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.
But many in the movie industry see things differently. Starting a few years ago, they became concerned that Netflix's bargain-priced rentals were a key reason that DVD sales were plunging, squeezing studios' profit margins. Wall Street noticed it too, leading Time Warner Chief Executive Jeff Bewkes to downplay the threat by famously referring to Netflix as "the Albanian army."
Many film companies decided to scale back the availability of their content. Warner Bros., Universal Pictures and 20th Century Fox in 2010 instituted a 28-day delay from the time DVDs went on sale at retail outlets to when they could be rented from Netflix. (Warner Bros. last month extended that delay to 56 days). Last year, the cable channel Starz, which has the rights to sell movies from Sony Corp. and Walt Disney Co. to Netflix, sought renewal terms so exorbitant that the two companies ended their relationship. After this month, Netflix will not have access to movies from either Sony or Disney.
The results of that conflict are evident in the fact that of 2011's top 100 movies at theaters in the U.S. and Canada, only 18 will be available on Netflix's streaming service this year. The vast majority of the nearly 10,000 films available via Netflix streaming (a number compiled by the website InstantWatcher; Netflix does not release data on its inventory) are independently financed pictures such as "Limitless" and "Drive" or older pictures like "The Hunt for Red October" and "On the Waterfront."
"It's been in theaters, it's been on DVD, it's been on video on demand, so by the time it gets to us, it's in the bargain bin at Wal-Mart," Sarandos said.
A tough-talking 47-year-old, Sarandos was a Hollywood outsider with a background in video distribution when he joined Netflix in 2000. Now he moves among the media elite, even making the cut to attend the exclusive Allen & Co. conference of big media moguls held every summer in Sun Valley, Idaho.
Sarandos oversees a team of about 25 at Netflix's Beverly Hills office who negotiate contracts worth billions of dollars with virtually every television and film studio in Hollywood. Although the company won't say how much it's spending on digital deals, it said in its latest earnings report that the amount doubled in the first quarter of 2012 compared with just a year earlier.
Much of that money has gone to TV reruns. Last year, Netflix signed a 4-year deal worth as much as $1 billion for every program on the CW network, home of "The Vampire Diaries" and "Supernatural."
Sarandos' unit draws on a massive database of Netflix customers' viewing patterns and quality ratings to predict what will prove most popular and bid accordingly. The content team is willing to pay more than the networks, which require massive audiences, for shows that attract a smaller but more dedicated niche of viewers. For the low-rated but award-winning period drama "Mad Men," for instance, Netflix outbid competitors by agreeing to pay Lionsgate $77 million, or $850,000 for each of 91 episodes.
"They're an incredibly sophisticated buyer because, more so than any other company, they know what's going to work with their audience," Beeks of Lionsgate said.
Sarandos' most surprising move to date may have been his deal to bring back "Arrested Development," a feat that the producers had been trying to accomplish with traditional networks for years.
"Their enthusiasm and aggressiveness was a little bit unexpected," said Gary Newman, chairman of 20th Century Fox Television, the studio behind the beloved but low-rated series. Netflix outbid other networks including Showtime by agreeing to spend $2.5 million to $3 million per episode of "Arrested," a knowledgeable person not authorized to speak publicly said.
But the series, which stars Jason Bateman, Will Arnett and Portia de Rossi, won't look exactly the same as fans remember it on Fox. Episodes of the new version, which are scheduled to debut in 2013, are expected to focus on one character at a time, rather than tightly interweaving them all.
Besides its checkbook, Netflix is also bringing a new approach to making television shows. The company doesn't have a traditional network's gaggle of development executives to supervise productions and bicker over scripts. It will even take the highly unusual risk of ordering multiple seasons of a show without a pilot episode.
Netflix committed to 26 episodes of "House of Cards," at a cost of about $4 million per episode, based on the concept and talent involved. And Netflix has already signed on to a second season of "Lilyhammer" before finding out if the first is popular with its viewers.
Sarandos downplayed the risk, arguing that Netflix's strength ultimately lies in the software that recommends programs users will like and lets them watch it on demand.
"The worst thing we'll do," he said, "is create mediocre shows."