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Home , Beau Willimon, House of Cards (novel), MRC (company), The Invention of Lying

9-515-003 REV: JUNE 6, 2019

ANITA ELBERSE MRC‘s House of Cards

Asif Satchu and Modi Wiczyk, co-chairmen and co-chief executive officers at independent production company Media Rights Capital (MRC), took a moment to reflect on one of the more unusual twists in their careers in Hollywood. It was March 13, 2011, and the two best friends and former Harvard Business School classmates had just heard two visiting executives make an offer for what was arguably MRC’s most ambitious project to date, a television series titled House of Cards. Netflix, in its first major move in original programming, had proposed to license the exclusive first- window rights to two full seasons of thirteen episodes each. Moreover, Netflix had promised MRC could retain ownership of the content and would have total creative control. “I can’t think of any other deal of this size made by an independent studio for decades,” said Wiczyk. MRC was a relatively new player in the entertainment industry. It had established a reputation for what Wiczyk called “director-driven projects” in film, bursting onto the scene with the Academy- Award-winning Babel in 2006, and following it up with titles such as Brüno, The Invention of Lying, and . In 2008, Satchu and Wiczyk had decided to branch out and produce content for television, too. The company had quickly become more ambitious in the size of its investments in that sector, but House of Cards promised to take things to another level entirely. The tale of politician Francis Underwood’s masterful scheme to vault himself to the highest circles of power, House of Cards was based on a critically acclaimed mini-series of the same name that had aired in the UK in the 1990s, which in turn was an adaptation of a bestselling novel. MRC had secured the rights, assembled a highly talented team of the filmmakers , Joshua Donen, and Eric Roth as executive producers, as writer, and as lead actor, and had enabled them to develop their ideas for well over a year. In March 2011, MRC executives had begun to pitch the series to each of the major premium cable networks in the US—“the obvious candidates,” as Wiczyk put it—including AMC, FX, HBO, Showtime, and . The executives had approached Netflix only to prepare for a possible second revenue window in video-on-demand, but to their surprise Netflix executives had quickly made it known they were prepared to make a bold step into the world of original programming. As thrilled as Satchu and Wiczyk were about Netflix’s offer, accepting it—and thus forgoing a sought-after one-season offer from a traditional premium cable network—raised major concerns, for instance about MRC’s ability to secure international rights fees, to obtain sufficient marketing support, to gain the necessary credibility in the marketplace, and to satisfy artists and other key constituents. As Satchu and Wiczyk walked out of the conference room at their Beverly Hills office and said goodbye to their guests, promising them a swift decision, they debated what to do. Was Netflix the right partner for MRC? And if so, how should they respond to the offer? 515-003 MRC‘s House of Cards

The Television Landscape

By 2011, the U.S. television industry was a $200-billion industry.1 Of the 117 million households in the U.S., 98% owned at least one television set, 90% subscribed to basic cable (for about $50 per month), 52% paid for premium cable content for additional fees, and 75% owned a computer with Internet access. On average, Americans watched nearly five hours of television per day.2 Three types of television networks—broadcast networks, basic cable networks, and premium cable networks— distributed the programs they viewed, while online services such as Netflix increasingly played a role in giving consumers access to video content (see Exhibit 1). Broadcast Networks

Broadcast networks, such as ABC, CBS, FOX, and NBC (known as “the big four”), provided programs to hundreds of so-called “television stations” across the country, which in turn distributed them to local households. Some of these stations were owned and operated by the networks themselves, while others were “affiliates” owned by a third party. Broadcast networks primarily relied on advertising revenues, which they generated from selling national and local spots on their own stations, and from selling national spots on affiliate stations (while the affiliate stations kept the revenues from local spots).

In 2010, advertisers paid nearly $25 billion to the broadcast networks, accounting for a third of all television-advertising expenditures.3 That stemmed from the popularity of the broadcast networks, which could draw tens of millions of viewers for their top shows. But the television industry was rapidly evolving, and with new channels and technologies giving viewers more options, the broadcast networks had seen their market position weakened. Broadcast ratings had declined more than 20% since the 2000-2001 season (see Exhibit 2). Basic Cable Networks

Cable networks came in two types: basic and premium cable networks. Dozens of basic cable networks, including , Food Network, Lifetime, Syfy, TBS, TNT and USA, generated revenues from both advertising sales and license fees paid by cable and satellite operators (such as and DirecTV) for the right to distribute their content. Although the reach of individual cable channels was generally smaller than that of any of the big four broadcast networks, collectively the basic cable networks now produced higher ratings than the broadcast networks (also see Exhibit 2).

Basic cable networks were often associated with “syndicated content,” meaning content that had run on the broadcast networks first (such as the series Friends, a popular NBC series in the 1990s, now airing on TBS). But many basic cable networks also produced original shows of their own. Some, in fact, made significant investments in high-quality scripted programming more often associated with premium cable networks—FX and AMC were two notable examples. FX In 2002, the basic cable network FX, then mostly known for reruns of Buffy the Vampire Slayer and X-Files, made a on a high-end original drama series called The Shield. Defying the rules of conventional police dramas, The Shield profiled a morally ambiguous group of inner-city police officers. Episodes cost over $2 million to produce, much higher than most cable series at the time.4 The show premiered to 4.8 million viewers, making it the most-watched debut of any scripted basic-cable series.5 FX rapidly became a top-ten network among adults in the 18-to-49-years-old demographic. From 2002 to 2007, the year before The Shield's run ended, FX’s advertising revenues more than doubled, from $142 million to $322 million.6 The show won critical acclaim, too: The Shield was awarded a Golden Globe for best dramatic television series, and Michael Chiklis became the first actor from a basic-cable series to win an Emmy for outstanding lead actor in a drama series. “FX had been showing re-runs of [the 1980s sitcom ] Married with Children for ten years,” said Wiczyk. “Then they have one good show with The Shield, and bam, they are a big network.” By 2011, FX had followed up with other provocative

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dramas, including Nip/Tuck, Rescue Me, and Sons of Anarchy. AMC American Movie Classics (AMC) underwent a similar transition. Known for its comprehensive library of classic and modern films, AMC dove into original scripted programming in 2007 with the launch of Mad Men, a show about advertising executives in the 1960s. Mad Men’s audience grew from one million television households during its first season to three million in its fourth season, and won many industry awards, including the Emmy for outstanding drama series—three years in a row.7 In 2009, airings of Mad Men produced a modest $2 million in advertising revenues, but also seemed to have helped AMC secure higher license fees.8 Before Mad Men, cable operators were rumored to pay AMC 20 cents per cable subscriber per month; after four seasons with the hit show, AMC earned 40 cents.9 AMC went on to launch Breaking Bad, a drama series about a high-school chemistry teacher turned methamphetamine dealer, and The Walking Dead, a zombie horror series. In 2010, the latter show became the most watched drama series in basic-cable history.10 Premium Cable Networks

Premium cable networks such as HBO, Showtime, and Starz, were free of advertising and relied on subscription fees paid by viewers—an additional $10 or $20 that came on top of the basic-cable package. Initially, these networks primarily showed feature films in an exclusive window after their theatrical run, but in recent years the premium cable networks had invested heavily in original series. HBO A subsidiary of Time Warner, HBO set its reputation for bold, artistic, and sophisticated programming with its iconic show The Sopranos, a drama about an Italian-American mafia family. Launched in 1999, the series collected 111 Emmy nominations and 21 Emmy awards during its six- season run.11 The network solidified its positioning, captured by the tagline, “It’s not TV, it's HBO.,” with a strong line-up of subsequent series including The Wire, Entourage, and Game of Thrones. By 2010, the network spent an estimated $1.5 billion on original programming.12 In pursuing its original content, HBO tended to give writers, actors, directors and other cast and crew a greater level of creative freedom than the broadcast and basic-cable networks. HBO was not afraid to order a second season when the first was still underway so as to give a show sufficient time to build an audience—a practice most other networks shied away from.

