How Netflix Built its House of Cards (and Changed TV Forever)

Before "House of Cards” was a hit TV series, it was a total shot in the dark. Luckily for the small production company behind it, Netflix saw it as a shot worth taking. Professor Anita Elberse discusses how the Emmy-winning show flipped the script on standard television series production, brought binge-watching into the mainstream, and ushered in a new era of must-see programming.

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Podcast Transcript

Brian Kenny: Since breaking the industry barriers with its launch of the political drama "House of Cards" in 2011, Netflix has spent billions on new content and has been rewarded with steady user growth. In 2016 they're doubling down on original content with plans to produce 600 hours, up from 450 the previous year. Yes, Netflix has changed the landscape of the business of television, but the story may not have unfolded that way were it not for MRC, a film and television studio that was willing to flip the script. Today, we'll hear from Professor Anita Elberse about her case entitled "MRC's House of Cards." I'm Brian Kenny, and you're listening to Cold Call.

Anita Elberse is an expert in the business of entertainment, media, and sports, and the creator of an Executive Education program at Harvard Business School that carries that very name. She's written extensively on this topic including the case that we're discussing today. Anita, welcome.

Anita Elberse: Thank you, it's great to be here.

Kenny: Could you start by setting this up for us? Who are the protagonists and what's the dilemma they're facing?

Elberse: Sure. The case is set in 2011, we go back a little bit, which is a time when "House of Cards" was not yet on the air. There was an idea and there was quite a bit of development that had taken place at MRC, Media Rights Capital, led by two executives, Asif Satchu and Modi Wiczyk, and they had shopped this idea around to various networks. To their big surprise—and that's where the case really focuses on—Netflix came along and said, “We might want to take this as our first major bet in original programming.”

Kenny: Which was a revolutionary concept, and we'll get into the details about why that is. What prompted you to write this case?

Elberse: Now looking back on it, and I wrote it a few years ago, for me it's a pivotal moment in television history, actually. Of course we all know now, it turned out to be Netflix's first major bet in the world of online video. This was a very expensive show for them, a huge risk, and I think it has prompted many such investments by Netflix, but also by other players since then.

Kenny: Are you a viewer of "House of Cards"?

Elberse: I am a viewer, yes. You’ve got to love Francis Underwood.

Kenny: Only a mother—only his mother could love him, I think. To lay this out and help people to understand, we need to talk about the prevalence of television in America. We know it's a big deal, but you have some great statistics in the case. It's a $200 billion industry?

Elberse: Yes, it's a gigantic industry. The statistic I love the most is that the average US consumer watches five hours of television every day. We spend an enormous amount of our time and of our money on watching television, so these kinds of investments that companies are making can have huge consequences for popular culture.

Kenny: Right, and now we compound the traditional television viewing experience with the online viewing experience, and there's more than enough opportunity to spend five hours a day watching something, right?

Elberse: Exactly, and sometimes multiple things at the same time, apparently. That's all the rage now.

Kenny: That's the shortening of our attention spans. Can you describe the TV landscape to us? You break it out very nicely in the case with the different types of TV that are out there.

Elberse: The way I think about it—I mean obviously we have a number of different producers (and MRC is an independent, relatively small production company) but we have huge producers of television content as well. Many of the major studios, the major television studios, are part of these huge conglomerates, right, the Disneys, and the Time Warners. That's where television shows originate, and then there's a range of distributors of that content, a range of intermediaries that make sure that that content actually gets to the consumer.

There I think of four major groups: the broadcast channels, the ABCs and the NBCs and the CBSs. There are basic cable networks, cable networks that are part of your cable bundle but that would still carry some advertising, so they make their money partly from that advertising and partly from the cable fees that consumers pay. There are premium cable networks, the third group, HBO and Showtime are examples of that, and they don't run advertising. They solely depend on the subscription fees that we as consumers pay. Then the fourth group, which is obviously a major focus in this case, are these online services, Netflix, and Amazon has come up strongly in recent years. They introduced binge viewing. They, too, depend on subscription fees, but it's quite a different experience to be watching these online services.

