Sarandos pointed to Bill Burr as one example of a stand-up comedian who has seen huge success on Netflix, to the point where he can now tour in countries where Netflix is operating its streaming service. Producing stand-up comedy is “also a great way to cultivate talent for future scripted projects,” Sarandos added.

Asked about his plans for the next phase of original shows on Netflix, Sarandos said that he wants to target audiences that the company has so far overlooked, including tweens, Sci-fi fans and sitcom viewers. Altogether, Netflix could debut as many as 16 originals in 2013, according to Sarandos.

In 2013, Netflix is going to launch a total of 8 originals, including the much-anticipated return of Arrested Development, which will premier on Netflix this coming Sunday.

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That kind of targeting is part of Netflix’s approach to use “a balance of intuition and analytics” for its original content, explained Netflix Chief Content Officer Ted Sarandos during an interview on the sidelines of the at All Things Digital’s Dive into Media conference in Dana Point, California Tuesday. Netflix is using “really big data,” as Sarandos put it, to evaluate everything from promotion of its original content to the question of which shows it is going to pick up next.

And we are talking not just simply audience size levels, but very fine-grained data, down to the engagement level with each individual piece of content, as well as the mix of content each subscriber is watching. “When you say ten million people watch a show, that really doesn’t tell you anything,” he said.

As a consequence, Netflix isn’t talking about how many people have been watching House of Cards ever since the show went up on the service earlier this month. “We are not doing ratings,” Sarandos said on stage Tuesday afternoon, adding the vague assesment: “We are thrilled with the numbers.” Asked what he would tell if House of Cards star Kevin Spacey called to ask about those numbers, Sarandos replied: “I don’t tell him.”

Creatives, however, don’t seem  upset about such secrecy. Arrested Development creator Mitchell Hurwitz and star Will Arnett, who joined Sarandos on stage, pointed to the problems they had with the industry’s love for ratings when their show was on air. Back then, Nielsen wasn’t including catch-up views from DVRs and online platforms in their ratings, and many of the show’s viewers simply didn’t register. “Appliance stores knew we were huge, but Nielsen didn’t give a sh*t about it,” Hurwitz joked. “The Nielsen system I think is incredibly flawed,” agreed Arnett.

That’s why a ratings-free approach is so appealing to creators, and potentially so disruptive to the industry as a whole. “The model is going to change,” predicted Hurwitz. Creatives would have to work with a different economic model, because a deal like the one with Netflix doesn’t include residuals. “The trade-off is that we are encouraged to make a more interesting show as opposed to flattening it out,” he said. Arnett agreed: “It’s very inviting to people in the creative community to have a place like Netflix,” he said.

Sarandos echoed that sentiment when talking to me, admitting that his phone has been pretty much ringing non-stop ever since the company announced that it got David Fincher to do House of Cards. “We became a first stop as opposed to a last stop,” after that announcement, he said.

This story was corrected on Sunday 2/17 with the correct first name of the creator of Arrested Development. His name is Mitchell Hurwitz, not Michael.

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But Sarandos also made it clear that he doesn’t just want to steal away big blockbusters from the likes of HBO and Starz. Throughout the conversation, he explained that Netflix aims much higher: it wants to change television forever. Asked about how TV will look like in five years, Sarandos replied: “It’s gonna look nothing like we’re seeing today.”

So what is going to change? Sarandos gave us some good clues Wednesday:

Ratings don’t matter. Come February, Netflix is going to launch two original TV shows, and chances are that millions will tune in to watch the new season of Arrested Development alone.  But don’t expect Netflix to brag about it. Sarandos made it clear that he won’t release any numbers, no matter how good they are. “It’s a really irrelevant number,” for a subscription TV service, he argued, because it doesn’t have to sell large simultaneous audiences to advertisers.

