Netflix will need more than Arrested Development to stay relevant: Peter Nowak

More exclusive shows will be key to retaining subscribers.

I’ve had a few intriguing chats recently with David Purdy, senior vice-president of content at Rogers (which owns Canadian Business), about the status and prospects of Netflix. They were good conversations because they were very level-headed and contrary to a lot of the conventional wisdom flying around out there, which surmises that cable companies must surely view Netflix (which just released the first trailer for the new season of Arrested Development) as the devil incarnate—a bitter rival to be crushed and destroyed.

There’s certainly no doubt that traditional television providers are threatened by the over-the-top provider, which is why, according to Purdy, they’re all looking to duplicate its services. But I found it interesting how he views the company overall.

“Right now it looks and smells very much like a premium pay service, like The Movie Network,” he said in an interview last week.

I take his point. Netflix is, essentially, an on-demand channel with a big catalog of movies and older seasons of TV shows. It’s different—and in some ways complementary—to traditional TV, which offers live news and sports and the latest “must-have, iconic” shows as its main value propositions. That’s why Netflix isn’t too different from, say, HBO.

Netflix’s big advantage over traditional television providers, or at least those in Canada, is that it can offer that big on-demand catalog over any platform at a relatively good price. And with the company continuing to grow globally, it’s achieving the sort of scale that is ultimately going to be hard to compete with. Right now, it’s disadvantaged in Canada because TV providers here are so heavily vertically integrated, which means they have existing relationships with content-producing studios and therefore online rights to a lot of content—but that could soon change.

“It’s possible [Netflix] could pressure the studios to throw Canada into a bigger global deal,” Purdy says. “That’ll be the tension point.”

The other new, potentially “game-changing” factor is Netflix’s headlong charge into producing its own exclusive series. If it really is a premium pay service like HBO, it’s going to need those series to drive subscribers and revenue. Purdy mentioned a recent conversation he had with AMC brass, who feel they need six to 10 exclusive hit series per year to stay relevant to subscribers, advertisers and distributors. “Anything less than that and one of those three relationships is at risk,” he says.

Netflix differs from that model in several ways. For one, it doesn’t have to cater to advertisers or distributors, seeing as it’s an over-the-top internet service. But more importantly, it may actually need more than 10 series to ultimately keep customers hooked. Since its strategy is to post every episode of a series at once, subscribers can binge view them very quickly, then ditch Netflix if they don’t see anything else that catches their eye.

Estimates peg this subscribe-and-quit rate—also known as churn—to be very high, at around 40 to 50% of customers per year. Those same analyses suggest that Netflix needs high-quality, exclusive series such as House of Cards to improve customer stickiness.

The only problem is the math. Including House of Cards and the recently launched Hemlock Grove, which has received largely negative reviews, Netflix will have five original series this year. If a channel such as AMC, which airs individual episodes of its “must-have iconic” series once a week, needs six to 10 of them over the course of a full year to retain customers, how many will Netflix need?