Kenny: Binge viewing for those listeners who don't know what that is, that's when you find a rainy day and you sit down and you watch an entire season of a show, which is really relative to this case.

Elberse: Yeah, I saw recently (and it's not in the case) that I think on average people watch four or five episodes in one go, which is quite amazing.

Kenny: There's your five hours right there. It's complicated about how shows get created and sold. Can you describe that as you do in the case?

Elberse: Sure. There's obviously a number of different ways in which this goes, and the way in which it went in the case for MRC is different from how it usually goes. The typical process you have to picture as several steps. It starts with an idea, and someone might say, “Hey, we should do a television show on X.” In this particular situation and very often you see that you need to get the rights to actually do that, right, if it's based on an existing book or an existing character or something else that already resides in popular culture. You need to make sure you get the rights. Another step might be to make sure you get the team, get someone who could be the executive producer, someone who could be the writer. Usually there's a quick pitch that happens at that moment, right, so someone might write a few pages that says, “Here's the idea.” But very often they go to the networks relatively quickly and say, “Would you be interested in helping us fund this idea and helping to make it possible?”

In this particular situation, MRC chose to do something very different. They said, “Actually, we'd like some time to develop this.” They invested in the development of a pilot, they invested in what we call a show bible, which is—this is not just what's happening in episode one, but we're going to be describing what's happening across the season, what's the story arc, what's going to happen to the major characters. They also did a lot of work in trying to get the director. David Fincher signed on to be a director and actually ended up directing the first episode, which is a really big deal. They also invested in getting cast members. The major players, the major actors and actresses involved were cast at a relatively early stage, even before there was a network deal. They took one and a half years, which is a really long time. As I said, usually they go to networks really fast and spend what they describe as a high six figure amount—not a great deal of money, but substantial if you have no idea whether this is actually going to be sold. They spent that money and they spent that time, and only then did they go to the networks.

Kenny: This is part of what differentiates MRC in this space is they had had some success, they had quite a bit of success, out of the gate with some movies that got great critical review. But their emphasis on building a relationship with the artists, with the creative talent, was something different, yes?

Elberse: Yes, absolutely, and that might be their main point of differentiation, the fact that they had these really strong relationships with the talent and that they gave the directors and the cast members and the producers and the writers this time to really develop this idea and make it their own. That might be a reason why they decided to go with this idea as opposed to pick from all the other opportunities that come from the major studios.

Kenny: You describe in the case how the seasonality of how some of these pitches are made and how it differs from the broadcast networks to now we've got these online. There's a different approach these days and it's not as regimented, and it allows for a little bit of this creativity to come into the process that really wasn't part of it before.

Elberse: Yeah, absolutely, and what you also see is that—and this is a major part of the decision here—that networks increasingly are willing to make full season orders. At the time in 2011, the idea that Netflix was going to put in a full season order, that they were saying, “We'll take thirteen episodes…in fact we'll take two seasons, we'll take twenty-six episodes,” that was really unheard of at the time.

Kenny: But not without some trepidation, I guess, on the part of MRC because Netflix was a new player in this space. Let's talk about some of the concerns they had about that.

Elberse: Yeah, there were lots of concerns, and I think that's what makes the case so interesting. We know that it worked out well, that show became really successful, but if you go back and analyze the decision they made at the time, it's not at all obvious that going with Netflix was the right choice. No one knew how they were going to be marketing the show. There weren't other hit shows that they could use to market this show to consumers, which is usually what the traditional networks do. No one knew if the show would qualify for awards, for instance, right? Could you win an Emmy if you go on online video? There were lots of unknowns about the situation.

Kenny: You point out in the case also that politics as a theme doesn't necessarily translate so well internationally, and the way this deal was cut, they needed to rely on that international audience to make up the difference of what Netflix was offering them.

