Netflix's Ted Sarandos Reveals His 'Phase 2' for Hollywood

Algorithms, deep pockets and a disdain for the existing TV model as the chief content officer reveals why the agent who talked about their budgets was "remarkably ill-informed," and countering "the managed dissatisfaction … of the entire entertainment business."

Algorithms, deep pockets and a disdain for the existing TV model as the chief content officer reveals why the agent who talked about their budgets was "remarkably ill-informed," and countering "the managed dissatisfaction … of the entire entertainment business."

This story first appeared in the May 31 issue of The Hollywood Reporter magazine.

Ted Sarandos doesn’t need to be liked by Hollywood. Netflix’s chief content officer is aware that his disinterest in playing by the industry’s rules — instead throwing his shows online all at once, bypassing the traditional development process and refusing to release ratings information — has irked some, but he has no plans to apologize, much less curb his agenda.

“I have a deep respect for the fundamentals of television, the traditions of it even, but I don’t have any reverence for it,” says Sarandos during a late April interview in his no-frills Beverly Hills office. Sarandos, 48, has earned his swagger because, like him or not, he’s become one of the most powerful executives in Hollywood. In two years, the company at which he has worked for more than a decade went from being a repository for old TV shows and movies to one of the most attractive buyers of original programming in town.

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House of Cards, which Sarandos snapped up in a jaw-dropping $100 million, two-season deal, bowed Feb. 1 to near-unanimous praise, with many heralding the streaming service as a legitimate rival to premium cable outlets HBO and Showtime. (The coming Emmy season will test that theory.) In the quarter that House of Cards premiered, Netflix’s subscriber base jumped more than 2 million to 29.2 million domestic streamers (36 million members worldwide), bigger than HBO's reported 28.7 million subs. The growth trajectory, especially in the aftermath of Netflix CEO Reed Hastings’ abandoned plan to split Netflix into a streaming entity and a DVD service called Qwikster, has led its stock price to jump 345 percent in nine months to $239.55 on May 20 on revenue of $1.02 billion for the first three months of the year.

in the process, Netflix has become Hollywood’s biggest fascination, in part because of its splashy initial shows but mostly because of what it represents: the first deep-pocketed platform for original content to emerge since the cable TV renaissance of the late 1990s. And at least so far, its strategy seems to be working.

The Netflix horror series Hemlock Grove launched April 19 to critical jeers but a bigger initial tune-in than Cards, and on May 26, Sarandos will debut perhaps his most high-profile project: the reboot of the cult Fox comedy Arrested Development. (He managed to steal some of the broadcast networks’ thunder by planting the show’s signature banana stands around Manhattan during upfront week.) Sarandos says that despite some grumbling that Netflix’s content costs keep escalating (“unsustainable,” says analyst Michael Pachter), he has no plans of slowing down as he looks to out-HBO HBO — and fend off new, lower-paying streaming players such as Amazon and Hulu in the process. In addition to Orange Is the New Black from Weeds creator Jenji Kohan (out July 11), Derek from Ricky Gervais (Sept. 12) and a sci-fi series from the Wachowski siblings titled Sense8 (out next year), he says he’d like to double his originals load in 2014. That would mean eight new series, and some of them might even be owned by Netflix rather than simply licensed, as the first batch of originals have been.

On his wish list for potential collaborators: Warren Beatty, who he argues has been constrained by the limits of theatrical run times, Sofia Coppola and Jodie Foster, who directed an episode of Orange. As he prepares to launch “Phase 2” of Netflix’s original content experiment, Sarandos and his vp original programming, Cindy Holland, 43, sat down with The Hollywood Reporter on two occasions to discuss their strategy, the surprise data they have collected about the Netflix audience and what shows they might buy next.

The Hollywood Reporter: If you had the House of Cards deal to do all over again, would it be so pricey?

Sarandos: Yes. If we were to get into original programming and it didn’t work out, I didn’t want it to be because we didn’t try hard enough or we weren’t ambitious enough. I felt like what [a network like] Starz was doing earlier on [during the Party Down era] was just kind of putting their toe in the water and doing a lot of “see what sticks” and not spending too much money. For us, I wanted to know that if it didn’t work, it was because it was a bad idea. The two things that got everyone’s attention about the House of Cards deal was the two-season commitment and David Fincher. After David Fincher directs a series for Netflix, no one else can say, “Well, I’m not going to direct a series for the Internet.”

THR: Beyond a willingness to spend, what is the Netflix pitch?

Holland: We’re buying their vision, not ours. Part of the conversation early on is thinking about it as a 13-hour movie. We don’t need recaps. We don’t need cliff-hangers at the end. You can write differently knowing that in all likelihood the next episode is going to be viewed right away.

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THR: You’ve been reticent to share ratings data, but tell us what you have learned about the House of Cards audience.

