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Net9ix and the Development of the Internet Television Network Net9ix and the Development of the Internet Television Network

Laura Osur

Syracuse University

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Abstract

When Netflix launched in April 1998, Internet video was in its infancy. Eighteen years later,

Netflix has developed into the first truly global Internet TV network. Many books have been

written about the five broadcast networks – NBC, CBS, ABC, Fox, and the CW – and many

about the major cable networks – HBO, CNN, MTV, Nickelodeon, just to name a few – and this

is the fitting time to undertake a detailed analysis of how Netflix, as the preeminent Internet TV

networks, has come to be.

This book, then, combines historical, industrial, and textual analysis to investigate, contextualize,

and historicize Netflix’s development as an Internet TV network. The book is split into four

chapters. The first explores the ways in which Netflix’s development during its early years a

DVD-by-mail company – 1998-2007, a period I am calling “Netflix as Rental Company” – lay

the foundations for the company’s future iterations and successes. During this period, Netflix

adapted DVD distribution to the Internet, revolutionizing the way viewers receive, watch, and

choose content, and built a brand reputation on consumer-centric innovation.

This reputation served it well during its second phase, “Netflix as Syndicator” (2007-12), when

the company turned from DVD rentals to online distribution. In chapter two, I explain who

Netflix adapted syndication – a business model that has been a staple of US broadcasting for half

a century – to Internet distribution. By doing so, Netflix up-ended both the TV industry’s

traditional content release structures and viewers’ habits. By shifting TV distribution to the

Internet, Netflix drastically increased the control viewers have over where, when, and on what

devices viewers watch TV.

In its third phase, Netflix entered the original programming business by subtly adapting

traditional program genres, content, and release schedules to Internet video. I split this phase –

“Netflix as Internet Network” (2012-present) – into two chapters. While many of Netflix’s

concerns parallel those of traditional networks – in terms of production and financing, for

example – Internet networks also have a number of unique concerns in areas such as Net

Neutrality and distribution windows. Netflix has led the charge on these issues, and chapter

three explores Netflix’s role as the first Internet network, including the development of its binge-

viewing strategy and its push into international distribution.

Finally, chapter four takes a deep dive in Netflix’s foray into original program production. In its

third phase, Netflix has adapted traditional TV structures to Internet distribution. Despite the

innovations in short-form and user-generated content that sites like YouTube, Crackle, and

Twitch have named, Netflix’s traditional approach to programming has set the template for

successful Internet networks that has been adopted by the likes of Hulu, Amazon, and Yahoo

Screen. Chapter four analyses Netflix’s biggest programs – including House of Cards, Orange is

the New Black, Daredevil and others – to explain how Netflix has adapted traditional TV genres

and structures to the freedoms in production, marketing, and content possibilities that the Internet

affords.

In the same was that NBC set the example for broadcast networks in the 1950s and HBO

developed the framework for cable TV in the 1990s, Netflix has set the template for Internet TV

in the 2000s. Netflix’s mix of technological advancements, consumer-centric practices,

personalized content, and global mindset have become the gold standard for the how-and-why of

developing a successful Internet TV network. Although other aspiring Internet networks Hulu

and Amazon started out with a different ethos than Netflix, Netflix’s financial, creative, and

cultural success has forced a series of reactionary decisions from both Hulu and Amazon that

have brought them closer and closer to the foundations Netflix began laying out in 1998. So

while the Netflix model isn’t the only possible model for an Internet network, it has become the

blueprint for the newly-developing Internet TV ecosystem.

NETFLIX AND THE DEVELOPMENT OF THE INTERNET TELEVISION NETWORK

by

Laura Osur

B.A., University of Chicago, 2007

M.A., Syracuse University, 2012

Dissertation

Submitted in partial fulfillment of the requirements for the degree of

Doctor of Philosophy in Mass Communications.

