5 Things Netflix Inc's Content Boss Ted Sarandos Wants You to Know

By Markets Fool.com

Image source: Netflix

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Netflix executives are in the mood for sharing these days. And investors just can't get enough of it.

On the heels of the digital video pioneer's first-quarter earnings report and its customary analyst call, Netflix CEO Reed Hastings dropped in on a German trade show for another information-packed fireside chat.

And if that weren't enough, chief content officer Ted Sarandos followed up by the stage at an American seminar. At the MoffettNathanson Media & Communications Summit in New York City, Sarandos held an hour-long chat with analyst Michael Nathanson. They discussed content strategy, global expansion, the value of Marvel titles, and much more.

Here are five of the biggest scoops Sarandos shared on that stage.

Global rights

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"There's a dynamic as we do more and more international expansion," Sarandos said.
"When you get there, you realize that some of these shows are really under-distributed in those markets. So when we got to the UK, Breaking Bad was on a network that was not getting watched in the time slot it got, so the show got canceled. Breaking Bad got canceled in the second season in the UK.

"Obviously, there is nothing wrong with Breaking Bad and there was nothing wrong with it in the UK. It was just on the wrong network at the wrong time. So it was incredibly valuable for us to step in and pick it up.

"Orange is the New Black in Australia is very similar, which is it was under-distributed in the market and we thought we could bring a much bigger audience to it. And we wanted to make sure we went back in and bought back the past season rights, and the exclusive rights on the go-forward. And at the time when we first commissioned Orange is the New Black, we didn't know what our Australia plans were, so we let those rights go.

"So we don't do that on any of our originals now, we don't let those territories go anymore, and I think it's got tremendous global value for us."

Here, Sarandos outlines how territorial license deals can come back to bite Netflix as it expands on a global level. Remember, the company plans to cover the world by the end of 2016, so these issues got pushed to the forefront very quickly.

Sometimes, like in the British Breaking Bad scenario, Netflix can step in and take advantage of glitches in the global patchwork of content rights. If someone fumbles the distribution and marketing of a valuable show in an otherwise perfect cromulent market, Netflix and its streaming model just might work where the original platform failed.

On the other hand, striking license agreements on a market-by-market basis leaves the company open for the flip side of the same coin. That's why it makes sense to set up new shows with a blanket distribution contract to cover every conceivable market. If at first you don't succeed, skydiving might not be your sport but at least you can try again -- as long as you still own the distribution rights in the failed territory.

How is Daredevil doing?
As the first bit of original content to come out of Netflix's Walt Disney contracts, Daredevil serves as a barometer of that crucial relationship. Here's an update from Sarandos on how Netflix markets around the world have responded to the gritty superhero show:

"We are thrilled with the show right out of the gate and around the world.

The Marvel brand and the Marvel Universe is incredibly valuable, a known IP everywhere in the world, so it came out of the gate strong and we are thrilled and it is a really unique model.

I'm sure it has been reported heavily, but we are doing four original character seasons and then a fifth season where all the characters come together, and then some of the four will have multiple seasons of shows. So it's a long-term big universe commitment and the characters from the show and the mythology of the show will start bleeding into the Marvel movie universe.

So it's a really great integration of the Marvel Universe across a bunch of different media platforms and we are thrilled with the partnership."

(Feeding the upcoming first-window Disney deal ... full of Marvel goodness.)

No hard data, but Sarandos seems pleased with this experiment.

Keep in mind that the five shows under the Defenders umbrella are harbingers of an even bigger contract. In 2016, Netflix gets exclusive streaming rights to the Disney catalog. This includes rights to new Disney movies in the traditional first distribution window, which usually belongs to a premium cable network. In Disney's case, Netflix will take this window from Starz when that cable channel's Disney contract expires.

This deal gives Netflix exclusive rights to exploit upcoming titles such as Captain America: Civil War, the Frozen sequel that's under development right now, and the third Star Wars trilogy.

Now, this was originally a U.S.-only agreement. But the companies quickly struck a similar accord for the Canadian market. And when Netflix launched in Australia two months ago, the service came with a broad Disney catalog right away. I think it's fair to assume that Netflix is working on a truly global contract here, though the House of Mouse must first honor whatever deals it already has in place around the world. So it could take some time, but the destination is obvious.

