Stranger Things shows just how much Netflix has transformed TV

Silicon Valley economics allow the company to back shows that might not find a home elsewhere.

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Today’s release of Stranger Things 2 is the second act in a modern TV story that underscores the transformative impact of the platform it will be watched on: Netflix.

The nostalgia-heavy supernatural series debuted last July and became the definition of a water-cooler hit. It wasn’t until people began gushingly recommending the show to their friends that its popularity surged and it became the most-discussed programme of the summer.

“Last year it was very much a sort of under the radar thing; we weren’t getting a lot of information about it,” says the Radio Times website’s on-demand editor James Gill. “Now, they [Netflix] are basically building their year around it. It’s almost a guaranteed winner for them.” Word of mouth hits are hardly new in TV. But the success of relatively unknown brothers Matt and Ross Duffer in achieving the funding and artistic freedom to produce Stranger Things owes much to Netflix’s innovative business model.

Unlike traditional broadcasters, Netflix is not concerned with bringing in large audiences to please advertisers, avoiding clashes between similar programmes or finding primetime slots for big productions. What matters is not even whether lots of people watch a show, but whether enough love it to take out or renew a subscription.

Much is made of the company’s data-driven commissioning. The recently released Mindhunter combines a popular topic – notorious serial killers – with a popular writer, David Fincher, in what Gill says seems “straight out of their algorithm playbook”. But more than clever data, it is the Silicon Valley economics underpinning Netflix’s strategy that enable the company to put significant amounts of money behind programmes that might not find a home elsewhere.

Last year, Netflix chief executive Reed Hastings told me that the company still had “a long way to go to get to ubiquity”. But its impact on the TV industry suggests this is a feasible goal.

Earlier this year, Netflix announced that it had passed 100 million subscribers, just over half of whom are outside the US. In the UK, Ofcom estimates that Netflix is used by nearly a third of adults, and almost half of teenagers.

Much of that growth reflects its low price of under £10 a month. “It’s something you can have on top of your regular services,” says Gill. “We’re at the stage where Netflix is just part of the fabric.”

Then there’s the company’s global scope. Shows such as Narcos, about the drugs trade in South and Central America, or the Japanese manga adaptation Death Note, help draw local audiences while also appealing to many viewers outside those countries.

This combination provides Netflix with the prospect of huge scale, which drives its aggressive approach.

“They still look like a start-up in many ways,” says Jonathan Broughton of analyst IHS. “They are not afraid to go back on something they have invested in. They are not afraid to upset their investors for a single quarter if they think that’s right for the overall company strategy.”

Like many tech companies, Netflix has faced scrutiny not only for its disruptive impact, but also for the relatively small amount of tax it pays.

Last year, the company registered just €22m in UK revenue and paid negligible tax on a profit of €1m, even though some estimates put its total British subscription revenue closer to $520m. In common with others, Netflix uses “efficient” tax structures that take advantage of the inadequacies of national tax regimes to constrain multi-national companies.

And yet like its TV-streaming rival Amazon, Netflix can argue that its low tax bill is in part the result of reinvesting the bulk of the money it makes. In 2016, its global revenues hit $8.8bn, but its profits were just $187m, primarily because the company has become one of the world’s largest spenders on original productions. This year its programme bill will reach $6bn, up $1bn on 2015, and it is set to increase the figure by $1bn a year until at least 2019.

While some of Netflix’s competitors have complained about the impact of that money – the boss of US network FX said in 2015 that there was “too much TV” – it is good news for people who make programmes.

“It’s all new money coming into projects that otherwise would not have been made from the UK,” says John McVay, the chief executive of independent producers association Pact. “It’s not just the money… they are very quick, they don’t have lots of oversight and interference editorially.”

Netflix has applied the scale economics of tech to the creative, high-value business of TV. In doing so, it is transforming everything from the programmes that get made to the way we watch them. While that may upset some of its competitors, it means the range of high-quality TV available at the click of a button will keep growing, too. 

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Now listen to a discussion of Stranger Things 2 on the NS pop culture podcast, SRSLY:

Jasper Jackson is the New Statesmans digital editor. He was formerly assistant editor of Media Guardian, and editor of TheMediaBriefing.

This article appears in the 26 October 2017 issue of the New Statesman, Poor Britannia