And what’s worse, once you start releasing these numbers, everything is going to get measured by it. Your new show isn’t as good as last season’s hit? Then it must be a failure. Well, in the case of Netflix, it may not, because audiences may discover the content over time. Sarandos said the same thing could be true for HBO, and argued that it was a mistake for the pay TV network to put such a big emphasis on ratings.

Time slots are for sports and talk. Netflix has a pretty straightforward understanding of the TV space. On one side, there’s content that works well on linear TV, like sports and nighttime talk. “The immediacy of Jon Stewart…. lends itself to linear business models,” Sarandos said. On the other side, there is scripted content, which comes with a much longer shelf life.

Sarandos made it clear Wednesday that he has no intention to mess around with scheduled content. And for good reason: Making successful linear TV, getting people to tune in every night at a certain time — that’s hard. “The most difficult thing in linear television is the pressure on the time slot,” Sarandos said. With a Netflix-like on-demand model, you don’t have any of those issues.

This is on the surface just a simple business decision – but it could foreshadow a much bigger change. After all, if Netflix is successful with its no-schedule strategy, should other TV networks stick to the schedule as their viewing is shifting towards an on-demand world?

In related news: Viewers don’t want to wait for the next episode. One of the biggest differences in the way Netflix approaches its original content is that it releases an entire season at the same time. Weinstein had some doubts about this approach, arguing that people who grew up with traditional TV may prefer a staggered approach, and that it may take away from word of mouth and other marketing opportunities. But Sarandos countered that this is how people already watch traditional TV, thanks to DVRs. And in the end, it’s giving subscribers what they want: “People have the most satisfaction with immediate access,” he said.

Creators love this as well. Turns out that there is an unintended side-effect of releasing an entire season at once: If you give people the ability to watch two to three episodes at a time, or an entire season over a two-week span, they’ll be less prone to TV schedule amnesia. Right now, many shows spend a number of minutes recapping the previous episode — which makes little sense if viewers finished the previous episode minutes ago. “If you don’t do all that, you have all of this additional story-telling time,” explained Sarandos.

TV is getting more personal. Netflix has been investing in personalization for years, fine-tuning its recommendation engine to highlight movies and shows you might like to watch. However, so far most of this has been happening on the household level. Now, the company is taking steps to differentiate even further. One of the first steps was Just for Kids, the UI that separates kids’ content from other streaming fare. Next up are efforts to take this even further. “There is all of these things that we are looking at (around) deep personalization,” explained Sarandos. “Voice recognition, visual recognition.” In the future, Netflix could be able to pull up a user’s personalized recommendations as soon as that person walked into the room, he added.

Image courtesy of (CC-BY-SA) Flickr user joe.ross.

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Sarandos was referring to the low broadband caps in place at Canadian ISPs like Bell and Shaw, which force their customers to pay more if they exceed monthly caps that can start at just 15 GB. Netflix has sharply criticized broadband pricing in Canada before, with CEO Reed Hastings calling caps and overage fees like these “grossly overpriced.”

However, Hastings had initially said that he didn’t anticipate the caps to be a problem for Netflix’s business in Canada. The company eventually adjusted its streaming rates in the country, making non-HD streams the default option for Canadian users, and now it looks like it’s acknowledging that the caps are having an impact on subscriber growth.

Asked about it on Thursday, Sarandos had to concede that business in Canada could be better if broadband access came without caps and expensive overage fees. Said Sarandos: “The problem in Canada is… they have almost third-world access to the internet.”

To learn more about the future of TV, check out my ebook Cut the Cord: All You Need to Know to Drop Cable.

Image courtesy of Flickr user LWY.

Netflix subscribers watched more than one billion hours of video in June, according to the company’s CEO Reed Hastings. That means that U.S. subscribers watched around 80 minutes of Netflix per day last month, which makes the service more popular than any traditional U.S. cable network, estimated BTIG analyst Richard Greenfield.