Syracuse University

May 2016

v

Table of Contents

Introduction … 1

Part I: History

Chapter 1: Netflix as Rental Company (1998-2007) … 21

1998-2007: Netflix’s Early Years … 23

Developing a Brand Synonymous with Innovation … 31

Innovation Reaches its Peak: The Netflix Algorithm … 36

Conclusion: Towards Internet Streaming … 43

Chapter 2: Netflix as Syndicator (2007-2012) … 45

Managed Dissatisfaction … 47

New Distribution Strategies … 49

New Content Strategies … 66

Conclusion: Growing Pains … 77

Part II: Netflix as Internet Network (2012-present) … 82

Chapter 3: Netflix Transitions to an Internet Network … 83

Net Neutrality … 84

Disrupting Distribution Practices … 90

Netflix Enters Film Production and Distribution … 96

Netflix as a Global TV Network … 102

Conclusion … 122

Chapter 4: Original Programming for an Internet Network … 124

The First Foray: Lilyhammer … 126

Quality Dramas … 129

Quirky Comedies … 144

Cult Shows … 165

Conclusion … 173

Conclusion: The OTT Ecosystem … 175

References … 184

CV … 215

1

Introduction

“[N]o one is happier to see streaming services take nominations away from Cable

than Network television. Not very nice when someone younger comes along is it, Cable?

Cable is looking at Netflix the way Justin Bieber looks at One Direction.”

– Seth Meyers, 66th Primetime Emmy Awards

It is fitting that I started this project on the eve of Netflix’s first Emmy ceremony. Only a year

after premiering its first original program – Lillyhammer in 2012 – all three of its qualifying

shows – House of Cards, Arrested Development, and Hemlock Grove – received nominations.

Just a year later, Netflix was the center of Seth Meyers’ opening monologue, signaling the

mainstreaming of Netflix as a legitimate original programming alternative to broadcast and

cable, for critics, audiences, and the Academy. Many books have been written about the five

broadcast networks – NBC, CBS, ABC, Fox, and the CW – and many about the major cable

networks – HBO, CNN, MTV, Nickelodeon, just to name a few – so this also seems a fitting

time to undertake a detailed analysis of how Netflix, as the preeminent Internet TV network, has

come to be.

When Netflix began its plans to deliver DVDs in 1997, both the Internet and the TV

landscape were radically different. At the end of the 1996-97 season, ER won the ratings race

with 21.2 million households weekly, and a 35 share (HH), followed by Seinfeld (20.5/32 share),

Suddenly Susan (17/27 share), and Friends (16.8/28 share). Seven of the top ten shows aired on

NBC. Nielsen regularly provided ratings in households, rather than the adults 18-49

demographic. On cable, 1997 saw the premieres of Oz (HBO, 1997-2003), Daria (MTV, 1997-

2002), Stargate SG-1 (Showtime/Syfy, 1997-2008), South Park (Comedy Central, 1997-), and

The Daily Show (Comedy Central, 1997-). It was still two years from when HBO would become

a legitimate original TV producer with the premiere of The Sopranos.

2

In 1997, Internet video was also in its naissance. Eight years before the debut of

YouTube, pixelated, somewhat primitive videos such as “Bad Day,” “Dancing Baby,” and

“Hampster Dance” circulated via e-mail over slow and unreliable dial-up Internet connections.

The foundations for Internet video had been laid, however, when, in January 1998, Ally McBeal

(Fox, 1997-2002) introduced the Dancing Baby Internet meme as a metaphor for Ally’s

impending biological clock, effectively integrating Internet video into popular broadcast

television programming.

The Netflix revolution began with the radical idea of using the US post office to send

DVDs to customers, a set-up not too far from the use of horses and elephants to transport the

circus from town to town a century ago. At one and the same time, Netflix’s DVD-by-mail

business was both old-fashioned and innovative. While the postal service is one of the

government’s oldest departments, applying the postal service to video rental distribution was an

innovative approach to a rental industry based entirely on brick-and-mortar stores. This balance

between old-fashioned and innovation is difficult to master; Blockbuster failed and other rental

stores like Hollywood Video and Movie Gallery never even tried. Netflix’s success lies in

elevating ‘old-fashioned’ to ‘cutting-edge,’ by mixing pre-existing elements of content

distribution with new and radical advancements. Before it began producing original programs,

Netflix took pre-existing DVDs of film and television shows and gave customers a new way of

receiving them; after, Netflix took pre-existing forms of televisual storytelling and adapted them

to new distribution methods. Part of being innovative is knowing when to maintain pre-existing

structures; namely, when comprehension and usability are predicated on these pre-existing

structures, formats, and models. By working within old-fashioned rubrics, then, Netflix was

able to be astonishingly innovative.