The strategy brought the network great critical acclaim: in 2010, for instance, HBO won 25 Emmys— more than any other network.13 The strategy also helped HBO grow its business. By 2011, even if churn continued to be a concern (about ten million U.S. households dropped the service each month, while another ten million subscribers signed up each month), the network averaged close to 30 million U.S. subscribers. HBO generated $4 billion in annual revenues, half of which it shared with cable and satellite operators.14 In foreign markets, the network had around 40 million subscribers and was expected to generate $1 billion in revenues in 2011.15 Showtime In the late 2000s, Showtime, a network owned by CBS Corporation, started to mirror HBO’s strategy of investing heavily in premium original programming to supplement its feature-film programming. Boasting the slogan, “TV. At Its Best.,” Showtime’s biggest hit was Dexter, a series named after its protagonist, a police expert by day, vigilante serial killer by night, and a show that blended suspense, action, comedy, and other genres. In 2010, a year in which Dexter drew 2.5 million viewers and was renewed for six seasons, lead actor Michael C. Hall won a coveted Golden Globe for best actor in a television drama.16 Scheduled to premiere in the fall of 2011 was Homeland, a psychological thriller about a CIA agent and her relationship with a U.S. Marine Sergeant who has been held captive by Al-Qaeda. The series was adapted from an acclaimed Israeli television series, Hatufim (“Prisoners of War”).17 Showtime had an average of 19 million subscribers in 2010, up from ten million in 2000.18 Starz Since its launch in 1994, the programming lineup of premium cable network Starz, owned by Liberty Media, consisted almost entirely of Hollywood movies. But in 2008, Starz produced its first original drama series, Crash. It was based on the 2005 film Crash, an ensemble drama about race

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relations, which had won three Academy Awards, grossed close to $100 million at the box office, and was once the most-rented DVD in Netflix’s history.19 However, Crash never gained much traction as a television series. The show had fewer than 100,000 viewers at the end of its second season, and did not continue for a third.20 The offbeat comedies Party Down and Gravity did not fare any better.21 Starz’s 2010 gladiator epic Spartacus drew a much larger audience, pulling in over a million viewers.22 Camelot, another big budget series thought to cost $7 million per episode, was due out in 2011.23 Starz averaged 17 million subscribers in 2010.24 Online Video Services

The growing ubiquity and popularity of high-speed Internet had given rise to a range of new ways to watch audiovisual content. By early 2011, American Internet users spent an average of 30 minutes a day watching videos online.25

They could do so through three types of services, which in 2011 largely served as secondary windows for previously aired television content (also see Exhibit 1). First, in what was known as electronic sell-through (EST), consumers could purchase videos for streaming or downloading through online stores such as , Apple’s iTunes store, and Google’s The Android Market. Second, consumers could freely watch videos using advertising-supported video-on-demand (AVOD) services such as YouTube, , and broadcast-network-branded websites (e.g., ABC.com). Hulu, a joint venture between NBCUniversal, Disney, and News Corp. (which together owned a range of broadcast and cable networks), provided the widest range of premium, professionally produced television content, including shows such as House, The Office, and The Daily Show with Jon Stewart. Hulu had roughly 30 million users of its free service. 26

A third category, subscription video-on-demand (SVOD) services, included Amazon Instant Video, Hulu’s paid service, Hulu Plus, to which 1.5 million users subscribed for $7.99 per month,27 Netflix, and various cable-network-branded online channels. For instance, consumers who subscribed to HBO and Showtime through their cable operator could access these networks’ online offerings, HBO Go and Showtime Anytime. Like their corresponding networks, both did not show advertisements. Amazon Instant Video was included in the online retailer’s $79-per-year Prime free-shipping service, and offered 5,000 movies and television shows to about five million subscribers.28 The largest player in this category, however, was Netflix. Netflix Founded in 1997, Netflix had originally built a business delivering DVDs by mail. Users paid a monthly subscription fee (which depended on how many DVDs a person wanted to be able to hold at any given time), created a profile, set up a queue of DVDs they wanted to watch, and received DVDs roughly in the order of that queue. Its subscriber base grew from under one million in 2002 to over six million in 2006.29 In 2007, around the time the company delivered its one billionth DVD, Netflix began to transition towards on-demand streaming, which allowed users to instantly watch an assortment of movies and television series through Netflix’s site.30 Initially, Netflix’s collection of video-on-demand movies primarily featured back-catalog titles. Netflix could not compete with the premium cable networks, which had bought the rights for movies and television shows from the major Hollywood studios in comprehensive, long-term deals worth hundreds of millions of dollars (also see Exhibit 3). Also because broadcast and cable networks often had locked up subsequent rights, Netflix was not able to stream some movies until nine years after their theatrical release.31 But in 2008, Starz announced it would make 2,500 of its movies, television shows, and other content available via Netflix. The deal included movies that were a part of Starz’s exclusive first-run agreements with Disney and Pictures that covered such movies as Spiderman 3, No Country for Old Men, and Pirate’s of the Caribbean: World’s End. With the deal between Starz and Netflix, which cost the latter an estimated $30 million per year, Netflix subscribers could stream these movies as soon as they made their debut on Starz, at no additional charge.32 Starz’s original series Crash was also included in the deal.

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By March 2011, Netflix reported a subscriber base of 24 million users in the U.S. alone. Its revenues were $2.2 billion in 2010, up from under $1 billion in 2006 (see Exhibit 4).33 More than 60% of Netflix subscribers streamed content online, where they could choose from an estimated 20,000 movies and television episodes that were available for instant viewing.34 Those subscribers who only wanted to watch online paid a subscription fee of $8 per month. Netflix continued to sign more content deals. For instance, it paid Warner Bros. $200,000 per episode for the rights to stream all one hundred episodes of Nip/Tuck after the series had concluded its run on FX.35 With the availability of entire series, many users were glad to partake in “binge viewing,” the act of viewing subsequent episodes for many hours in one sitting. This allowed viewers to catch up on serialized shows before the next airing on television. In September 2010, Netflix began to expand internationally by offering its unlimited-streaming plan in Canada; the company was expected to report 800,000 new subscribers and $12.3 million in revenues from that market for the first quarter of 2011.36 Netflix had plans to expand to other international markets in the second half of 2011.

Selling Television Each year, executives from television production divisions of the major Hollywood Studios (such as ABC Studios, which belonged to Disney, and Warner Bros. Television, which belonged to Time Warner) and from independent production studios (such as Endemol and ) pitched hundreds of ideas for new television shows to broadcast and cable networks. Broadcast versus Cable

For the broadcast networks, the cycle was highly structured and similar each year. Production companies pitched ideas and submitted scripts in the fall. The networks decided which scripts were to be made into episodes in January and February, providing funding for their development. Pilots were produced during the next two months. In early May the networks made their picks for series for the fall schedule based on those pilots and how they tested with audiences. That schedule in turn was presented to advertisers at the annual “upfront market” during which the lion’s share of the advertising space for the upcoming season was sold. Only a small fraction of ideas pitched made it through the entire process; one industry estimate put it at 1%.37 And the majority of those new series were canceled within their first season.

