netflix Inc.'s growth strategy may be built on a house of cards — literally.

In a shift in strategy, the DVD and online video company is in advanced negotiations to distribute online "House of Cards," a political drama series that will star and be produced by Oscar winner Kevin Spacey, people familiar with the matter said.

Should the agreement close, it would represent Netflix's first venture into original programming and make the company more of a direct rival to cable networks such as Home Box Office and Showtime.

The talks between Netflix and independent production company Media Rights Capital are raising eyebrows in Hollywood and on Wall Street. Netflix has succeeded primarily as a distributor of previously released movies and television series and has more than 20 million subscribers. Now, instead of offering established content, it wants to get into the riskier game of hawking its own original fare.

If Netflix lands the rights to stream the show, it could be the most prominent test of whether a traditional multimillion-dollar, star-driven show can succeed on an Internet platform where people watch when they please and may learn about it only if a website recommends it. Unlike traditional broadcast and cable networks, Netflix won't be scheduling the show on a certain night and time.

Although Netflix may spend a lot to get "House of Cards," it doesn't intend to put marketing muscle behind its series, according to a person close to the company. The person said that Netflix wouldn't spend money to specifically advertise "House of Cards" or any other original series it might buy and would rely on its recommendation technology to suggest the program to consumers who might enjoy it.

"House of Cards," a remake of a 1990 British miniseries, won't come cheap. Under the pending arrangement with Media Rights Capital, Netflix would commit to 26 episodes of the show at a cost of tens of millions of dollars. Typically, a high-quality cable show costs $2 million to $4 million an episode. Most striking is that as part of the deal being discussed, Media Rights Capital would not have to make a test episode or pilot, according to those close to the talks.

That was enough to send Time Warner Inc.'s HBO running to the exits. The premium pay-TV channel had considered "House of Cards," but going forward without a pilot was a deal killer, people with knowledge of the network's thinking said.

Netflix's change in direction is surprising given that as recently as January, Chief Executive Reed Hastings indicated that the company had little interest in original programming. "We think that we're better off letting other people take creative risks, and get the rewards," he said on a conference call with analysts.

The development comes as the company faces escalating costs to acquire content and hold on to the rights it currently has. The most significant challenge it faces, many analysts agree, will be renewing its pact with pay cable channel Starz, which gives it access to recent releases from Walt Disney Studios and Sony Pictures.

Janney Capital Markets analyst Tony Wible estimated that for Netflix to renew that agreement, which expires in early 2012, it would have to increase the amount it pays from approximately $30 million per year to $300 million.

Hollywood has a love-hate relationship with Netflix. On one hand, Netflix has become a prominent buyer of Internet streaming rights, committing billions of dollars in recent multiyear deals with distributors such as Epix — the cable network owned by Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer — as well as with CBS Corp. and Relativity Media. By going into original programming, Netflix would become a new buyer of content, which would also be good news for the studios.

On the other hand, Netflix has drawn the ire of some in the entertainment industry who feel it is undermining traditional business models. Time Warner Chief Executive Jeff Bewkes, whose HBO is directly threatened by Netflix, has been particularly critical of the company.

"It's hard to see how that kind of economics can fit into a service that charges $8 or $10 a month, because the math doesn't work," Bewkes said at a media conference in December, citing the lowest prices Netflix charges subscribers.

Some industry analysts fear that Netflix could be taking too big a gamble by swimming in unfamiliar waters.

"They could be paying a very high price tag for content that does not find an audience," said Laura Martin, an analyst with Needham & Co. "No way they will get access to a hit show unless it is by accident."

A person close to the company said that Netflix, unlike other programmers, is not interested in being involved in the creative process of producing content, including casting and developing scripts. That is another alarm bell for some.

"If you bring a show to HBO, you have people who have helped create hits and know what they're doing," Martin said.

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