3

I subscribed to Netflix halfway through my undergraduate years at the University of

Chicago. Hyde Park didn’t have a movie theatre, so on Friday nights I would catch a classic film

on campus, or I would take a few-blocks-walk to our neighborhood Hollywood Video to stroll

through the aisles and argue with my dormmates over the limited rental options. Once Netflix

started delivering DVDs to our mailboxes, we would still spend our Friday nights arguing over

which of the films to watch, but now these discussions could be held in the Linn House living

room. For a University of Chicago student, the less contact with the outside world the better.

At first, our movie choices didn’t change much, but, as Netflix’s selection increased and

became more refined, our choices narrowed to our personal tastes. In the same way that having

1,000 cable channels allows for selective exposure, Netflix allowed me to skip the film club-

chosen movies that I was less interested in. Although I was less likely to fall asleep during a film

I considered boring, I was also less likely to discover something new, unique, or outside of my

traditional movie tastes.

The move towards personalization, individualization, and fragmentation in television

programming is nothing new. The early 1980s saw the development of cable television and an

explosion of channel options, a specification in Nielsen measuring technologies, and the

development of VCR technology, all of which paved the way for niche programming. The

decades-old business model that relied on a large, least-common-denominator audience gave

way to a more targeted business model. This new model allowed for the success of sophisticated

and literate quality television dramas, leading to the success of shows like Hill Street Blues

(NBC, 1981-87), St. Elsewhere (NBC, 1982-88), The Sopranos (HBO, 1999-2007), The Wire

(HBO, 2002-08), Mad Men (AMC, 2007-), and Breaking Bad (AMC, 2008-13).1

1 Programs like Hill St. Blues and St. Elsewhere were successful because their small, sophisticated, high–income, well–educated

audiences were worth a premium to advertisers. This was not, however, the only business model throughout the 1980s or, even,

4

The success of recording technology – first the VCR, then the DVR, then on-demand

streaming services – allowed for a sophisticated form of serialized storytelling designed for

repeated viewing. The popularity of Netflix coincided with the boom of the TV-on-DVD

market. While box sets cost upwards of $60 ($80 for BBC or HBO productions), Netflix

customers spent $15.95 per month to rent four discs at a time. When planned correctly, you

could watch a six-disc season in a week for the equivalent of $4. On computers and televisions

all across the country, viewers had unprecedented control over when, where, and how many

times they watched certain shows. Binge viewing did not start with Netflix, but Netflix certainly

had a role to play in the mainstreaming of personalized television viewing habits.

In 2007, a decade after Netflix started sending DVDs through the mail, the company

played an even bigger role in the digitization of television content. In only a few short years,

television content migrated from physical DVDs to streamed content that was stored on servers –

the Cloud – and accessible by computers, smartphones, tablets, and Internet-accessible television

sets. In important ways, the success of Netflix’s streaming service was both a result of, and a

contribution to, the popularity of mobile devices in the US and around the world.

For all its advancements, however, Netflix has innovated – stubbornly, surprisingly, and

ingeniously – within the framework of old-fashioned rubrics. Netflix has made an art form out

of adapting traditional business models to the Internet: in its first phase, Netflix innovated on the

US postal system, applying matching algorithms and sorting advancements to a business that

traces its roots back to 1775; in its second phase, Netflix adapted syndication – a business model

that has been a staple of US broadcasting for half a century – to Internet distribution by up-

ending traditional windowing and release structures; and in its third phase, Netflix entered the

today. At the same time as Hill St. Blues was airing on NBC, so were mass audience programs like Knight Rider (NBC, 1982–

86), The A–Team (NBC, 1983–87), and Diff’rent Strokes (NBC, 1978–86).

5

original programming business by subtly adapting traditional program genres, content, and

release schedules to streaming video. Netflix original programming, despite the new ways in

which it is distributed, looks very much like premium cable programming. Sixty and thirty

minute episodes. Ten–to-thirteen episode seasons. Well-respected directors, writers, and actors.

Emphases on anti-heroes and heroines. Sophisticated, highly-serialized stories, broken into

segments and ending in episode cliff-hangers that build to season-ending cliff-hangers. In effect,

Netflix shows are cable shows streamed on-line, adapted and fit to the peculiarities of Internet

distribution.