Elberse: Yes, the way it works is that if you sell a show to network, usually you do it under what's called a deficit financing deal, so if an episode cost $3 million to produce, the network licenses that show but for a fee that's not quite allowing you to recover all those costs. They might pay $2 million for an episode, which means that MRC has to make up $1 million each episode and they do that by going for these other windows. Netflix just says, “We want to be the first window, so everyone in the US and Canada can see this show first on Netflix,” but MRC can still go to the international market and get it on television, can still sell DVDs, they retain the ownership, can still find other sources of revenue. If the show had failed on Netflix, it's not entirely clear that they would have been able to go for these other sources of revenue. In fact, the fact that they made the deal with Netflix made it very uncertain that they could cut deals with international television companies because they were wondering: what kind of show is this? I don't understand what they're trying to do, so how do I fit this into my regular way of doing business?

Kenny: You've discussed this case in class?

Elberse: I have, several times in both my MBA course and in Executive Education.

Kenny: I'm curious, what's the difference in the way that it's received from MBA students versus Exec Ed students? Do they come at it differently?

Elberse: This may be disappointing, but I think they come at it exactly the same way. I think they're all really keen to discuss it. The show is popular across the world, so it works well with the international audiences, too. They seem really interested in understanding what would have been the right decision at the time, would I have made that decision myself to go with Netflix? I think they enjoy diving into the development process and learning what is it usually like and why did MRC decide to change the process so significantly, and is that something we'll see more often? They enjoy looking at the television industry as a whole and say this is one example of a distributor trying to become an original programmer. Will we see this more often? What does this mean for the world of television? I've taught it with audiences where everyone in the audience was part of the television industry in one form or another, so you can imagine that those become very heated discussions.

Kenny: This leads me to my last question, which is if you look at MRC and what they've done, would you categorize them as a disruptor in this space?

Elberse: I think they certainly were very innovative and they were extremely gutsy. I think even now if you look at the decision, it's not clear that this was necessarily the safest or the most logical decision, but it certainly was very gutsy. As I said early on, I think it became a pivotal moment in television history, so in that sense they may deserve that stamp of being a disruptor.

Kenny: Well, I for one hope that they find some more breakout series like "House of Cards.” It's a great show.

Elberse: Yes, but "House of Cards" is still on the air, so...

Kenny: I need to catch up.

Elberse: You have a lot to look forward there to.

Kenny: I need some rainy days. Anita, thank you so much for joining me.

Elberse: My pleasure, my pleasure.

Kenny: You can find this case along with thousands of others in the HBS case collection at hbr.org. I'm Brian Kenny and you've been listening to Cold Call, the official podcast of Harvard Business School.

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Podcast Transcript

Brian Kenny: Since breaking the industry barriers with its launch of the political drama "House of Cards" in 2011, Netflix has spent billions on new content and has been rewarded with steady user growth. In 2016 they're doubling down on original content with plans to produce 600 hours, up from 450 the previous year. Yes, Netflix has changed the landscape of the business of television, but the story may not have unfolded that way were it not for MRC, a film and television studio that was willing to flip the script. Today, we'll hear from Professor Anita Elberse about her case entitled "MRC's House of Cards." I'm Brian Kenny, and you're listening to Cold Call.

Anita Elberse is an expert in the business of entertainment, media, and sports, and the creator of an Executive Education program at Harvard Business School that carries that very name. She's written extensively on this topic including the case that we're discussing today. Anita, welcome.

Anita Elberse: Thank you, it's great to be here.

Kenny: Could you start by setting this up for us? Who are the protagonists and what's the dilemma they're facing?

Elberse: Sure. The case is set in 2011, we go back a little bit, which is a time when "House of Cards" was not yet on the air. There was an idea and there was quite a bit of development that had taken place at MRC, Media Rights Capital, led by two executives, Asif Satchu and Modi Wiczyk, and they had shopped this idea around to various networks. To their big surprise—and that's where the case really focuses on—Netflix came along and said, “We might want to take this as our first major bet in original programming.”

Kenny: Which was a revolutionary concept, and we'll get into the details about why that is. What prompted you to write this case?

Elberse: Now looking back on it, and I wrote it a few years ago, for me it's a pivotal moment in television history, actually. Of course we all know now, it turned out to be Netflix's first major bet in the world of online video. This was a very expensive show for them, a huge risk, and I think it has prompted many such investments by Netflix, but also by other players since then.

Kenny: Are you a viewer of "House of Cards"?

Elberse: I am a viewer, yes. You’ve got to love Francis Underwood.