Hastings revealed the new number in a public Facebook post Tuesday morning, which also had him congratulate the company’s chief content officer Ted Sarandos:

“Congrats to Ted Sarandos, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!”

Greenfield took it upon himself to do a little back-of-the envelope math based on that number for a blog post Tuesday (registration required), and estimated that 90 percent of that viewing originated in the U.S. He also suggested that Netflix had around 24 million U.S. subscribers in June – we won’t know the exact number until the company releases its quarterly earnings later this month. Based on those numbers, Greenfield estimated that U.S. subscribers watched an average of 80 minutes of Netflix every day last month.

That puts the service right up there with many traditional TV networks, and in fact could make it more popular than all of the U.S. cable networks. We don’t have June viewership numbers of most cable networks yet, but based on earlier trends, he concluded that Netflix was the most viewed cable network last month. Equally impressing: In households that have Netflix, it even beats broadcast networks like ABC and CBS.

Netflix has long positioned itself as not a cable killer but a cable-like network, competing with HBO and Showtime as opposed to TV itself. Regardless of these semantics, the recent numbers show that Netflix is definitely starting to eat into cable networks’ market share.

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In fact, speaking at the Nomura 2nd Annual U.S. Media & Telecom Summit in New York, Sarandos stopped just short of saying that Netflix’s four-year, $1 billion deal with the CW’s parents, Time Warner and CBS Corp, has saved the broadcast network from extinction.

“What’s important to note is that you look at programming at CW, Netflix license fees makes that content profitable,” he said. “Without it, it was struggling along.”

Did Netflix really save an entire broadcast network? Well, based on the just-released dire ratings data for CW from last season, the jury is still out on that. But as the network seeks to stabilize its linear TV ratings situation as it transitions itself into broadcast TV’s first true multi-platform programming institution, those Netflix dollars — as well as revenue culled from a separate streaming deal with Hulu Plus  — are proving pivotal.

Broadcast TV’s most innovative model

The CW targets a much narrower audience than the Big Four networks (ABC, CBS, Fox and NBC), primarily going after young women 18-34 with shows like Vampire Diaries and Heart of Dixie. But while its scale is much smaller, the network presents a very forward looking model for the television industry.

Simply put, CW’s audience is migrating to digital platforms at a faster rate than viewership for the Big Four networks. And CW is innovating its monetization strategy at a quicker pace as a result.

“Their demographic is much more cutting-edge, demanding and fickle,” noted Bill Carroll, a senior analyst for Katz Media, a firm which advises TV stations on programming decisions.

In fact, CW digital chief Rick Haskins told paidContent Tuesday that the network received 18 percent of its viewership during the just-completed 2011-12 TV season from digital platforms.

“When you’re bumping up on 20 percent of your viewing being someplace else, you’re model has to be different,” Haskins said.

For CW, that “different model” means limiting the differentiation between broadcast and streaming for both viewers and advertisers.

While Fox delays free streaming availability of its shows for eight days after initial linear airing, CW has cut that wait time down to just eight hours on its CWTV.com channel.

The CW has been putting full TV-like commercial loads into its streams for several years and pushes harder than any other network to integrate the sale of impressions on its digital platforms with those on its linear channel to advertisers.

While ratings have trended down for the network recently, ad sales have not. During last year’s upfront market, for example, the CW generated nearly $420 million in ad revenue, which was 10 percent year-over-year growth.

Having worked to create its own systems of measuring viewership across platforms for several years, network president Mark Pedowitz told advertisers during the CW upfront presentation two weeks ago that the company will soon introduce its own fully-baked cross-platform ratings system to the TV industry.

Almost in the same breath, Pedowitz touted a new digital studio that will specialize in low-cost, short-form digital content, extending the CW brand mobile platforms in a way no other network has attempted.

About those ratings…

But as the CW transitions into a next-generation, multi-platform video programmer, it can’t surrender the underpinnings of its traditional business model — drawing viewers to its affiliate broadcast stations, which still accounts for more than 80 percent of its viewership.

