Netflix's $100 million bet on must-see TV

As streaming content grows more competitive, Netflix is branching out in a big way: producing its own original series. It's a bold and risky bet, particularly the $100 million Kevin Spacey vehicle "House of Cards" that went live just after midnight on Friday.

In 2011, after a series of missteps -- let's call it "the Qwikster era" -- Netflix (NFLX) grabbed headlines by announcing its foray into original programming. Its splashiest project is "House of Cards," an American reboot of a successful British miniseries. The star-studded lineup and premium production values are widely believed to be costing the company $50 million per 13-episode season. In addition to Spacey, the cast includes Robin Wright and Kate Mara, with David Fincher on board as an executive producer.Netflix's original series lineup also includes "Lilyhammer" (already picked up for a second season), an upcoming new season of the canceled TV show "Arrested Development," a new series from comic Ricky Gervais, one from horror king Eli Roth, and another from "Weeds" creator Jenji Kohan.

"Part of our goal is to become like HBO faster than HBO can become Netflix," says Netflix spokesman Joris Evers, echoing an oft-spoken line from CEO Reed Hastings. "Perhaps people saw us in the past as a distributor, or aggregator. We want to have an experience that cannot be replicated by our competitors."

Series like "Cards" -- which chronicles the cold world of Washington politics, with Spacey starring as a ruthless congressman -- are key to the strategy.

"When I say 'Game of Thrones,' you think HBO," says Wedbush Securities analyst Michael Pachter. "But if I say 'The Dark Knight, you don't think HBO -- even though you can watch it on HBO. That matters. You have to have your own content that can't be obtained anywhere else."

Plus, buying content from others is getting more expensive. Studios now shop their prized shows around to a bunch of Netflix rivals: Hulu, Redbox (CSTR), Amazon (AMZN, Fortune 500) and more. HBO (owned by CNNMoney parent company Time Warner (TWX, Fortune 500)) and Showtime are also expanding their streaming offerings.

Netflix acknowledges that original content game is a gamble.

"There's a lot still to be released, and we'll see how this goes," Evers says. "Some of the [metrics of] success will be attracting new members and retaining the existing ones. It's also about making Netflix a place for unique content."

Rich Tullo, an analyst at Albert Fried, appreciates that goal -- but he's concerned about Netflix's method.

"The approach is solid: content is king," Tullo says. "But they're taking a lot of unnecessary risks on what could otherwise have been a coup."

The most obvious risk, Tullo thinks, is the $50 million per season price tag. With 56 million Netflix shares outstanding, the two seasons of "Cards" alone will cost the company nearly $2 per share.

Netflix earned just 29 cents per share in all of 2012, weighed down by its streaming-content bills. Those will keep rising: Netflix is on the hook for at least $5.6 billion over the next few years to pay for its content deals, according to its latest annual report. This month, the company said it's considering issuing debt to raise capital and fund more original programming.

"It can't just be a good show," Tullo says of "Cards." "It has to be a spectacular show, where people say, 'Wow, you've got to sign up for Netflix to watch this.' Is it really great enough to bring in two or three million people not subscribing already?"

Netflix spokesman Evers insists Netflix spent about the same amount on "Cards" as it would have on an exclusive streaming deal with an outside studio.

Pachter, the Wedbush analyst, points out that $2 million per half-hour of original television is on par with standard production costs. He doesn't think Netflix has to inspire new customers to sign up and stick around for its deal to pay off.

"If they keep their 27 million customers happy, and fewer people quit, that's great for them," Pachter says.

"Early on, the cost isn't justified by the benefits," he adds. "But if you have four or five successes, if you have great stuff coming out in March, April, May that are all must-haves, that can get you there. No one is going to join Netflix for life to watch 'House of Cards.'"

Thanks to the unusual way Netflix is releasing "Cards" -- all 13 episodes at once -- someone could sign up for a month and cancel. That's what concerns both analysts.

