TV Upfront

Rise of the Non-Network Originals Gives TV Nets Cause for Concern

Shows on Streaming Platforms Such as Netflix Are Blamed for Viewership Fragmentation, Ad-Revenue Loss

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TV networks showcasing their wares during the recent upfront have a bigger concern than one-upping their broadcast rivals: grabbing attention from original content on nontraditional platforms, many of which are not ad-supported.

'House of Cards'
'House of Cards' Credit: Netflix

This influx in originals such as Netflix's "House of Cards" and "Hemlock Grove" is being blamed for the overall decline in TV viewership, and potentially stealing dollars from the estimated $63.9 billion U.S. TV-ad market in 2013.

Originals are a small but growing factor. "We think the shift from ad-supported viewing to Netflix had a negative impact of $500 million on total advertising during the quarter," UBS analyst John Janedis wrote in a research note in April.

In addition to those two buzz-generating shows, Netflix is gearing up for the launch of "Arrested Development," while Amazon Prime released 14 pilots for viewers to vote on. At the NewFronts, Hulu, Yahoo, YouTube and AOL, among others, unveiled nearly 100 digital series; Microsoft has poached several Hollywood vets to run its Xbox Entertainment Studios; Redbox Instant said at the Ad Age Digital Conference that originals are inevitable; and DirecTV introduced its first original "Rogue," while ordering 10 episodes of "Full Circle" for the fall.

Netflix said subscribers streamed 4 billion hours of content during the first three months of the year. While it did not disclose how much of this time was spent on its originals, Netflix is widely believed to be a major factor in viewer fragmentation. "Netflix overall is eating into TV viewership," said Janney Capital Markets analyst Tony Wible.

Of course, the jury is still out on the sustainability of this business model. Netflix reportedly spent $100 million for the 13 episodes of "House of Cards." With no advertising revenue, Netflix's investment in originals is supported by subscriber fees. While Netflix CEO Reed Hastings has been adamant about the platform remaining advertising-free, industry analysts have debated if it can continue to acquire such content without raising subscriber fees or finding another source of revenue.

'Arrested Development'
'Arrested Development' Credit: Netflix

Neither Amazon Prime nor Netflix sell 30-second spots, but marketers should still be looking for opportunities to get brands' messaging onto these platforms. "They may not be looking for content to be underwritten; they can get the funds to produce content from subscribers," said Angela Courtin, chief content officer of Aegis Media Americas and president of The Story Lab. "But we need to figure out a value proposition for Netflix and Amazon to want to partner with brands."

Ms. Courtin will sit down with Amazon and Netflix in the coming weeks to discuss how the companies see involving brands in their content. "We are asking ourselves, "What does Netflix need to expand viewership? What are its challenges?'" she said.

Amazon, on the other hand, "can attach its programming to commerce," she said. "It may never need advertisers or a product partner, but there could be an opportunity to put products around the content. Amazon is a commerce platform, so there's potentially a more natural proposition there."

Ultimately, the appeal of Netflix and Amazon Prime is the absence of advertising, said Christopher Vollmer, partner-leader of Booz & Co.'s global media and entertainment practice, which makes it unlikely they will move toward an advertising model.

And some content may not even lend itself to advertising because of the size of the audience, said Pivotal Research analyst Brian Wieser.

Mr. Vollmer expects to see more product placement in these originals.

"House of Cards" already is a hotbed for products. Sony's PlayStation, Apple, Canon and BlackBerry are among the brands featured throughout the 13-episode series.

It's unclear if these brands paid for placement or if they were organically written into the script. Netflix declined to comment, directing the question to Media Rights Capital, producer of the series. An MRC spokeswoman said it does not comment on production.

If streaming platforms are opposed to advertising directly in the content, there could be an opportunity to incorporate a second-screen experience that is ad-friendly and doesn't disrupt viewers, Mr. Vollmer said.

But ad-free originals may not be that big of a disruption for advertisers, who have had to contend with pay-TV series for years. "The model is how linear TV is built," said Michael Baliber, senior VP-director of media strategy, ID Media. "There are premium-subscription services like HBO and Showtime that advertisers can't be a part of."

"It's the same thing as HBO launching a new hit," Mr. Wieser agreed. "'The Sopranos' didn't change advertising."

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