The broadcast networks had a tight grip on the creative process, explained Wiczyk: “When the network buys the rights to a script, network executives play a role in picking the writer, the director, and the cast, they provide notes on every draft, they work on budgeting and scheduling, and help make the pilot. They are highly involved in all creative decisions.” He added: “No one says pilots aren’t useful, but it’s clear that when you deal with the broadcast networks you subject yourself to the views and decisions of a third party.”

Cable networks, and in particular the premium cable networks, had a more flexible approach. “Premium cable networks are year-round developers,” said Joe Hipps, who as vice president of television development oversaw the creative process for MRC’s television activities. “They will listen to pitches for new shows throughout the year.” But even there, most ideas never made it to the screen: “Out of all the pitches they receive, the cable networks might develop a hundred scripts over the course of two years,” said Hipps. “Maybe ten of those developed projects will make it to the pilot stage, and of those five might actually become series.” The misses were expensive, explained Wiczyk: “Pilots for shows on cable networks can cost between $10 million and $20 million, while regular episodes tended not to cost more than $6 million.”

Compared with broadcast networks, cable networks usually granted production companies a greater degree of creative freedom. HBO and Showtime, in particular, were known for catering to high- profile filmmakers such as Steven Spielberg and Martin Scorsese and writers such as and David Chase by taking a more hands-off approach. That method fit Wiczyk’s vision: “I believe in artists

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being accountable to their audience,” he said. “That manifests itself in thorough creative discussions in the course of making films or television series. But those discussions should be with other artists—not with executives.” Hipps agreed: “You never know, creatively, what is going to work. But with too many cooks in the kitchen, ideas can easily get watered down.” Deal-making Television series were typically financed through common ownership, co-production, or deficit financing. Common Ownership First, oftentimes broadcast and cable networks acquired shows from studios that belonged to the same company or conglomerate (as in the network ABC purchasing from ABC Studios which also belonged to Disney). By some estimates, major Hollywood studios sold between 60% and 75% of their programming within their corporate umbrella.38 At the same time, however, it was not uncommon for production companies to license shows to networks belonging to competing conglomerates. The hit show Two and a Half Men, for instance, aired on CBS (which was owned by CBS Corporation) but was produced by Warner Bros. Entertainment. HBO produced virtually all of its shows in-house: In 2010, HBO owned 95% of the original programming it carried on its channels.39 Co-Production Second, networks and studios could co-produce television series, making both responsible for the production costs but also giving both a stake in the revenues of the series across its different release windows. Co-production was a popular approach for premium cable channels. For example, AMC’s The Walking Dead was co-produced by AMC Studios and three other production companies. Deficit Financing Third, the go-to method for independent production companies but also frequently used by companies owned by the major conglomerates, studios could rely on “deficit financing.” The practice involved a network paying the studio a license fee in exchange for the right to air a series. The fee usually covered only between 60% and 80% of the cost to produce the series, however, hence the term. The initial deal typically gave the network the rights to the “first window” for a limited amount of time in the domestic market, while the studio retained ownership of the series and could sell the rights for subsequent windows and foreign territories.

In either case, revenues after the first window—through sales in international markets, video-on- demand and home video, and syndication—were crucial to a series’ overall profitability. Those windows could be highly lucrative for a select few winners in the marketplace. For example, HBO had secured $2.5 million per episode from international sales for Game of Thrones—easily making it the network’s best-selling series internationally—before the series had even premiered in the U.S.40 HBO’s True Blood: The Complete Second Season’s DVD sales reportedly totaled more than $40 million in the U.S. in 2010.41 And while only 10% to 15% of first-run shows made it to syndication, the rewards could be staggering: the comedies Friends and Seinfeld earned over $3 billion each in syndication.42

“You can lose a lot of money or make a lot of money,” observed Wiczyk. Liz Jenkins, MRC’s senior vice president of corporate development and strategy, agreed: “All studios are trying to make their business less volatile, but the problem is that the industry is driven by the whims of consumers. To minimize your risk as a studio, you don’t want to accept a low rate for your deficit financing and hope for syndication to bail you out—you want to get a reasonable rate of return in the first season.”

Media Rights Capital (MRC) Media Rights Capital’s roots could be traced back to an independent study project at the Harvard Business School. “Asif and I were both students in the Class of 1999. He was my hall mate and my section mate,” explained Wiczyk, adding jokingly: “He had really good cereal, which is why we became

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best friends.” Having interned at independent in the summer between his first and second year, Wiczyk was fascinated by the question what it took to, as he put it, “unlock value” in the film industry: “You need to have access to and understand an ocean of information in order to properly evaluate films and film rights. I thought that if you could gather all that data and use it on behalf of the artists, then you could build an interesting company where you could capture economic value but also provide artists with control and independence.”

After graduating, Wiczyk joined the studio and later the talent agency (“I shot myself out of cannon in Hollywood in order to gather the necessary skillset,” he said) while Satchu worked on his own start-up outside the field of entertainment, Suppliermarket.com, which he sold after two years for $1.1 billion. Satchu went on to found Storage Now, which became Canada’s third largest self-storage company, which he also sold. Then, in 2003, the two friends set out to raise a modest amount of capital to get MRC off the ground. “Asif and I had been in constant contact over the years and he was always quite engaged in the independent study idea,” recalled Wiczyk. Satchu saw the entertainment business as a challenge: “First, there are very few entrepreneurs in entertainment. Most people work at the major studios. The business is run by an oligopoly that is focused on keeping new entrants out.” He added: “Second, whereas other businesses are very numerically driven, in the entertainment business the numbers can lie. You have to make million-dollar decisions based on scripts—on words on a page—and the range of outcomes is massive. There’s a much larger human component to it than anything I had done before.” Films MRC’s first movie was Babel, a multi-narrative drama that was directed by Alejandro González Iñárritu, written by Guillermo Arriaga, and featured a high-profile cast including Brad Pitt, Cate Blanchett, and Peter Wright. First screened at the Cannes Film Festival and Toronto International Film Festival in 2006, and distributed by major Hollywood studio Paramount, the film was made for a $25- million production budget and generated $34 million at the domestic box office and $101 million internationally.43 Babel was nominated for seven Academy Awards, including Best Director, Best Picture, and Best Supporting Actress, and won for Best Original Score. “Babel was a great way to start for us,” said Wiczyk. “At the center of it is an incredibly talented director—a really strong filmmaker with a specific vision of what they want to make.”

By 2006, Wiczyk and Satchu decided to raise more capital. ”With our first few projects, we had built credibility with artists and investors,” said Wiczyk, who resigned at Endeavor to work at MRC full- time. The two became co-chief executive officers. Investments from , AT&T, WPP and ABRY Partners gave MRC the ability to spend $500 million on new content.44 “We still had hardly any staff and had a lot to learn about how to make movies. We always said ‘We had no idea how the celluloid got to the projector,’” said Wiczyk. “But we had become an entity that could produce movies in an atmosphere that was friendly to filmmakers.”