Kenny: Only a mother—only his mother could love him, I think. To lay this out and help people to understand, we need to talk about the prevalence of television in America. We know it's a big deal, but you have some great statistics in the case. It's a $200 billion industry?

Elberse: Yes, it's a gigantic industry. The statistic I love the most is that the average US consumer watches five hours of television every day. We spend an enormous amount of our time and of our money on watching television, so these kinds of investments that companies are making can have huge consequences for popular culture.

Kenny: Right, and now we compound the traditional television viewing experience with the online viewing experience, and there's more than enough opportunity to spend five hours a day watching something, right?

Elberse: Exactly, and sometimes multiple things at the same time, apparently. That's all the rage now.

Kenny: That's the shortening of our attention spans. Can you describe the TV landscape to us? You break it out very nicely in the case with the different types of TV that are out there.

Elberse: The way I think about it—I mean obviously we have a number of different producers (and MRC is an independent, relatively small production company) but we have huge producers of television content as well. Many of the major studios, the major television studios, are part of these huge conglomerates, right, the Disneys, and the Time Warners. That's where television shows originate, and then there's a range of distributors of that content, a range of intermediaries that make sure that that content actually gets to the consumer.

There I think of four major groups: the broadcast channels, the ABCs and the NBCs and the CBSs. There are basic cable networks, cable networks that are part of your cable bundle but that would still carry some advertising, so they make their money partly from that advertising and partly from the cable fees that consumers pay. There are premium cable networks, the third group, HBO and Showtime are examples of that, and they don't run advertising. They solely depend on the subscription fees that we as consumers pay. Then the fourth group, which is obviously a major focus in this case, are these online services, Netflix, and Amazon has come up strongly in recent years. They introduced binge viewing. They, too, depend on subscription fees, but it's quite a different experience to be watching these online services.

Kenny: Binge viewing for those listeners who don't know what that is, that's when you find a rainy day and you sit down and you watch an entire season of a show, which is really relative to this case.

Elberse: Yeah, I saw recently (and it's not in the case) that I think on average people watch four or five episodes in one go, which is quite amazing.

Kenny: There's your five hours right there. It's complicated about how shows get created and sold. Can you describe that as you do in the case?

Elberse: Sure. There's obviously a number of different ways in which this goes, and the way in which it went in the case for MRC is different from how it usually goes. The typical process you have to picture as several steps. It starts with an idea, and someone might say, “Hey, we should do a television show on X.” In this particular situation and very often you see that you need to get the rights to actually do that, right, if it's based on an existing book or an existing character or something else that already resides in popular culture. You need to make sure you get the rights. Another step might be to make sure you get the team, get someone who could be the executive producer, someone who could be the writer. Usually there's a quick pitch that happens at that moment, right, so someone might write a few pages that says, “Here's the idea.” But very often they go to the networks relatively quickly and say, “Would you be interested in helping us fund this idea and helping to make it possible?”

In this particular situation, MRC chose to do something very different. They said, “Actually, we'd like some time to develop this.” They invested in the development of a pilot, they invested in what we call a show bible, which is—this is not just what's happening in episode one, but we're going to be describing what's happening across the season, what's the story arc, what's going to happen to the major characters. They also did a lot of work in trying to get the director. David Fincher signed on to be a director and actually ended up directing the first episode, which is a really big deal. They also invested in getting cast members. The major players, the major actors and actresses involved were cast at a relatively early stage, even before there was a network deal. They took one and a half years, which is a really long time. As I said, usually they go to networks really fast and spend what they describe as a high six figure amount—not a great deal of money, but substantial if you have no idea whether this is actually going to be sold. They spent that money and they spent that time, and only then did they go to the networks.

Kenny: This is part of what differentiates MRC in this space is they had had some success, they had quite a bit of success, out of the gate with some movies that got great critical review. But their emphasis on building a relationship with the artists, with the creative talent, was something different, yes?

Elberse: Yes, absolutely, and that might be their main point of differentiation, the fact that they had these really strong relationships with the talent and that they gave the directors and the cast members and the producers and the writers this time to really develop this idea and make it their own. That might be a reason why they decided to go with this idea as opposed to pick from all the other opportunities that come from the major studios.