Despite the innovations in short-form and user-generated content that sites like YouTube,

Crackle, Twitch have made, Netflix’s traditional approach to programming has set the template

for successful Internet programming. Netflix was nominated for 14 Emmy Awards in 2013 and

another 31 in 2014. In summer 2014, Netflix surpassed 50 million subscribers worldwide, even

before a huge international push in fall 2014, including premieres in France and Germany (two

of Europe’s largest markets) (Luckerson, 2014), and a promise to be in all countries by 2017.

Main competitors Hulu, Amazon Prime, and Yahoo Screen have also adopted Netflix’s template

for original, serialized, quality programming. Netflix is, then, the model for a successful Internet

television network, in the same way HBO was the model for cable twenty years earlier.

This book, then, combines historical, industrial, and textual analysis to investigate

Netflix’s development as an Internet TV network, strong enough to compete with the monoliths

of the broadcast and cable industry. As Seth Meyers’ opening quote suggests, the popularity of

broadband television viewing has followed a familiar cycle in American media history. In the

early 20th century, circuses, vaudeville, and minstrelsy ceded dominance to electronic media,

then broadcast television, cable television, and, now, Internet television. The development of

6

new entertainment distribution systems has always spelled large-scale changes not only for new

media, but for existing media, as well. Netflix’s legacy, then, must be understood within larger

cycles of American television history.

The Network Era

For this book, I have adopted – and adapted – Amanda Lotz’s (2007) three eras of television

history: the Network Era, the Multi-Channel Transition, and the Digital Era. The Network Era

stretches from the late-1940s – when Networks began to provide regular weekly programming

schedules – to the mid-1980s. During these years, American television was dominated by three

national networks,2 and the Network Era symbolizes a lack of choice, for viewers, advertisers,

and television creators. NBC, CBS, and ABC delivered national programming to their networks

of local affiliates across the country, which transmitted these programs to viewers over-the-air.

The FCC regulates the air waves in the public’s “interest, convenience, and necessity”3 and, thus,

network programming is subject to the limited but real requirements of the federal government.

More real censorship – and self-censorship – came from advertisers. Advertisers’

assumptions about the television audience affected the types of programs that were produced

during the Network Era in two important ways: first, advertisers could refuse to advertise during

programs that proclaimed values the advertisers didn’t agree with; second, programs like Texaco

Star Theatre were literally created by advertisers like Texaco for stars like Milton Berle. As

William Boddy argues in Fifties Television (1990), the shift from single-sponsorship to a multi-

commercial structure changed, in fundamental ways, the funding, scheduling, and narrative

structures of prime-time entertainment programs. Most importantly, the dependence on

advertisers led to the dominance of specific genres – namely, sitcoms, westerns, and episodic

2 Not including the Dumont Network, which folded in 1956, and the Fox Network, which premiered in 1986. For more on the

Dumont Network, please see David Weinstein’s The Forgotten Network: Dumont and the Birth of American Television (2004).

3 47 U.S.C. § 310(d).

dramas – and, increasingly, the power of the Networks and studios that excelled at those

particular genres.

This shift in economic structures was paralleled by a drastic change in how – and where –

Americans were being entertained.4 For the first half of the 20th century, leisure time was spent

out of the home, at movie theaters and amusement parks and ball parks, but the advent of

television moved entertainment into the living room, creating an insulated, privatized viewing

experience. By 1955, two-thirds of American households had television sets, by 1960, almost

90%; as Lynn Spigel (1992) has suggested, the television set quickly became a ritualized part of

everyday life. Building on Raymond Williams’ (1974) concept of “mobile privatization,” Spigel

argues that television served as a ‘window on the world’ that made leaving the home “an

antiquated and even redundant exercise” (p. 9). Television offered a way of exploring the world

without the dangers inherent in leaving the home (Avila, 2004). Television sets, then, were the

backdrop for, and an important catalyst in, the privatization of American entertainment.

Television’s sacred place in the center of the suburban living room was, in part, due to

technological restrictions. During the Network era, television was a non-portable, non-

recordable, domestic medium. Television sets were large, heavy, and awkward. To change the

channel, viewers would have to get up and turn the dial on the set, itself. The concept of channel