Among the films MRC released in subsequent years were: Brüno, a raunchy “mockumentary” about a gay Austrian fashion journalist starring Sacha Baron Cohen (fresh off his wildly popular comedy Borat), The Invention of Lying, a romantic comedy about a fantasy world in which everyone tells the truth that featured as lead actor and co-producer, Devil, a supernatural horror story directed by M. Night Shyamalan, and The Adjustment Bureau, a science-fiction thriller about a politician torn apart from his love interest by a mysterious organization starring Matt Damon and Emily Blunt. In the pipeline were 30 Minutes or Less, an action comedy starring Jesse Eisenberg, Danny McBride, and Aziz Ansari that was scheduled to be released later in 2011, Ted, a comedy co-written and directed by Seth MacFarlane and starring Mark Wahlberg and Mila Kunis, and Elysium, a science-fiction film written and directed by , also starring Matt Damon.

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Television In 2008, Satchu and Wiczyk decided to produce content for television, too. “We saw that there was strong growth and that margins were massive in cable television. Filmmakers, who until then did not drive enormous value in television, were becoming extremely valuable to the networks,” recalled Wiczyk. “We said, ‘We’ve already built a practice of supporting filmmakers—they’re already working with us—so why don't we ask them if they want to be in television, and make it attractive for them by enabling them to develop scripts, and budget and cast shows?’” He added: “We know our guys don’t want to waste their time and creative energy on a pilot. So we said ‘Why don't we construct the script and go to the networks and ask for a full-season order. If nobody wanted to do that deal, that’s okay— all we would lose was our development money.” Wiczyk described MRC’s strategy as one that was “about making television safe for filmmakers.”

MRC took on the production of broadcast network The CW’s entire Sunday-night block, including the reality show In Harm’s Way and the dramas Valentine and Easy Money. However, the latter were canceled in the fall of 2008 and The CW eventually changed the direction of their Sunday lineup. MRC’s next forays into television included the sitcom Rita Rocks on cable channel Lifetime, which lasted two seasons, and Mike Judge’s animated comedy on ABC, which lasted one season.45 Two other animated shows—The Life & Times of Tim and The Ricky Gervais Show—were “straight-to-series” orders for HBO. Both developed a loyal following, were in their third seasons by March 2011, and performed well in ancillary windows. “We’ve become more ambitious in the size of investments in television,” noted Hipps. “For us, it’s all about working with people with talent.” Online

MRC had even experimented with online channels. It partnered with MacFarlane to launch an animated web series called Seth MacFarlane's Cavalcade of Cartoon Comedy, which consisted of fifty one- to-two-minute episodes that were distributed over Google’s AdSense network, a collection of websites hosting Google’s ads, and were sponsored with pre-roll advertisements. Each time a viewer clicked on an episode, advertisers paid a fee that was split between MacFarlane, Google, MRC, and the site hosting the video. The first video, launched on MacFarlane’s YouTube channel, received three million views in just two days, and the series landed MacFarlane a Webby as Film and Video Person of the Year. But not all results were favorable, remembered Wiczyk: “The bottom line on this project was best-in-class, but the order of magnitude was pretty disappointing. We could not have done a better job with the execution, but realized that film and television are a better use of an artist’s time. So that’s when we talked to Seth about Ted and other films. I thought, ‘If that’s the best we’re going to do, online should not be a focus.’” MRC in March 2011

As of March 2011, MRC had 25 full-time staff members, including assistants (see Exhibit 5 for its track record). “We love being a boutique. For artists, it is pretty easy to start a conversation with us,” said Wiczyk. “We want to make two to three movies a year, and two to three television series a year. We’re built for that. The scarce resource is great filmmakers.” He described MRC as being “director-driven” from the start: “Directors generate the ideas. They are the ones who have the vision for a piece of content and they are the ones who can control the costs. They are the leaders.” Contracts with filmmakers were designed to align interests, Wiczyk explained: “They are directly and transparently rewarded for being efficient. We motivate them to eliminate waste. We have a track record of saying ‘Save me a dollar, I’ll get you 50 cents.’” He added: “If an artist wants to get paid for an idea, they typically sell it to a studio that will then own it and dictate all the terms and conditions. But at MRC, artists can get paid to develop the idea on their own, so they can budget and cast it themselves. Then when it’s time for the idea to be realized, they can control it, and they can much more carefully dictate the terms of how it gets made.” Giving artists a great deal of creative freedom was part of the philosophy, Wiczyk clarified: “We think that the difference between

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us and an artist is that between an orderly and a brain surgeon. I can wheel the body in, but I should definitely not be handling the scalpel. If content doesn’t test well I can say ‘the ending doesn’t work,’ but I can’t tell a director how to fix it.”

Developing House of Cards The idea to pursue the rights for House of Cards came from an intern who had seen the critically acclaimed 1990s four-episode mini-series that had aired on British public broadcaster the BBC. “We had a company-wide meeting to brainstorm ideas, and one assistant jumps up and says ‘There was this show in England, and all these modern anti-hero shows are just borrowing from it,’” recalled Wiczyk, who admitted he “didn’t pay attention to it” at the time: “Months went by. And finally, I was getting ready to go on a flight, he gave me a DVD and urged me to watch it on my laptop. I board the plane, start watching the series, and within twenty minutes I could tell why it was a hit. It was riveting. So I immediately investigated the rights situation, asking myself ‘how could this not be sold already?’”

Wiczyk learned that the British show had been an adaptation of a novel written by Lord , ’s former chief of staff. Dobbs reportedly wrote House of Cards while on vacation and emotionally recovering from the experience. Andrew Davies in turn adapted Dobbs’ book into a mini-series for the BBC in 1990. Like the book, the show followed , a fictional Chief Whip of the Conservative Party, as he schemed and manipulated his way to power. Many regarded the program as one of the best British dramas ever.46 “They called Francis Urquhart ‘the original anti-hero,” knew Hipps. “The show was a phenomenon,” Wiczyk agreed. “But Dobbs had never been willing to license the rights to a large Hollywood studio.” In June 2008, Satchu and Wiczyk flew to the UK to meet with Dobbs, Davies, and their agents. They agreed to license the rights to MRC. “We pointed out that we were small and focused on protecting artists’ interests, and I think our reputation helped us,“ said Wiczyk. The MRC executives next presented the idea to David Fincher, director of the film The Social Network, with whom they had a production deal in place (in which MRC paid Fincher a certain annual fee, and he in return was obligated to present movies he wanted to produce to MRC first). Fincher was immediately enthusiastic about the idea, and joined the project as an executive producer in July 2009, and brought in film producer Joshua Donen and Academy-Award-winning screenwriter Eric Roth as co-executive producers. “I knew once we had those people attached, we needed to find a great writer. That was my job,” said Hipps. He added: “At this point, the big studios would have pitched the concept to the networks, expecting the network to tell them how to write the script. But we decided to spend some development money ourselves, without a broadcaster. Normally you wouldn’t dare write a script unless you knew you had a home for it.” Hipps thought of , a political play he had been impressed with, and invited its young writer Beau Willimon to meet the House of Cards' executive producers. “They all loved each other,” Hipps remembered, prompting him to hire Willimon in January 2010 to write the pilot script and ‘show bible.’ “The bible is a document that outlines how the whole first season might go, with the understanding that once you actually start writing you may decide to go in a slightly different direction,” Hipps explained. “It is designed to give you a robust understanding of the characters and the world they inhabit, and of possible story lines.” The team took a year and a half to develop the script and bible (see Exhibit 6 and 7 for some impressions). Wiczyk put the development cost in the high six figures: “We paid for the writer, for the producers, for the location scouts, for budgeting, for artist renderings, and for other services by production designers and cinematographers.” He added: “It’s unusual to take so much time to develop this kind of thing. But we wanted to give them the time to make it right, and position ourselves to get a full-season order.” In September 2010, the MRC executives received a first draft of the pilot script. “At that time, Fincher indicated he didn’t just want to produce, but also direct the first two episodes. That’s a big deal. That’s a very big deal,” said Wiczyk. “So we said ‘If we’re going to be having feature-film directors in

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television, why don’t we think about feature-film actors in television, too?’” Kevin Spacey quickly emerged as a leading candidate for the lead role as Congressman Francis Underwood on his ruthless quest to gain power in Washington. “He had worked with Fincher on The Social Network and Se7en, and was a fan of the original House of Cards,” said Wiczyk. “Once the idea of Kevin Spacey came up, it was “wow”—nobody could see anyone else in the role,” Hipps recalled. “Good artists attract good artists,” said Wiczyk. “Now that we had a great team and solid plan for the show in place, we said ‘let’s talk to the networks and find a home for House of Cards.’”