"Why give up the benefit of word-of-mouth that lasts the entire 13-week season?" Pachter asks. "That's the nature of serialized drama. Instead they'll get a few days. [Netflix CEO] Reed Hastings says, 'This is what our customers want,' and he's too arrogant to realize he's wrong."

Netflix often waxes poetic about its immediate-release setup, saying it's catering to binge-watchers. In its fourth-quarter earnings report this month, the company employed a drawn-out metaphor about traditional networks making a book available one chapter at a time, for an hour per week, and then closing the book again.

But Hollywood has its reasons for the serialized setup.

"It's a really risky proposition to completely remove that feedback loop, both from [studio] executives and the audience," says Tullo, the Albert Fried analyst. "You see a lot of shows kind of change direction midseason based on viewership: '24,' 'Sopranos.' You take what works and provide people with more of that."

Pachter is more concerned about viewers signing up to watch series like "Cards" and promptly canceling their subscriptions when they're done.

"It's not like the tech [in Hollywood] only permits weekly broadcasting. There's a reason they don't run the whole season as a marathon," he says. "But Hastings wants to be different. And instead of getting a new subscriber, he's going to get eight bucks."  

Could this replace cable?

It's no secret that some budget-conscious families are canceling their cable subscriptions, which often cost more than $100 a month. But that doesn't mean they have to go without TV. 

With an antenna, people can get over-the-air channels; and with a media streaming device, they can get some movies and TV episodes. This antenna and media player solution is about to get a lot easier, though it may not be less expensive.

VOXX is working with Roku to make a single device that provides both content sources. It will release the digital antenna with Roku streaming in time for the holidays next winter. The Roku Streaming Stick, a small USB device that plugs into an HDTV port for access to Netflix, Hulu Plus, Pandora Radio and others, will be stuck onto the back of flat tabletop antennas made by RCA and TERK.

The price of this two-in-one solution has not been released. Alone, the Roku Streaming Stick  costs $100 and can be used only with "Roku-ready HDTVs." (For now, that means a handful of TVs from Hitachi and Insignia (Best Buy's own brand), as well as a palm-sized projector from 3M.)

It's unlikely that the cost of the two-in-one device would be less than today's solutions. For instance, the unobstrusive Mohu Leaf antenna  ($40) plus a Roku HD ($60) can work with any HDTV, old or new.

Aereo to bring streaming TV to 22 U.S. cities

Live, local...illegal? Online TV's new war

One of the boldest startups in the streaming media market, Aereo, is preparing a nationwide rollout of its controversial streaming TV service.

Aereo lets users live-stream or record programs off basic, over-the-air broadcast channels. Subscribers can view their shows and recordings on mobile devices (right now only the iPad and iPhone are supported), on a Web browser, or on TV through media devices like AppleTV or Roku. Want to watch a local sports game in your hometown while you're waiting at an airport across the country? Put it on your Aereo playlist and you can stream it live or save it for later.

The service's selling points include its intuitive user interface and flexible pricing. Occasional viewers can buy a $1 day pass (recordings are stored for 10 days), while power users can take out monthly or annual subscriptions.

Aereo isn't letting that slow its expansion plans. The company announced Tuesday that it will launch this year in 22 new U.S. cities, including Atlanta, Boston, Philadelphia, Dallas, and Houston. Aereo called that schedule the "first phase" of its planned nationwide coverage.

"Watching television should be simple, convenient, and rationally priced," Aereo CEO Chet Kanojia said in a written statement. "Customers want and deserve choice."

Aereo also announced a $38 million financing round, led by Barry Diller's IAC/Interactive Corp. and Highland Capital Partners, which it plans to use to fund its expansion. The news came during a press conference at the Consumer Electronics Show in Las Vegas.

Aereo uses a novel technical setup that the company insists make its service legal: It created tiny antennas, each about the size of a dime, and deployed thousands of them in its data centers. When you pay for an Aereo stream, you literally rent your own antenna, getting exclusive use of it until your recording or live stream is finished.

