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Today's Must-Read: The Coming Colossal Battle Between Netflix and the Networks TV Guide magazine

This story is written by our good friend Mike Schneider, a superb reporter who used to work for us a number of years ago, when we were known as Electronic Media. This is an expanded version of a story that first appeared in the print edition of TV Guide magazine.


By Michael Schneider, TV Guide magazine

When more than 10 million fans tuned into the series finale of "Breaking Bad" on Sept. 29, 2013, it was a stunning coda to a show that could barely muster one million viewers in its early seasons. Although AMC kept it on the air during the lean years and now gets to bask in the glory of those finale ratings, pundits and even creator Vince Gilligan have instead credited the show's success to another source: Netflix.

"I think Netflix kept us on the air," Gilligan said backstage at the Emmy Awards, after "Bad" won for outstanding drama. "I don’t think our show would have even lasted beyond Season 2. It’s a new era in television, and we’ve been very fortunate to reap the benefits."

A few days after the "Bad" farewell, ABC premiered Season 3 of guilty pleasure "Scandal" to record ratings on Oct. 3, with 10.5 million viewers. Not bad for a series that earned average ratings in its first season – and another testament to the power of delayed viewing via Netflix, as a cult fave turned into a monster hit.

According to a recent Nielsen study, 88 percent of Netflix users are binge viewing – watching three or more episodes of the same show on the same day. Netflix is even touting that utility in a series of new ads, "TV Too," reminding viewers that they can consume full seasons of shows such as "Bad" and "Scandal," as well as "Sons of Anarchy," "Once Upon a Time," "Mad Men," "The Vampire Diaries," "Parks and Recreation" and "The Walking Dead."

Clearly, audiences are changing the way they watch TV. And the TV studios are enjoying additional revenue from the streaming services that pay to license the series. "They're providing a backend value, which still enables us to afford expensive shows," says one TV exec. "It's also nice to have something out there that people can catch up on."

But some broadcast and cable network execs are concerned that they're losing brand equity in those shows, as viewers turn to Netflix instead of them in order to get a full-season fix. And because of how deals are set up, the networks behind TV's top shows are missing out on TV's big binge trend.

It's the studios that negotiate on-demand streaming video deals with Netflix and other services like Amazon and Hulu Plus, and most of those deals prevent the networks from offering more than five episodes at a time, on demand, during the season. That means viewers who want to stack and watch a full season's worth of episodes have to wait until Netflix starts airing them – and at that point, the networks are out of the picture.

FX Networks CEO John Landgraf has publicly expressed his frustration, noting at an industry conference that it doesn’t make sense for the networks to put up the money to create, 
 market and license a
show and not be al
lowed to offer it to
 viewers the way they
 want to watch it. “It’s illogical,” he said.

Networks like FX would like to be able to offer a show's full current season via video on demand, not just the last five episodes, right now. That would help bring viewers up to speed on the season already underway, while also giving a boost to the network's brand and making it more valuable to cable system operators.

"There's a tug of war going on over in-season SVOD (subscription video on-demand) rights, with the networks demanding exclusivity and the right to offer the entire season during the season," says Marc Graboff, president of Core Media Group [and the former co-chairman of NBC Entertainment and Universal Media Studios]. "I think the big battleground currently is the month or so before Season 2 begins. Netflix wants that window (for the prior season) and the networks want it for themselves as well. Ultimately though, I think Netflix will have to settle for being the second window for binge viewing, one season after premiere. Unless, of course, they come in at the beginning as a co-financier and the early window is negotiated upfront with the applicable network."

Another TV exec is frustrated that non-Netflix users don't ever have a chance to binge his shows. "There are a lot of consumers that are never going to be Netflix subscribers," he says. "And so they should have the opportunity to binge view as well."

But Netflix, which wants to be the home of the binge viewer, doesn't want to pay a premium for shows that have already been binged in-season by a portion of the audience. "That they say we're not going to buy a show or take some sort of reduction from a show because it’s being stacked by a network, that seems unfair," the TV exec says. "They're not in the advertising business, they're in the subscriber business. They buy Netflix because it represents a pretty broad array of content. For us, we want to be able to, if appropriate, stack shows for the whole season because people sometimes find these shows late. They need to discover it."

What about the argument that shows aren’t worth as much to Netflix if people already binged it via a network's episodic stack? "How do they know that?" the TV exec asks. "So as long as that viewer is still a subscriber to Netflix, it doesn't make any difference. No specific show is being valued independently by Netflix. They don't tell you how people are viewing it. They're just offering a wide array of product."

That exec's message to Netflix: "Do your business but don't put any restrictions on our business. We're really two different businesses. You're in a subscription business; we're an ad business. We have to accommodate for the fact that people are watching shows differently."

Industry execs also remain frustrated that they have no way to fully gauge ratings for shows watched via Netflix or obtain consumer demographics, as the service steadfastly refuses to release any viewership data. Broadcast and cable execs also have to adjust to a new marketplace as Netflix offers attractive deals to producers and actors for original programming like "House of Cards" and "Orange is the New Black," bypassing the pilot process and giving shows straight-to-series orders. That has flummoxed rivals, particularly at pay cable services like HBO.

Despite those gripes, the arrival of Netflix (and rivals like Amazon) is, on balance, still seen as a big boost to the TV industry, which has been experiencing viewership splintering and erosion for years. "It's given value to certain shows," says one exec. "They've been out there in the marketplace buying certain shows, that's helped the backend for profit participants. It's helped the studios continue to finance these shows as other markets have diminished what they're paying. I think there's room for both of us."

Even low-rated shows are seen as having more potential value now: Viewers may be one binge session away from the next "Breaking Bad" or "Scandal."

Please click here to read a separate story about a milestone reached this week by Netflix, and its effect on the company's stock prices.


Michael Schneider is the Los Angeles Bureau Chief of
TV Guide magazine. Follow him on Twitter: @franklinavenue