Finding a Deal In March 2011, MRC took the House of Cards package—the script for the first episode, the show bible, a proposed budget and schedule, and the information that Fincher was attached to direct and Spacey attached to star—to the marketplace. The objective was to “find a network that had the necessary scale and a respected reputation, and was willing to commit to making a full season,” said Hipps. The MRC executives set up so-called “pitch meetings” with each of the major premium networks, including AMC, FX, HBO, Showtime, and Starz. “We send them the materials in advance, and then we’ll be in a room for half an hour to an hour with each network, talking about ideas for the show and its production,” said Hipps. On behalf of the network, the head of programming and several other executives usually attended the meeting; on behalf of MRC, Hipps, Wiczyk, Satchu, Willimon, Fincher, and Roth attended. “The first question everyone always asks after seeing the script for the pilot is, ‘What’s next?,’” said Hipps. “They want to see where the show will go, and whether it has legs—they want to understand the themes. Questions related to the production follow from there.”

Hipps, Jenkins, and others at MRC kept close tabs on the networks throughout the year so they were well prepared for these meetings. “We track what’s on their slate, what is in their development pipeline, and what they might be looking for,” said Hipps. “And we talked to partners like HBO as our ideas for House of Cards were coming together—things like ‘Willimon will write,’ ‘Spacey will star’— just to keep them warm, as they were a place we were targeting.” Hipps added: “Some networks drop out during those pitch meetings, for instance because the costs are too high for them, or because they already have something that’s just like it. Starz had a political drama in the pipeline and therefore bowed out.” The other cable networks all expressed a strong interest in bidding for the rights to the show, Wiczyk said: “We knew they were preparing full-season orders.”

The MRC executives had also reached out to Netflix. “We wanted to do a deal with a cable network, and then partner with someone else for a second window—we wanted to have that deal in place before we started production,” said Wiczyk. “Netflix had sworn up and down that they were not interested in original content. So we wanted to see if they had any interest in being a second window before entering an auction, which is why we sent them the materials a few weeks early.” What came next was a “total surprise,” said Wiczyk: “A week later they called us and said ‘We love it, we want to do it.’ So then we said ‘Well, so let’s talk about how that would work, with the network being the first window.’ But they said, ‘No no no, we want this to be our first major original series.’ I remember I went, ‘Wait, what?’”

The MRC executives and other House of Cards team members subsequently met with Netflix representatives a day after their pitch meetings with the cable networks, to discuss their plans for the series. As the executives’ enthusiasm had not waned, they agreed to again meet a week later to discuss business issues and deal terms.

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An Offer from Netflix The Offer

On March 13, 2011, Netflix’s chief content officer Ted Sarandos and its vice president of content acquisition Cindy Holland walked into MRC’s offices in Beverly Hills. They were there to present their offer for House of Cards. In a meeting with Satchu and Wiczyk, Sarandos and Holland proposed to license the first-window rights to two full seasons of thirteen episodes each. Netflix aimed for those rights to be exclusive for the U.S. and Canada, meaning that no cable network could air House of Cards in those territories during the years for which Netflix had the instant-streaming rights. Under the proposed deal, MRC and the producers would retain complete creative freedom as well as ownership of the content, meaning MRC could make separate deals for subsequent windows and other territories.

“Aside from Netflix’s commitment to two seasons as opposed to one, there is not a fundamental difference in economics on a per-episode basis,” said Wiczyk. “They propose the same window lengths that are typical for cable shows, and all the other numbers are pretty comparable with what we’ve heard the cable networks are going to be offering, too.” Wiczyk had put down some numbers to illustrate the typical economics for a deficit-financing deal in this context (see Exhibit 8): “A high- quality drama series might cost anywhere between $3 million and $6 million per episode. If the network pays a license fee for the first window that is 65% to 70% of that cost, you know that anywhere between $2 million and $4 million is covered and between $1 million and $2 million is exposed.” He added: “The goal is to make up that money in foreign markets, in home video and video-on-demand, and in syndication.“

Satchu and Wiczyk were thrilled with the creative freedom that the proposed Netflix deal offered. “There has not been an artistic final cut of this magnitude that is produced by an independent studio in the world of television for decades,” Wiczyk said, “and our artists will love having a 26-episode canvas to work with.” But they also knew there were a number of other variables to consider. Concerns

One major concern was what partnering with Netflix would do to the show’s international value. “International buyers want to know that a series’ U.S. network is credible and committed and that its brand means something,” said Wiczyk. “And here we come, having never made a big television drama before, working with artists that have never made television before, and with a distribution partner that has never shown a television show before. Even the most self-confident among us understand this is going to be met with some skepticism.” He added: “The income from international markets differs dramatically across shows. If we do this deal, we will effectively have to establish Netflix’s brand internationally. The burden will be on us to establish a reputation not just for our show but also for Netflix as a distribution partner. Because some buyers may see this as a political show, and that genre normally doesn't travel well, we may have to work extra hard.”

Another worry involved the marketing of the series. “There is no one better at marketing a show than HBO, Showtime, and Starz,” said Jenkins. Wiczyk chimed in: “With those networks, I know how it works. But Netflix is an anomaly... how are they going to market our show? Is there going to be a premiere night? Is it going to have a lead-in? It's tough to envision how consumers will find and view our show if we make a deal with Netflix. They may have a wealth of user data, but they have no experience doing this. And if the first window is not a success, that could hurt other windows.”

A third concern was Netflix’s prospects more generally. “They have a volatile stock price,” noted Wiczyk. “So what will they be doing in two years? Are they going to have aggressive competitors that challenge their business? Will policy changes torch their economics? There are many questions.” Hipps, who admitted he found the Netflix proposal “a little scary,” pointed to one related example: “We sold a series about Silicon Valley to Epix a few years ago. We had to choose between Showtime and Epix, and went with the latter which was a new player at the time. Unfortunately, the show never made it to

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air, because they decided to shutter their original programming department. There’s fear that Netflix may end up doing the same.”

Going outside the traditional television system brought more uncertainties. “Can our artists win Emmys? Or will being a streamed series mean we’re out of contention for those important industry awards? Can Netflix even run an effective Emmy campaign?,” asked Wiczyk. Also, without the scrutiny of Nielsen ratings, the industry might never know how the show had actually performed, possibly again complicating subsequent rights sales. “Some people have done web series before,” said Hipps, “but none of those come close to the premium quality we envision here.” How to Respond to the Netflix Offer? Looking back at MRC’s short history, Wiczyk reflected on the company’s progress in the television business. “We made real screw-ups,” he said. “We’re competing with one-hundred-year-old companies. We’re constantly learning, and are cycling through all the mistakes you could possibly make—the goal is just not to repeat them.” Now, after four years, they had reached an important goal: securing a straight-to-series order for a one-hour drama. With one-season offers from cable networks on the way, Wiczyk and Satchu had just a few days to respond to Netflix’s offer. The two entrepreneurs had not forgotten the disappointing business results of their first foray into online channels, and were keen to avoid another mistake. Was Netflix, a new player in this space, the right partner for MRC? And if they chose to return to online video, how should Satchu and Wiczyk respond to Netflix’s proposal?