Sarandos: The major international appeal for House of Cards was kind of a surprise because it’s a very American show. What we learned is that American politics is very American, but greed and corruption and all of that is very global. Corrupt politics is not new in Latin America, as it turns out. (Laughs.) Within the U.S., you could have argued that most people who watch Mad Men would watch House of Cards. But the viewing is much more on par with the large-scale mainstream things like The Walking Dead. It was much younger than we thought. One of the things that surprised me was that women love the show because they love Robin Wright. And younger people love Kate Mara. Everyone is able to gravitate to this show for very different reasons.

THR: How do you know that’s why women or young people are tuning in?

Sarandos: You see it in what else they watch — the algorithmic similarities to what else they’re watching and why they’re watching. And then we can very directly focus-group with them and survey them about what their attractions are. So we found that there’s overlap with Gossip Girl and House of Cards.

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THR: What do the algorithms say about the Hemlock Grove audience?

Sarandos: Hemlock is much more polarizing; you either love it or hate it. The crossover for the people who love the show was American Horror Story, not The Vampire Diaries. It was incredibly popular in the Nordics because of the popularity of the Skarsgards [Bill Skarsgard stars] and in Latin America, where the horror genre is very big.

THR: Will you renew it?

Sarandos: We’re hearing the pitches for the second season with plotlines and storylines now.

THR: How are you making decisions about whether to renew or cancel a series?

Holland: We’ll certainly look at how much viewing activity is taking place compared to what we projected when we licensed the series. How do we think it will play out over time? Is there an audience that justifies the expense? Certainly, what does it do for the overall conversation about Netflix? And long term, does it mean incremental subscribers or that subscribers stay around longer?

Sarandos: The signal that something is working is a renewal. But one of the things I loved about Derek is Ricky Gervais likes to make shows that exist in a one- or two-year time frame and then they’re done. I want our shows to be somewhere in between. So when people say how many episodes, I want it to be the exact number of episodes you need to tell the story perfectly. It’s very difficult to sustain a show beyond three years. Characters start to fall apart, and your writers turn over. Some of the other conventions that I'm happy to dismiss: How long does the episode have to be? And how many episodes does the season have to be? Because of the constraints of the business outside of Netflix, they have followed the same form — 13 one-hour episodes — but with Arrested Development, the running times of the shows are not rigidly 22 minutes, and there’s a 15-episode season.

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THR: Reed Hastings suggested one season would be it for Arrested. True?

Sarandos: We would love to do more, and we have a deal in place that says that there could be. The problem is logistics. They were all working full-time and doing this show in between, and they did it for the love of the show and for Mitch Hurwitz. If we can muster up that love again, we’d love to do it again. And we have talked openly about a movie scenario, too.

THR: Walk us through how you use viewer data to make decisions.

Sarandos: Sometimes it’s explicit ratings: I watch this, then I rated it five stars because I loved it. Then there are implicit ratings: Even if somebody who watches 13 hours of a show in 24 hours doesn’t rate it, we’ve got a pretty good sense of how they felt. Or if they watch 20 minutes of the first episode and never came back, they don’t have to rate it zero for us to know they’re not interested. But it’s the overlaps that really matter. With House of Cards, it was identifying not just somebody who saw The Social Network or liked David Fincher but trying to figure out what everybody who liked Benjamin Button, Seven, Fight Club and Social Network have in common. It’s that they love David Fincher’s style of storytelling. They may not even be able to identify him by name, but we know from their behavior that that’s who they are. You look at Kevin Spacey fans, and then you say, “How about people who love political thrillers?” We went back and pulled all the political thrillers people have watched and rated highly. So you’ve got all these populations, and right where they overlap in the middle is the low-hanging fruit. If we can get the show in front of these people, they will watch it and love it.

THR: So you know who they are; how do you reach them?

Sarandos: Completely automatically. We did advertising for House of Cards on billboards, but that was very much industry-focused, letting New York, L.A. and London know that we’re in the original content business. But the wins on the viewing were all happening on the website and on the user interface, which recognizes that you’re one of those people and presents House of Cards to you in a pretty aggressive way. Fincher cut seven different trailers for us. Some of them were focused really heavily on the female characters, some on the politics, some on Kevin Spacey, one on David Fincher. So the trailer that you saw was based on what you were just watching or what you just watched recently.

Holland: For Hemlock Grove, we targeted a younger demographic, and it was less about the cast and more about the genre. We created a thematic trailer that was more focused on Eli Roth fans. We created one focused on the teen romance elements of the show. And then one focused on the thriller aspects of the show.

THR: What will “Phase 2” of your original series programming look like?

Sarandos: It’s feasible that we would double the load that we did this year [with eight new shows]. People’s tastes are wildly diverse, and I want to be able to appeal to all of those tastes and across demos. Hemlock Grove is totally different from House of Cards. Orange Is the New Black is a very different show. I think we can support a lot of specific tastes.

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THR: What are genres you haven’t tackled but would like to try?

Sarandos: Sense8 from the Wachowski siblings is a genre that we were looking for, adult contemporary sci-fi, and done in a way that’s very difficult to do for television, both because of budget constraints and because sci-fi storytelling tends to be very complex. Because of our “watch them all at once” mentality, we were able to allow them to create a dense and complicated world.