And right now, that part of the business isn’t going well.

On Friday, ratings tracker Nielsen revealed that for the just-completed 2011-12 TV season, CW’s primetime usage dipped 15 percent to an average of only around 1.5 million watchers. Viewership for the network’s target demographic, adults 18-34, dropped 20 percent to 800,000.

With ratings like these, how can the network’s affiliate partners survive, much less negotiate hefty retransmission fees with cable and satellite operators?

It is here where the Netflix licensing deal has helped tremendously, delivering the network — which had previously struggled to sell its shows to cable and syndication — back-end resources for the first time.

Rather than having to further cut back on the number of fresh, original programming it will supply to its affiliates next season — thus further dropping ratings — CW announced that it will have 50 additional hours of original series on the air next year and will be able to supply original programming during the summer for the first time.

“We’ve taken the money and put it back into supporting the model,” Haskins noted.

Here’s former CW president Dawn Ostroff discussing the Netflix deal with paidContent editor Staci Kramer last year:

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Truth be told, Sarandos (pictured left with his better angels and worser devils) told a morning panel that also featured Time Warner CEO Jeff Bewkes and News Corp. deputy chairman Chase Carey, and which was moderated by CNN personality Piers Morgan, Netflix’s impact on the multichannel business is far from “black and white.”

“We’re additive to certain programs,” he told the audience, that included entertainment trades Deadline Hollywood and the Hollywood Reporter. “We’re additive to certain programs. Whether we are cannibalistic or not to other programs, I don’t know. We have billions of hours of viewing, so we are going to take away from something.”

Patrick Esser, president of the No. 5 pay TV service in the U.S., Cox Communications, summed up Netflix’s role as a teenager might break down a dichotomous classmate: the company is simply a “frenemy” to the pay TV industry.

Moderator Morgan brought up a recent hot media-on-media story, which has tied double-digit ratings losses for Viacom-owned kids channel Nickelodeon to tikes choosing to stream shows like Dora the Explorer on Netflix.

Sarandos denied a direct connection between his company’s streaming deal and ratings drops on Nick.

“People’s tastes are so diverse that no specific network and no specific show has such high viewing concentration that you’d see that kind of cause-and-effect on ratings,” he explained.

The flip side of that story is that AMC’s popular adult dramas, Mad Men, Breaking Bad and The Walking Dead, have reportedly received ratings help from the streaming service, with new viewers turned on by watching legacy seasons of these shows on Netflix.

Perhaps belying his earlier deflection regarding Nick, Sarandos definitely sees a connection on that positive interaction.

“In the gap between season four and season five, we brought maybe 1 million new viewers to AMC,” he boasted. “There were people who had four years to watch the show and didn’t. Because we gave them a good opportunity and a well-priced model (they were able) to catch up on the show.”

Netflix’s positive impact on the broadband business was also brought up.

Esser noted that in March, about 40 percent of Cox’s nearly 4.8 million subscribers were streaming Netflix — a boost to the cable company’s high-speed internet services.

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How quickly things change

This was my fourth or fifth year in attendance, and in many ways, it was shockingly similar to the others I’ve attended. There was (again) a lot of talk but no real movement on stuff like mobile DTV and 3-D TV, as well as grudging acceptance among incumbent content creators that the Internet, mobile and tablets are platforms they need to play on, even if there’s no real money there.

But there was one thing that was very different, at least in the makeup of the show’s keynotes and “super sessions.” In attending a few of the higher-profile sessions, I got the feeling that this year’s NAB Show wasn’t actually about broadcast TV, at least not in the way that it’s sold or distributed. It was instead about the multiplatform piece, and seemed specifically to shine a light on those who were leading the charge in that arena. The only problem is that the creators and distributors it highlighted weren’t broadcasters, at least not in the traditional sense, but those mired in the online-only or online-first world.