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Exhibit 1 Primary Television Rights Windows in the U.S.

Rights Description Network, Service, or Distributor

First Run on Broadcast or cable networks that give viewers Broadcast, basic cable, or premium Television Network access to content in its “first run” on television. cable networks

Ad-Supported Video Services that give viewers access to a menu Hulu, Sony’s Crackle, YouTube, On Demand (AVOD) of on-demand content, free-of-charge, but with network-branded websites, on- advertisements. demand services from distributors such as Comcast and DirecTV

Subscription Video Services that give viewers access to a menu Amazon Prime, Hulu Plus, Netflix On Demand (SVOD) of on-demand content for a recurring fee.

Electronic Sell- Services that give viewers ownership of a piece Amazon, Apple’s iTunes Store, Through (EST) of content for a one-time fee. Google’s The Android Market

DVD Physical DVD and Blue-Ray discs that are sold Physical and digital retailers or rented to viewers.

Syndication Television networks or other services that give Station groups, basic cable viewers access to content in its “second run” networks, or SVOD platforms (or beyond). Includes so-called “stripped” syndication in which a show is programmed in a daily time slot (as a “strip” on the weekly schedule). Often occurs after a series has achieved 100 episodes, allowing for 20 weeks of programming without repeats.

Source: MRC company documents, casewriter.

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Exhibit 2 The Television Industry: Primetime Ratings by Network Type (2000–2010)

Source: Adapted from Veronis Suhler Stevenson, “VSS Communications Industry Forecast,” 2007-2011.

Notes: Primetime ratings are for Monday-Saturday, 8-11 PM and Sunday, 7-11 PM. Broadcast networks include ABC, CBS, NBC, FOX, WB, UPN, PAX from 2001-02 to 2004-05; ABC, CBS, NBC, FOX, CW, ION from 2005-06 to 2008-09; and ABC, CBS, NBC, FOX, ION, UNI, TEL, TF, AZA, and ETV in 2009-10. MRC‘s House of Cards 515-003

Exhibit 3a Premium Networks: Estimated Subscribers and Revenues (as of March 2011)

Network or Service U.S. Subscribers Revenues a

AMC 89 million $0.5 billion FX 96 million $1.4 billion HBO 29 million $4 billion Showtime 18 million $1.5 billion Starz 17 million $1.3 billion Netflix 24 million $2.1 billion

Source: Compiled from Ad Week, CBS Corporation, Liberty Media, Netflix, and The Wall Street Journal. Some numbers are casewriter estimates.

Notes: a “HBO” includes HBO and Cinemax; “Showtime” includes Showtime Networks, CBS College Sports Network, and Smithsonian Networks; “Starz” includes Starz, Encore, and Movieplex.

Exhibit 3b Premium Networks: Select Hit Shows (as of March 2011)

Average Years Episodes Viewership in Peak Emmy Network Show on Air Aired First Season a Viewership Awards

AMC Mad Men 2007 – 52 0.9 million 2.9 million 6 Breaking Bad 2008 – 33 1.2 million 2.0 million 4 Walking Dead 2010 – 6 5.2 million 6.0 million –

FX The Shield 2002 – 2008 88 3.2 million 4.8 million 1 Nip/Tuck 2003 – 2010 100 3.3 million 5.7 million 1 Rescue Me 2004 – 84 2.7 million 4.1 million 1

HBO Sex and the City 1998 – 2004 94 4.2 million 10.6 million 7 The Sopranos 1999 – 2007 86 3.5 million 13.5 million 21 Six Feet Under 2001 – 2005 63 5.4 million 6.2 million 9 The Wire 2002 – 2008 60 3.4 million 4.0 million 0 Entourage 2004 – 88 1.9 million 3.7 million 6 True Blood 2008 – 36 2.0 million 5.4 million 1

Showtime Weeds 2005 – 76 0.4 million 1.9 million 2 Dexter 2006 – 60 0.6 million 2.6 million 4 The Tudors 2007 – 2010 38 0.8 million 1.5 million 6

Starz Spartacus 2010 – 19 1.0 million 1.7 million –

Source: Compiled from Emmys.com and IMDB.com. Ratings information compiled from Ad Week, Broadcasting & Cable, , and Variety, among other sources. Some numbers are casewriter estimates.

Notes: a “Viewership” is an estimate of same-day television viewing.

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Exhibit 3c Premium Networks: Film and Television Studio Deals (as of March 2011)

Network or Service Partner Time Frame Details

HBO Warner Bros. 2004 – 2014 Exclusive pay TV rights to films 6 months after they debut on DVD, for the following 18 months. Universal 2007 – 2015 Exclusive pay TV rights to films 6 months after they debut on DVD, for the following 18 months. Fox 2010 – 2015 Exclusive pay TV rights to films 6 months after they debut on DVD, for the following 18 months. Reportedly cost $200 million per year.

Showtime Summit 2008 – 2012 Exclusive pay TV rights to Twilight and 42 other current and upcoming films. DreamWorks 2010 – 2015 Exclusive pay TV rights to 35 films, 5-6 films per year. Weinstein Company 2008 – 2015 Exclusive pay TV rights to 95 movies over seven years.

Starz Disney 2010 – 2015 Exclusive pay TV rights to live-action and animated feature films. Sony 2011 – 2016 Exclusive pay TV rights to live-action and animated feature films. Reportedly includes 35 to 40 films per year for $200 million annually.

Netflix Starz 2008 – 2012 Rights to stream around 2,500 movies 90 days after their premiere on Starz. Also rights to stream Starz’s original series 90 days after the original broadcast. Reportedly cost $25-30 million per year. Epix 2010 – 2015 Rights to stream new releases and library titles from Paramount, , and MGM 90 days after their premiere on Epix and video on demand. Reportedly cost $200 million per year. 2010 – 2012 Rights to stream films a few months after their release on DVD. Reportedly cost $20 – $32 million per year. Disney 2011 – 2011 Rights to stream Disney’s ABC TV episodes 15 days after their original broadcast. Reportedly cost $150-200 million for one year, at which point Disney can renew.

Source: Compiled from CBS Corporation, Deadline.com, Liberty Media Corporation, Multichannel News, Reuters, , The Wall Street Journal, and Variety, among other sources. Dollar amounts are industry-analyst or casewriter estimates.

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Exhibit 4a Netflix (NFLX)’s Stock Price (July 1, 2002 – March 11, 2011)

Source: New York Stock Exchange. Prices are closing prices adjusted for dividends and splits.

Exhibit 4b Netflix’s Key Financial Data

2006 2007 2008 2009 2010

Revenues (in $000s) $997,000 1,205,000 1,365,000 1,670,000 2,163,000 Total cost of revenues (in $000s) 627,000 786,000 910,000 1,079,000 1,357,000 Cost of subscription, as % of revenues a – – 55.8% 54.4% 53.4% Fulfillment expenses, as % of revenues b – – 10.9% 10.2% 9.4% Operating expenses (in $000s) 305,000 327,000 333,000 399,000 522,000 Technology, as % of revenues – – 6.6% 6.9% 7.6% Marketing, as % of revenues – – 14.6% 14.2% 13.6% Operating income (in $000s) 65,000 92,000 122,000 192,000 284,000 Net income (in $000s) 49,000 67,000 83,000 116,000 161,000 Net income per diluted share ($s) $0.71 $0.97 $1.32 $1.98 $2.96

Source: Netflix’s 2010 Annual Report.