The other thing I look at is the tween segment. Hemlock Grove is horror, but it’s not really CW horror; it’s much more adult than that. So I think that we’d like to look at some series in that category. There’s probably a lot of opportunity in the comedy space, too. The more traditional sitcom space, but done with a different twist. Not like a straight-up-the-middle network sitcom, but the kind of thing that I think FX has done a great job with in shows like Louie and Wilfred.

And then we’re doing quite a bit in the original standup comedy space, too. Bill Burr, for example, is somebody who has had a great cult following, and now his audience is getting so large from him being on Netflix. He is touring in all of the parts of the world where Netflix is, like Norway and Finland, because he has an audience there now. So, we’ll definitely be competitive [with HBO and Showtime] in that space. it’s also a great way to cultivate talent for future scripted projects.

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THR: How appealing are original films or miniseries?

Sarandos: There are some parts of it that are really appealing in that you tend to get a lot of the same fundamental benefits of original programming -- star power, excitement, event content -- on a smaller budget. And if you get proportionally the same amount of watching, that’s a good thing. The reason why I've shied away from original movies has been that there are so many more great movies that get made than ever get distributed, and I think we function better as a distributor for movies than we do as a creator or marketer of movies for now. But I probably would have said the same thing about TV shows three years ago.

THR: How important is Emmy attention?

Sarandos: It’s a valuable symbol of the mainstreaming of Internet television. It puts it on the same playing field with the best of broadcast, cable and premium television and resets the expectations of the industry and of the consumer. We’ll have to challenge conventional thinking among the voters.

THR: CAA agent Peter Micelli recently revealed during a conference that the budgets for your originals range from $3.8 million to $4.5 million. Accurate?

Sarandos: It was remarkably ill-informed and really out of character, so I don’t want to beat him up about it. But no, it’s not accurate. He wouldn’t know the information that he was sharing at that level of granularity. There’s an enormous range in the budgets.

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THR: At this stage, describe your place in the Hollywood ecosystem.

Sarandos: There’s no question when we launched our series 13 episodes at a time that the one thing that everybody agreed on in this town was that it was insane. I got a call from every network executive I knew who said: “Don’t be crazy. You’ve got this huge investment, drag it out. Make ’em come back every week, and you could launch new things off of them.” It just sounded to me like the same kind of managed dissatisfaction that is the entire entertainment business. I believe there’s a bigger business in customer satisfaction than managing business satisfaction.

THR: You’ve garnered a reputation for being hands-off. When do you weigh in?

Sarandos: It’s typically when we can bring to the table really factual and data-based information. On Orange Is the New Black, there was a lot of casting influence. But because we’re not getting involved in the minutiae, [our showrunners] want to hear what we have to say. I'm not saying I'll never give a note, but I'll never give one like, “So-and-so shouldn’t have a mustache.” It’s that kind of process that’s built for conflict.

THR: How do you assess which shows make sense to revive?

Holland: Arrested made sense for us because the show was a cult favorite and we’ve had it for a number of years and knew how many new fans were being created through our service. And because there had been talk of the movie, we knew that Mitch was interested in doing it again and that the cast loved it.

Sarandos: There’s no specific agenda around reviving shows as part of our strategy. Arrested Development is unique. If all of the technology that’s in place today were around when Arrested came out, it probably would have been a huge hit. Remember, the show was canceled the same year that we started streaming. Prior to that, the notion of catching up on a show didn’t really exist. For us to consider [reviving a series], it needs to be more than a great show for the people who love it. We need to try and find a bigger audience for it for the economics to make sense. I've not seen anything that was as much a slam dunk as Arrested Development is.

THR: Looking ahead, how important will it be to own your content as opposed to licensing it?

Holland: We will be seeking more control over some of our series. As we think about international expansion, it’s a natural extension for us to want to ensure that we have a series to launch in other places. [Cards, for instance, is owned by Media Rights Capital and distributed internationally by Sony.] But I think we’ll continue to license series in a bunch of different ways.

Sarandos: Also, we’ll continue to pursue this hybrid model where we’re premiering a show that launched in other parts of the world, like Derek did in the U.K.

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THR: Does that suggest you’ll get into the development business, too, which you so far have managed to avoid?

Holland: We have a tremendous amount of respect for the development and pilot process, but it’s not something that necessarily works for our model. It’s much better for us to make a season of something because then we have an asset that we can actually get out there and monetize, as opposed to having a bunch of development projects and then narrowing that down to a bunch of pilots and then narrowing that down to the ones we order. There’s a lot of activity that’s not terribly efficient, and for our model we can’t do much with it.

THR: There’s been much attention paid recently to Netflix ending some studio movie deals. Are you backing away from film?

Holland: No. We’re programming our service, and just like any other network, there are movies and series that come and go and we have an enormous amount of content. It’s not like when HBO's window on a series of films expires the world ends.