While last year’s NAB show featured a keynote speech by CBS head honcho Les Moonves, there were no comparable heavy hitters from the TV world to give their vision for the future. Notably, the show seemed to cater instead to those who were interested in how streaming and multiplatform delivery were disrupting the traditional TV model. NAB brought in speakers like Netflix Chief Content Officer Ted Sarandos, Machinima President Philip DeBevoise, Electus’ Ben Silverman and Revision3’s Jim Louderback, among others.

Even those speakers who are part of the traditional broadcast model seemed to be there not to talk about the business of TV, per se, but about distribution in the bold new multiplatform world. Hell, even Betty White — who we all know of because of her TV career, and who spoke at an early breakfast slot on Tuesday — has seen her career resurrected mostly because of a Super Bowl commercial that went viral online and made her part of the conversation again.

What is a broadcaster, anyway?

I wasn’t the only one who was confused by the whole thing. I facilitated a roundtable discussion for a group of attendees Wednesday morning, leading a wide-ranging talk about a number of topics facing content producers and distributors.

The makeup of the room was impressively diverse: There were attendees who were there at their first NAB show, and others who had been going for decades. There were some present who worked for PBS, others who produced news and other content for local affiliates, and a university professor who was there to comment on the way the behavior of college-aged viewers were changing. There were participants from the agency side, others who created apps, and still others working on new web-original projects. There was even a guy from Brazil who produces surfing shows for the web. He switched from TV distribution to streaming video more than a decade ago.

One of the folks there — whose name I’ve unfortunately forgotten — summed up the feeling of the show pretty well: “How do we define a broadcaster?” he asked. “Is it someone who distributes content over the air? Is it someone who does over-the-air and cable and satellite? Is it someone who does that and also does delivery on the web and to other platforms, with a certain number of viewers?”

Barbarians at the gates

Considering who was speaking at this year’s show, I think there’s a clear answer to that: the definition needs to fall outside the traditional scope of the broadcasting industry and needs to include folks who are making content that doesn’t necessarily originate on TV. When Netflix introduces a slate of programming that includes shows from David Fincher, Kevin Spacey, Eli Roth and the return of Arrested Development, you can no longer define content as “premium“ just based upon whichever distribution platform it appeared on first.

I’ve always attended NAB with a view toward the digital future — and over the years, I’ve been frequently frustrated by how the industry doesn’t seem to “get it.” This is the first year where I’ve felt that the show and attendees were having real discussions about the future, the first time someone acknowledged that the big broadcast and cable networks weren’t the only ones who held the keys to the future of video.

But I wonder what that means for everyone else at the show, or, what the people who have been going to NAB for decades think about the barbarians at the gate that are taking up all their speaking slots and shaping the discussion. What does it mean when there are no real broadcast titans speaking at a show for and about broadcasters?

It probably means that the world is changing, and it could mean that smart content creators and distributors are doing everything in their power to stay ahead of that change. And maybe, just maybe, it means that the broadcasters at NAB could learn a lesson or two from those who are doing so, including the folks at Netflix, Machinima and Revision3.

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On Tuesday, Netflix Chief Content Officer Ted Sarandos took the stage at the National Association of Broadcasters Show in Las Vegas to give a preview of the streaming service’s upcoming slate of original programming. It was an interesting moment. After all, here’s the guy who has spent the last several years making nice with cable and broadcast networks, writing big checks for their content. Now, he’s showing that Netflix is seeking to become a bit of a competitor with the very same networks and studios that it currently sources content from.

But if Netflix ends up competing for a greater share of viewers’ attention with its streaming offering, it’s only fair, Sarandos posited. After all, the increasing number of TV Everywhere apps and services are starting to encroach on its turf, he reminded the audience.