Notes: a Cost of subscription revenues consists of expenses related to the acquisition and licensing of content, as well as content delivery costs related to providing streaming content and shipping DVDs to subscribers. Costs related to free- trial periods are allocated to marketing expenses. Content acquisition and licensing expenses increased by $46.6 million from 2008 to 2009, and by $165.9 million from 2009 to 2010.

b Fulfillment expenses represent those expenses incurred in content processing, including operating and staffing shipping centers, as well as receiving, encoding, inspecting and warehousing the content library. Fulfillment expenses also include operating and staffing customer service centers and credit card fees.

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Exhibit 4c Subscriber Data (in 000s, unless indicated otherwise)

2006 2007 2008 2009 2010

Total subscribers at end of year 6,316 7,479 9,390 12,268 20,010 Free subscribers (%) a – – 2.4% 3.1% 8.7% Paid subscribers (%) – – 97.6% 96.9% 91.3% Gross subscriber additions during year 5,250 5,340 6,859 9,332 16,301 Net subscriber additions during year 2,137 1,163 1,911 2,878 7,742 Subscriber acquisition cost ($) b $42,94 $40,86 $29,12 $25.48 $18.03

Source: Netflix’s 2010 Annual Report.

Notes: a The relative increase in free subscribers in 2010 as compared to in 2009 was partly due to the expanded use of Netflix’s one-month-free-trial subscriptions over the previously used two-week-free trials.

b Subscriber acquisition cost is defined as total marketing expenses divided by total gross subscriber additions during the period. MRC‘s House of Cards 515-003

Exhibit 5a MRC’s Past Projects: Feature Films

Title Genre Distributor Year Box Office US Foreign

Babel International drama Paramount 2006 $34M $101M Deception Drama / thriller 20th Century Fox 2008 $5M $13M Brüno “Mockumentary” 2009 $60M $79M Shorts Family adventure Warner Bros. 2009 $21M $8M The Invention of Lying Fantasy romantic comedy Warner Bros. 2009 $18M $14M The Box Psychological thriller Warner Bros. 2009 $15M $18M Devil Supernatural horror Universal Pictures 2010 $34M $29M The Adjustment Bureau Science fiction thriller Universal Pictures 2011 $62M $65M

Source: Adapted from www.boxofficemojo.com and www.imdb.com.

Exhibit 5b MRC’s Past Projects: Television and Digital

Title Genre Network Year(s)

Television In Harm’s Way Reality television The CW 2008 Valentine Fantasy comedy / drama The CW 2008 Easy Money Comedy / drama The CW 2008 The Goode Family Animated comedy ABC 2009 Surviving Suburbia Sitcom ABC 2009 Krod Mandoon Fantasy comedy Comedy Central 2009 Rita Rocks Sitcom Lifetime 2008 – 2009 Shaq Vs. Reality television ABC 2009 – 2010 The Life & Times of Tim Animated comedy HBO 2008 – The Ricky Gervais Show Animated comedy HBO 2010 –

Digital Seth MacFarlane's Cavalcade of Cartoon Comedy Animated comedy Google AdSense Network 2008

Source: Adapted from www.boxofficemojo.com and www.imdb.com.

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Exhibit 6 House of Cards: Excerpts from the “Show Bible”

House of Cards is the tale of Francis Underwood’s masterful scheme to vault himself to the highest circles of power. Underwood is the consummate Machiavellian, a potent mixture of Richard III and Iago, an amoral and ruthless chameleon who will stop at nothing to achieve his goals. House of Cards will expose the ignoble souls who run an imperfect world from the heart of a flawed city. The stakes are high. The fate of the free world hangs in the balance. Democracy is up for grabs. People are bought, sold, seduced, and discarded. Unholy alliances form and unknowing enemies are placed in the crosshairs. The hurricane of power whirls around an unforgiving eye. Nothing is sacred in House of Cards except Francis Underwood's relentless self-interest and desire to conquer. It’s a story about the lust for power, about the raw underbelly of Washington, about the explosive battle of morality versus ambition. Underwood is the villain as protagonist, the hero we love to hate, the gangster we can't stop rooting for. While the story may take place in Washington, it won’t require viewers to be familiar with the U.S. political system. Our themes—hubris, humanity, corruption—are universal. There is no agenda, and there will be no debate over specific issues. Our world will be about the gamesmanship of power, not the particularities of the American government. As Underwood weaves and dodges, maneuvers and manipulates, we witness an expert politician at his best. We vicariously share the thrill of his victories and endure the burn of his defeats. With direct address to the camera, Underwood establishes an intimacy with the audience that forces their complicity in his crimes, and he'll always leave them salivating for more.

While we may use a few plot elements and character archetypes from the BBC version, our series is most decidedly not a re-make. Because our version is open-ended as opposed to a mini-series, we will have time to delve much more deeply into the complexity of our characters. Ian Anderson's Francis was a fascinating sketch. Kevin Spacey's Francis will be an unforgettable icon. Our plot will be much thicker and subtler, spread out over seasons as opposed to four-episode parts. And our story will be distinctly American: rawer, bolder and sexier. Fans of the original should enjoy this version even more. And those who are coming to House of Cards for the first time will find no need to reference the original.

Source: MRC company documents.

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Exhibit 6 (continued)

Season One – Episode Breakdown

Below is a tentative breakdown for a season one culminating with Underwood's ascendancy to the Vice- Presidency. This is a very rough approximation of how the season could play out, of course, and we can change the course of the arcs, the order in which major events occur, etc.

