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So What Are You Supposed to Make of Netflix?

The dust has pretty much settled since Netflix surprised a lot of people by getting into original programming with one massive swing, but you still have no idea what the hell to think about the company. It’s okay, go ahead and admit it. No one else really knows either.

If you own programming, yes they are giving you some found money on the back end. But ever since they announced they were spending big bucks on a fancy new original project called House of Cards, suddenly their widespread distribution pipe and simple customer interface looked a lot more threatening.

So what do you do with Netflix? Keep selling them your stuff and cash the checks in the short term, a keepthe- enemies-closer kind of strategy? Or do you cut them off and treat them like the potential adversary they will eventually become? Is all of this keeping you up at night? You’re not alone.

Not too long ago, a high-level broadcast network executive told me they were up in the wee hours one night trying to " gure out what to make of Netflix, and started writing down their thoughts. They were smart enough not to put their name to it and send it around à la Jerry Maguire, because they are in business with Netflix, and getting " red is overrated these days. But I asked them to send it to me, and it was fascinating.

They wrote that it “was not surprising to any student of media that Netflix has chosen to get into the original production business. This is a well-trodden path for new programming aggregators such as HBO, Showtime, USA and TNT.”

But, they wrote, the catch is that Netflix had recently invested signi" cant time and effort trying to convince Hollywood that it is not a competitor. And with one move, that perception changed in the eyes of many, including this executive: “Led by Time Warner, Netflix has been suspected by many to be a wolf in sheep’s clothing, trying to overpay for content to ramp up its subscriber base to a critical mass that will enable it to become the cord-cutter’s equivalent to HBO. By entering into the original content business, especially in the splashy way Netflix has done with House of Cards, it seems that Netflix may just have shown its fangs and beady eyes a bit too soon.”

And those fangs were the subject of quite a few conversations last week in Chicago, where the cable industry met to talk about what is next. While Netflix reps were not to be found on any stages at The Cable Show, chatter about the company was a constant.

No one will really say it out loud, but many programmers think Net! ix was smart to jump into originals, that it was inevitable, but that they did it the wrong way. Many wondered why instead of plunking down huge money on a show that multiple other networks had already passed on making, Netflix didn’t take all that dough and make 10 pilots, then pick a few of those and better their chances.

While that’s the production process that has led to most TV shows tanking, it does make sense in one respect: Netflix is a company with a hot reputation that is trading on buzz as well as its growing subscriber base. If they put all their original eggs in one basket, does the brand take a hit if it tanks?

But really, that’s not the issue. For pretty much everyone who makes and/or distributes television programming, there is really just one question on everyone’s mind: is Netflix a friend or a foe?

Most industry execs like to sing its praises, while some savvy big names, like Time Warner’s Jeff Bewkes and Showtime’s Matt Blank, have been more calculated with their words or their actions.

So we decided to just listen to what the talk was on industry panels, and then take it a step further. We asked a sample of top cable industry execs if Netflix was a friend or foe—and if that opinion changed once the company announced it was jumping into the original programming game itself. The answers—or lack thereof—were telling. Many very senior execs simply told us they would rather not talk about Netflix on the record. The reasoning to us is obvious: It’s not that they want to hide their strategy, it’s that they just don’t know yet. In the meantime, they don’t want to bite a hand that is currently feeding them.

But plenty of others had the con" dence to share their thoughts. There is a healthy amount of respect being paid toward Netflix, as everyone wants to keep collecting from them while they " gure out exactly what to make of them. But everyone is sleeping with one eye open.

Ken Lowe, chairman/president/CEO, Scripps Networks Interactive

Netflix—friend or foe? We see them as a friend because it’s another platform for some of our library content.

Did your opinion of them change when they acquired their first original series? Not necessarily. Having done this for a number of years, we know the challenges of creating original programming, so a one-off I don’t think changes the equation.

David Zaslav, president/CEO, Discovery Communications

Netflix—friend or foe? I think in the long run, friend to the content industry because they provide another opportunity to sell content, particularly because they’re buying content that’s two or three years old, and they’re creating a market for content that didn’t exist before.

Did your opinion of them change when they acquired their first original series?
No. Net! ix as a provider of older content is an easy yes for the content players and maybe a neutral to positive for distributors. As they start to move into original content, and newer [content], there’s a real question of how the content industry will support them and how the distributors will react to them. As they do newer content and more original, they move closer to a direct competitor of the distributors.