Kenny: You describe in the case how the seasonality of how some of these pitches are made and how it differs from the broadcast networks to now we've got these online. There's a different approach these days and it's not as regimented, and it allows for a little bit of this creativity to come into the process that really wasn't part of it before.

Elberse: Yeah, absolutely, and what you also see is that—and this is a major part of the decision here—that networks increasingly are willing to make full season orders. At the time in 2011, the idea that Netflix was going to put in a full season order, that they were saying, “We'll take thirteen episodes…in fact we'll take two seasons, we'll take twenty-six episodes,” that was really unheard of at the time.

Kenny: But not without some trepidation, I guess, on the part of MRC because Netflix was a new player in this space. Let's talk about some of the concerns they had about that.

Elberse: Yeah, there were lots of concerns, and I think that's what makes the case so interesting. We know that it worked out well, that show became really successful, but if you go back and analyze the decision they made at the time, it's not at all obvious that going with Netflix was the right choice. No one knew how they were going to be marketing the show. There weren't other hit shows that they could use to market this show to consumers, which is usually what the traditional networks do. No one knew if the show would qualify for awards, for instance, right? Could you win an Emmy if you go on online video? There were lots of unknowns about the situation.

Kenny: You point out in the case also that politics as a theme doesn't necessarily translate so well internationally, and the way this deal was cut, they needed to rely on that international audience to make up the difference of what Netflix was offering them.

Elberse: Yes, the way it works is that if you sell a show to network, usually you do it under what's called a deficit financing deal, so if an episode cost $3 million to produce, the network licenses that show but for a fee that's not quite allowing you to recover all those costs. They might pay $2 million for an episode, which means that MRC has to make up $1 million each episode and they do that by going for these other windows. Netflix just says, “We want to be the first window, so everyone in the US and Canada can see this show first on Netflix,” but MRC can still go to the international market and get it on television, can still sell DVDs, they retain the ownership, can still find other sources of revenue. If the show had failed on Netflix, it's not entirely clear that they would have been able to go for these other sources of revenue. In fact, the fact that they made the deal with Netflix made it very uncertain that they could cut deals with international television companies because they were wondering: what kind of show is this? I don't understand what they're trying to do, so how do I fit this into my regular way of doing business?

Kenny: You've discussed this case in class?

Elberse: I have, several times in both my MBA course and in Executive Education.

Kenny: I'm curious, what's the difference in the way that it's received from MBA students versus Exec Ed students? Do they come at it differently?

Elberse: This may be disappointing, but I think they come at it exactly the same way. I think they're all really keen to discuss it. The show is popular across the world, so it works well with the international audiences, too. They seem really interested in understanding what would have been the right decision at the time, would I have made that decision myself to go with Netflix? I think they enjoy diving into the development process and learning what is it usually like and why did MRC decide to change the process so significantly, and is that something we'll see more often? They enjoy looking at the television industry as a whole and say this is one example of a distributor trying to become an original programmer. Will we see this more often? What does this mean for the world of television? I've taught it with audiences where everyone in the audience was part of the television industry in one form or another, so you can imagine that those become very heated discussions.

Kenny: This leads me to my last question, which is if you look at MRC and what they've done, would you categorize them as a disruptor in this space?

Elberse: I think they certainly were very innovative and they were extremely gutsy. I think even now if you look at the decision, it's not clear that this was necessarily the safest or the most logical decision, but it certainly was very gutsy. As I said early on, I think it became a pivotal moment in television history, so in that sense they may deserve that stamp of being a disruptor.

Kenny: Well, I for one hope that they find some more breakout series like "House of Cards.” It's a great show.

Elberse: Yes, but "House of Cards" is still on the air, so...

Kenny: I need to catch up.

Elberse: You have a lot to look forward there to.

Kenny: I need some rainy days. Anita, thank you so much for joining me.

Elberse: My pleasure, my pleasure.

Kenny: You can find this case along with thousands of others in the HBS case collection at hbr.org. I'm Brian Kenny and you've been listening to Cold Call, the official podcast of Harvard Business School.

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