Of course, Netflix would love to nail a global Disney deal down before opening its doors in every nation on Earth. I can't think of a better promotional tool than an exclusive ticket to the Disney library. In the meantime, Netflix will be happy to nail down one territory at a time to form a temporary patchwork. It's not Sarandos' first choice, but an excellent compromise that builds on an already strong relationship.

Image source: Netflix

Spend more on this, not that

"What we are doing with originals has been kind of in lieu of looking for more output deals," Sarandos said.

"The pay-TV output deals, the biggest problem with them in my opinion is that they are too long. About 10 months from the time they are in the theater to the time you can get them on Netflix, in their kind of earliest window. And for me, for that kind of money, I think I would rather try what we're doing with original movies, which is be fully exclusive.

"Remember, in those pay deals, you are not really exclusive. They are on VOD and DVD and they stay there for a long time. So with original we can get global, we can get more exclusive access to the programming, we can get faster windows -- all for, I think, less money than a typical output deal."

Here, Sarandos explained why Disney might be a special case. Pay-TV deals, like the Disney contract, come with some serious drawbacks that don't exist when you are producing your own content.

That's why Sarandos isn't looking for pay-TV distribution window deals from every studio under the sun. He'd rather spend that time, effort, and budget on more Netflix originals, ready for distribution in every corner of the globe. Elsewhere in this presentation, he noted that original shows produce more bang for the buck in terms of hours viewed per dollar spent.

Netflix already has an impressive slate of upcoming shows on tap. Expect many more titles on that list in 2016.

Local content on a global scale

"We recently reorganized my team," said Sarandos. "They are fully global, so I don't have regional buying teams anymore.

"The local programming is really important country by country, but in most cases, it is not more than about 15% to 20% of watching or spending. So while it is super important, we didn't want to organize the company around it.

"And so I have people who still focus on those deals, but they work within the global team. And more and more of what we are licensing, we license on a global basis. Even though the studios aren't orchestrated to sell that way yet, my bet is that they will. And when we go forward, when we show interest in a show, in some cases, it is either we are interested in the global rights or we are not interested at all.

"So that is one way we try to move the needle over. And remember, we are a curated service. We are not trying to carry everything. It is not like we are leveraged in that way, where we will have to buy the way they sell because we're trying to get everything; we will buy the way we buy and be a competitive bidder for that product."

That's one way to start tipping the scales toward a global licensing model.

Netflix is producing locally flavored shows in various exotic locales such as France, Colombia, and Long Island. These titles are sure to become eyeball magnets in their own backyards, adding a touch of local interest. But they should also travel well, replacing your Travel Channel fix with colorful Netflix fare. You could see family ties drama Bloodline as an early step in this direction, being shot in the sandy beaches and steamy swamps of the Florida Keys.

It's still an untested theory, but Sarandos is betting that it will work.

Rising program costs

Ted Sarandos, head of Netflix content operations. Image source: Netflix

Nathanson pointed out that many Netflix bears worry about content costs rising out of control. Won't the company's success in digital distribution just drive up licensing costs into the stratosphere?

"Perhaps," Sarandos said. "I think mostly, though, we have a big platform we can monetize better than most.

"We have original programming that will act as a balance, a counterbalance to some of that as well. So for me, when the cost of a show gets irrational, we have the discipline and the history and we've displayed that history to say, 'That just doesn't make sense for us. For that kind of money, we would rather have two other things that people will watch.'

"And we have done that time and time again. So we always anticipated there would be competition. There is competition for shows and there's competition for customers and we've been navigating those grounds since we've been doing this."

That's a juicy statement.

Netflix is fully aware of the pitfalls that come with runaway success in a brand new field. Original productions serve as a hedge against the potential for runaway content costs, and also set the brand apart from the competition.

Moreover, Netflix isn't trying to stream the entire Hollywood catalog. As the chief curator of Netflix's content portfolio, Sarandos is picking out the most cost-effective materials he can get his hands on.

Sometimes, that means paying a premium for excellent shows. Other times, it means diving into the bargain bin. There's an audience for every niche, and Netflix grabs their attention by building a broad -- but far from complete -- catalog.

The article 5 Things Netflix Inc's Content Boss Ted Sarandos Wants You to Know originally appeared on Fool.com.

Anders Bylund owns shares of Google (A shares), Netflix, and Walt Disney. The Motley Fool recommends Google (A and C shares), Netflix, and Walt Disney. The Motley Fool also owns shares of Google (A and C shares), Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.