Monday, June 23, 2014

Chelsea Handler: Netflix's MacGuffin?

Last week, Netflix announced that it will launch a talk show starring Chelsea Handler. The announcement triggered speculation about Netflix's reasons for launching a talk show, and what kind of a talk show it would offer. After all, Netflix is a video-on-demand service that features movies, old television shows and new series, while talk shows are one of the most time-sensitive show formats, after news and sports. Is Netflix trying to copy HBO shows such as "Real Time with Bill Maher" and "Last Week Tonight?" Would Handler's show be shown the day of production, or even live, or would Netflix delay it? Would Netflix try to create a new type of talk show that's not, as Variety says, "perishable"?

You may know of Netflix's first original series, "Lillehammer," starring Steven Van Zandt. It's never gotten much critical notice; certainly nothing like "House of Cards" or "Orange is the New Black." Netflix has renewed it for a third season, even though I suspect that most television viewers have never heard of it. When Netflix announced "Lillehammer," industry observers thought that was the story, and discounted its (and Netflix's) impact when the show turned out to be mediocre. The real story, however, wasn't "Lillehammer," but the fact that Netflix was targeting HBO with its own original series.

An important nugget in Netflix's announcement of Chelsea Handler's talk show is that the show won't go into production until some time in 2016. That seems like an awfully long time, given that talk shows are usually launched in a matter of months, not years. A daytime talk show can get "greenlighted" in the spring and be on the air in the fall. Why is it going to take Netflix more than 18 months to get Handler's show into production?

I believe the reason is that Netflix is preparing to launch a live service in addition to its existing VOD. Given that all of Netflix's infrastructure and all of the software that people use to watch Netflix was developed solely for VOD, Netflix has a lot of work to do in order to offer live programming. Once Netflix gets it working, however, it opens up entirely new opportunities for the company. One of them is Pay-Per-View (PPV). Typically, PPV is used for big-ticket sporting events, such as boxing and wrestling matches, as well as live concerts. These PPV events are one of the biggest profit generators for cable, satellite and IPTV operators. They would also be a big profit generator for Netflix, above and beyond the company's monthly "all you can eat" subscription revenue.

Another opportunity is live sports--the kinds of events shown by broadcast and cable networks: Football, baseball, basketball, hockey, golf, soccer and tennis. Sports can be very lucrative for networks. Games on Netflix would be very appealing to viewers who could watch them without commercial interruption. Consider something like DirecTV's NFL Sunday Ticket, which offers subscribers every out-of-town NFL game. It costs from $230 to $330 for a six-month (full-season) subscription, depending on the level of service, and it's one of DirecTV's most profitable offerings. In fact, NFL Sunday Ticket is said by many observers to be one of the biggest reasons why AT&T wants to acquire DirecTV. If Netflix develops a live streaming capability, it can offer a similar service to subscribers to any high-speed Internet service. All 99 million U.S. households become potential buyers. No cable, satellite or IPTV company has that kind of reach.

With that in mind, it becomes clear that the real story isn't that Chelsea Handler is getting a talk show on Netflix, it's that Netflix plans to offer live programming--and live programming is increasingly the lifeblood of broadcast and cable networks alike. In short, if your television business is known by initials (HBO, TNT, ESPN, ABC, CBS, NBC, Fox--okay, those aren't initials--etc.), Netflix is coming for you in 2016. And, Chelsea Handler is the least important part of it.