Is that a novel twist on the old rabbit-ear antennas, or a copyright dodge? That's the question Aereo will be fighting out in court for the foreseeable future.

Aereo's phase-one expansion list noticeably omits any cities in California, such as tech and media industry towns San Francisco and Los Angeles. In those areas, it may face a chillier legal climate. A Los Angeles court ruled last month against a knock-off service called "Aereokiller," granting a preliminary injunction to shut it down. U.S. District Judge George Wu's decision acknowledged the conflicting legal views different jurisdictions appear to have regarding systems like Aereo's.  

CES 2013: 5 Things to Expect at the Big Tech Trade Show

Las Vegas lights up next week, not with its usual bright lights but with thousands and thousands of gadgets and electronic devices. The annual CES show is here, and while we have our doubts that this show will be as big as it has been in the years past, everyone from Samsung to Sony to Toshiba to thousands of gadget companies you have never heard of, will be packing the Las Vegas Convention Center with their new wares.

Every year a few trends emerge from the show that help set the tone for the rest of the year in tech. Think back to 2012 and you might remember hearing a lot about connected TVs, ultrabook laptops and Android and Windows 8 tablets.

So what's in store for CES 2013? Here are five of our expectations:

1. HD, HD, HD, HD TVs 

HD televisions at CES? Shocker, we know! But get ready for HD times four. Expect to hear the term "ultra HD" over the next week. A lot. Ultra HD or 4K HDTVs have four times the resolution of current HD televisions. Yes, that means even higher resolution than the 1080p HDTV you bought this year or last.

Many companies are expected to release or show off their new Ultra HD TVs this year. Sony already has one, but it costs $25,000. Many of the others introduced are expected to be expensive, but we also expect some of the affordable TV makers to talk about their plans. We promise, we'll be all over this category… in regular definition.

2. Wearables and Other Gadgets That Pair With Your Phone

This year's CES is not expected to be all about smartphones. Many of the big smartphone makers -- HTC, Nokia, Samsung, etc. -- seem to be saving their biggest announcements for Mobile World Congress, a mobile trade show held in Barcelona at the end of February. But we do expect this year to be all about the hardware devices that work with your phone or tablet.

And we're not talking about speaker docks (though there will be a lot of those). Many wearable devices, like the FitBit or Jawbone Up, pair with your phone to tell you more about your fitness activity. There will be even more of those types coming at the show and Pebble, the maker of the popular smart watch, has even promised to show us a working version of the watch. We also expect many companies to talk about the connected home and how your phone can control everything from your light bulb to your doorbell.

3. Self-Driving and Smarter Cars 

It might not be the New York or L.A. Auto Show, but the cars are driving in for CES. Toyota and Audi have announced that they plan to demonstrate their self-driving cars, and others like Ford are holding press conferences to talk more about their connected, in-dash technologies.

4. More Windows 8 

So what's in store for tablets and computers, you ask? CES 2012 saw a number of new Android tablets and a lot of talk about Microsoft's Windows 8, which was then released in October. And while Microsoft isn't officially at the show this year, you can expect more Windows 8 tablets, laptops, and tablet / laptop hybrids.

While many of the major companies -- Dell, HP, Lenovo, Toshiba, Samsung, etc. -- released Windows 8 tablets and computers before the holidays, you might be surprised at what some were holding back. We're also holding out for some interesting tablet concepts from Intel, Nvidia and others.

5. Headphones from Every Celebrity You Know 

As someone recently said to us, celebrity headphones are like the new celebrity perfume. CES always turns into a Hollywood hotspot with lots of celebrity appearances, talks and performances. But this year the celebrities are coming with their own products, and by products, we really mean headphones.

Dr. Dre kicked off the trend with Beats by Dre and now you have 50 Cent, Snooki, Tim Tebow, Motorhead's Lemmy Kilmister (yes, Motorheadphones) and even more with their own branded headphones or lines of audio gear.

You could spend all your time at CES just covering the celebrities. We're not going to do that, but we promise to bring you the highlights.