Tom Rogers, president and CEO, TiVo

On Netflix: I think we’re at a critical point here. I think the cable industry was much too slow coming to understand the phenomenon of Netflix and what it’s created. I think now they realize how much of the broadband capacity of their subscribers is being absorbed with content that is not being provided by the operators, but is being provided by a third-party video packager. And that in and of itself gives them certain competitive weapons through pricing and all to deal with it….I think the issue with Netflix is that we’ve often seen that people that are first out have enormous advantages and HBO is a perfect example of that. That begins to build on itself in terms of what you can pay for content and how much you can afford to pay for original contnt, which has a unique way of creating a hold on the user and the viewer.

Netflix—friend or foe?
Well I think they’re a friend in that they’ve shown them that broadband to the TV is not a kind of a techy early adopter….People said, “People aren’t going to connect broadband to their television set. It’s not going to happen.” We’re beyond that. Netflix proved this is mass. Mass with options. It’s going to be mainstream television. In that I think they’re a friend because they have helped transform the landscape to one which is going to be defined increasingly as get anything you want when you want it. And once you’re in that world, that much choice, it’s all about how do you create a user experience that’s personalized, makes it easy. And from there a lot of opportunity flows that the television industry has not begun to take advantage of.

Did your opinion of them change when they acquired their first original series? I’m not sure that Netflix will not for a long time to come be first and foremost thought of as a place where there’s an abundance of choice, of non-first run movies, non-first run television shows and probably a smattering of original programming. If there’s a Sopranos that emerges or a Mad Men, something that is truly a cultural phenomenon that has the ability in and of itself to drive subscribers from its popularity, that could change the nature of things. That’s lightning in the bottle stuff.

Carolina Lightcap, president, Disney Channels Worldwide

Netflix—friend or foe? We view distribution opportunities as positive. You probably heard something similar from Bob Iger at the digital conference, so that is how we think of it.

Did your opinion of them change when they acquired their first original series? No, not really. [Distributing acquired product] is still their core focus, clearly. We’re more than happy to take all competition. And to the extent that a Netflix wants to pay for the kinds of rights that comprise our services, undoubtedly they’re going to have to charge prices that are comparable to the prices of our services.

Kim Martin, president/GM, WE tv and Wedding Central

Netflix—friend or foe? We don’t really have a position on Net! ix at this time, we don’t have a deal with Netflix. At this time the cable operators are where we drive our revenue, so we don’t have any deal with Net! ix and we’re not really embracing the over-the-top model.

Did your opinion of them change when they acquired their first original series? I think they’re in the programming space, there’s no doubt about it. I think the fact that they’re in 25 million households says that they’re a force to be reckoned with. It’s a changing model.

Michael Smith, general manager, Cooking Channel

Netflix—friend or foe? I see them just as what they always were. We forget, they started out as a competitor to Blockbuster, as a very successful business in the home video rental world. And they’ve morphed into a streaming company because they’ve found it’s much more efficient to deliver home rentals through stream. And to me, that’s all they are. And they do that very, very well.

So your opinion of them didn’t change when they acquired their first original series? So the top 75 cable networks make, what, 7,500 shows, Netflix makes one show, and they’re a competitor? I guess I shoot baskets on the weekends, I guess LeBron James is worried about me winning the championship next year. I think the people that should worry about them, and they have proven it, are the Blockbusters and the other video services, Amazon’s video download service, Walmart’s video service. They become the go-to place to rent videos, which is always what they wanted to be. They’re not a TV network, they’re just making direct-to-video product to help make their video store more competitive to other video stores.

Sean Cunningham, president and CEO, Cabletelevision Advertising Bureau (CAB)

Netflix—friend or foe?
It’s a distribution platform, a subscription distribution platform. We’ve got several. Ultimately this is a business of partnerships, frenemies, cooperation and litigation. Most of the relationships are relationships where they’re continually testing the boundaries as to what their core relationship is and what’s within their permission continuum. So a little tension in the continuum? Nothing new. Anything that pushes the edge in terms of the tension on our key issues about content and distribution is ultimately a friend to the industry. So to me, even if they’re wearing a foe jersey, and it seems like that’s the way everybody sees it, ultimately it’s a friend to the business because it’s agitating on the edge of our model and it’s going to make us stronger.

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