The early look at its foray into original content shows that Netflix’s future appears pretty promising Beyond Lilyhammer‘s quirky fish-out-of-water story of a New York City gangster who goes to Norway to enter the Witness Protection Program, Netflix has a slate of content that is star-packed. There’s House of Cards, the David Fincher-Kevin Spacey project that is based on a British novel and miniseries of the same name, appearing in early 2013. There’s Orange is the New Black, the story of one woman’s time in minimum-security prison, being spearheaded by Weeds creator Jenji Kohan. There’s the Eli Roth-led murder mystery Hemlock Grove, starring Famke Janssen. And, of course, there’s the long-awaited return of Arrested Development, five years after the series was cancelled by Fox.

Kohan, Roth, Janssen and a number of the members of the Arrested Development cast were there to tell the audience why they were excited about creating content for Netflix. For Kohan, the opportunity to work with Netflix was a way to show off a great new business model. And Roth talked about how Netflix gives him the freedom to create what will essentially be a long-form, 13-hour feature that will allow him to do what he does best — frighten people — and give his fans what they want and expect from him, something that might not be possible at a normal TV network.

The freedom to make interesting shows — without a network controlling the process or the output — seemed to be an underlying theme, though I don’t think anyone actually came out and said it. In that respect, Netflix could use its newcomer status as a way to recruit more talented content creators who are frustrated by the usual network system. That’s something HBO has long been applauded for — giving artists the creative freedom to build shows that wouldn’t necessarily play anywhere else.

Of course, it’s one thing to announce a bunch of star-studded shows. It’s a whole other thing to have them be good. Lilyhammer was an interesting starting point, but many who saw it seemed a little underwhelmed. And if House of Cards doesn’t hit it out of the park, serious questions could begin to emerge about Netflix’s ability to not just license shows that have already proven to be popular, but to create some of its own. And as the networks begin to increase the cost of the content that they license to Netflix, its future could very well depend on its ability to do that.

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The lawsuit was filed in U.S. District Court in Northern California, by the City of Royal Oak Retirement System, and seeks compensation for all shareholders stock who purchased Netflix stock between December 20, 2010 and October 24, 2011.

The complaint claims Netflix senior management didn’t disclose that many of its contracts to stream content were short term and would soon have to be renegotiated at substantially increased cost. It also states that CEO Reed Hastings made $43.2 million selling 190,000 during the period in question.

It says the defendants violated section 10(b) of the Securities Exchange Act of 1934. The provision forbids manipulation or deception in the securities market, and has been invoked in thousands of investor related lawsuits.

The investors are represented Robbins, Geller, Rudman & Dowd LLP, a firm that specializes in corporate class actions, and has won large verdicts against companies like Enron and AT&T (NYSE: T). Class action law firms typically attempt to force a settlement from firms and then take a commission of around 25 percent.

In addition to Hastings and the company itself, the defendants are: CMO David Wells; chief content officer Ted Sarandos; chief product officer Neil Hunt and CMO Leslie Kilgore.

A Netflix spokesman has yet to respond to an inquiry made late Monday by paidContent.

Netflix stock was trading on the NASDAQ at $291.27 per share on July 12, the day before Netflix announced separate charges for streaming and DVD and a 60 percent price increase for some subs. It quickly abandoned an attempt to spin off its disc-rental operation. The moves that were rejected by consumers and investors alike.

Netflix stock closed after-hours trading Friday at $94.79 a share. On Tuesday, company shares were up almost 2 percent in mid-afternoon trading.

The suit, posted on the law firm’s site, contends:

“At the beginning of the class period, Netflix was facing increasing competition for streaming business, and content providers were exploring new ways to distribute their content and/or maximize their licensing fees, … Rather than fully disclose the devastating cost increases which were then threatening Netflix’s entire business, the defendants talked about [their] ability to grow.”

The suit also notes that Netflix senior managers sold many of their shares when the stock was high, netting $90.2 million between them. It doesn’t cover the circumstances of those sales — whether or not they were pre-scheduled, for instance, or how much stock those managers may have acquired.

Netflix class action
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