Episode 1: When Rep. Francis Underwood is denied a top Cabinet position, he begins laying the foundation for a scheme to achieve more power than the new Administration ever thought possible. Episode 2: The White House reels from a leaked draft of its new Education Bill. Underwood comes to the rescue while enlisting his minion Congressman Patrick O’Neal to begin undermining Secretary of State nominee Michael Kern. Episode 3: Scandal breaks around Michael Kern forcing President Garrett Walker to pull his nomination. Underwood turns down a reluctant offer from Walker’s Chief of Staff Linda Vasquez, suggesting Senator Catherine Durant instead. Durant is confirmed in the Senate while Underwood continues to try and push through the Education Bill. Episode 4: The Education Bill fails, but Underwood is able to shift the blame on Vasquez and others. Meanwhile he orchestrates a compromise bill that succeeds in getting passed, proving his value as the House Whip and ingratiating himself with Walker. Vasquez decides it’s better to be Underwood’s ally rather than enemy. Episode 5: A natural disaster strikes in Bolivia. Underwood joins a congressional delegation to the stricken area. He uses the trip to his advantage to secure profitable reconstruction contracts for SanCorp (leaning on Durant to ensure the contracts go through). He does all this backroom dealing while feigning sympathy for the thousands of victims from the disaster, although eventually the horror takes its toll on him. We see a rare glimpse of compassion from Underwood. Also during the episode, Claire joins her husband for the trip and we get a condensed portrait of their complex marriage. Episode 6: Underwood, whose relationship with reporter Zoe Barnes has been escalating, finally embarks on a full-fledged affair with her (with Claire’s approval). Zoe calls Underwood “Daddy” – he’s as much a father figure as a lover. Underwood helps Zoe land a position as White House Correspondent for her paper, ousting veteran reporter Janine Skorsky. Also, Underwood now begins putting his V.P scandal plan into action. Again, he employs O’Neal to help with the task. Episode 7: Underwood’s returns to his alma mater, The Citadel – a school he deeply loves – for a reunion weekend. The toast of the reunion, Underwood appears to be at his happiest. But he is also tormented by memories of a young cadet who committed suicide after incessant hazing. We learn that the cadet was in fact gay, and it was Underwood who led the charge in hazing him. In a flashback, Underwood is wracked with guilt at the young man's death until he comes before a disciplinary board. With a choice between owning up to his actions and outright lying, he chooses the latter, and in an instant we see where the seeds of his cold-hearted pursuit of self-preservation are planted. Episode 8: Scandal breaks on the V.P. – Tim Matthews is accused of insider trading with regard to SanCorp’s recently awarded contracts in Bolivia. It looks as though Matthews may be forced to resign. Vasquez asks Underwood to make a secret trip to Omaha to meet with “Warren Buffett” (we’ll call him something else, of course) and gauge whether Buffett might be willing to take Matthews’s place. Buffett is Underwood’s hero, but Underwood must dissuade him from considering the V.P. position in order to leave it open to himself. To do this he essentially makes a deal with the devil that may come back to haunt him in Season Two. Episode 9: The V.P. scandal matures into a full-blown crisis, unleashing chaos within the administration. Matthews is forced to resign. The office is now vacant and with Buffett’s refusal to fill the spot, Vasquez is scrambling for an alternative. Meanwhile the strain Underwood’s assignments have placed on O’Neal is beginning to take its toll. His assistant Christina Malone is worried about him. He indulges in his coke habit more than ever, his work is getting sloppy, and he nearly divulges his dealings with Underwood to a friend.

….

Source: MRC company documents.

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Exhibit 7 House of Cards: Excerpt from the Script for Episode One

EXT. UNDERWOOD RESIDENCE – NIGHT

SLOWLY PULL IN on the front door of a fashionable DC townhouse.

Off-screen, we hear the SOUND OF SCREECHING TIRES followed by a LOUD COLLISION. A CAR ALARM blares.

After a moment, the door to the townhouse opens and A MAN emerges, curious to see what the commotion is outside.

As the man comes into the light we see he’s dressed in a crisp TUXEDO with the collar unfastened, no tie. This is FRANCIS UNDERWOOD – Richard IIII, Iago, and Hannibal Lecter all rolled into one. He has intelligent eyes, mischievous lips and a deep baritone dripping with Southern charm.

Frances glances down the street. He sees a CAR backing up then PEELING AWAY from the parked car that it just hit. It disappears around the block.

As Francis heads purposefully toward the scene of the accident, we begin to hear a DOG WHIMPERING IN PAIN. Francis looks down at the ground. Francis’ security detail guy STEVE (40s) appears beside him.

STEVE Blue Toyota Camry.

FRANCIS Did you get a good look?

STEVE First two letters of the plate.

Francis and Steve gaze down at the suffering animal.

FRANCIS Ohh – the Whartons’ dog.

STEVE Looks like a broken back.

FRANCIS It’s not gonna make it (to Steve) Go next door and see if they’re home.

Steve heads towards the neighbors’ townhouse.

Francis kneels down beside the dog. It’s in awful shape. He tenderly strokes the dog’s head.

FRANCIS (CONT’D) Shhhhh. It’s okay.

Frances looks up at us. The sound of CAR ALARM FADES.

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FRANCIS (CONT’D) (to the camera) There are two kinds of pain. The sort of pain that motivates, that makes you strong. Or useless pain, the sort of pain that’s only suffering. I have no patience for useless things.

Francis calmly places a hand around the dog’s neck and begins to put it out of its misery.

FRANCIS (CONT’D) (to the camera) Moments like this require someone like me. Someone who will act. Who will do what no one else has the courage to do. Someone who will do the unpleasant thing. The necessary thing.

The dog’s muffled whimpers cease. Francis looks down.

FRANCIS (CONT’D) (to the dog) There. No more pain.

He let’s go. The sound of a CAR ALARM RISES again.

Francis stands as Steve approaches. The shook-up neighbors, JACK AND SUE WHARTON, follow several yards behind him.

FRANCIS (CONT’D) (to the Whartons) It was a hit and run.

JACK (to his wife) He must’ve jumped over the gate again…

Sue wells up. Francis lays a hand on her shoulder.

FRANCIS I’ll have Steve file a report with the DCPD. And he’ll get his people on it too. We’ll track him down.

OMIT

INT. UNDERWOOD RESIDENCE – BEDROOM – MOMENTS LATER

CLOSE ON FRANCIS’ HANDS zipping up the back of a woman’s elegant evening gown.

We PULL BACK to see that the gown belongs to Francis’ wife CLAIRE UNDERWOOOD. She is the epitome of elegance and poise. They both look at themselves in the mirror.

FRANCIS Stunning.

Francis looks composed, dignified. If we hadn’t know, we never would have guessed what he was up to just moments before. He offers his arm to Claire.

23 515-003 MRC‘s House of Cards

FRANCIS (CONT’D) Shall we?

INT. GRAND BALLROOM – SECONDS UNTIL MIDNIGHT

A loud, raucous count-down. DC’s Democratic Party elite are watching the Times Square ball drop on massive monitors.

Three! Two! One! Noisemakers. Applause. People kiss and hug. CUT TO the stage where we see a beaming GARRETT WALKER (late 40s), the apotheosis of leadership. He’s flanked by his family – wife PATRICIA and two teenage sons. They lead the crowd in “Auld Lang Syne.”

The camera finds Francis in the adoring crowd. He turns to us.

FRANCIS (to the camera) President-Elect Garrett Walker. Do I like him? No. Do I believe in him? That’s beside the point.

FRANCIS (CONT’D) (staring up at Walker) Anyone who can get 70 million Americans to vote for him has tapped into larger than himself, larger than even me, as much as I hate to admit it. (back to the camera) I could smell it a galaxy away – that winning smile, those trusting eyes. So I latched onto him and made myself vital. After twenty-two years in Congress I can tell which way the wind is blowing.

FRANCIS starts to make his way through the crowd. He passes by Walker’s soon-to-be V.P. JIM MATTHEWS (early 60s) clinking champagne flutes with a small group of admirers. Matthews is all smiles, maybe a little tipsy.

FRANCIS (CONT’D) (mocking) Jim Matthews – his right honorable Vice President. Former Governor of Pennsylvania. He did his duty delivering the Keystone State, bless his heart. Now they’ll put him out to pasture. What is a man who is both invisible and impotent? Less than nothing? But he looks happy enough, doesn’t he? For some people it’s simply the size of the chair.

Francis keeps moving. He reaches the side of the room, toward the exit. Glances at Walker’s recently appointed Chief of Staff LINDA VASQUEZ. She’s on her phone – all business, even on New Year’s Eve. A POLITICAL CLIMBER taps her on the shoulder – he wants to take a photo with her. She lowers the phone, exchanges a word with him. They turn to the EVENT PHOTOGRAPHER. She throws up an instant smile. The camera flashes. She bids the political climber good-bye and gets immediately back on the phone.

FRANCIS (CONT’D) (grudgingly admiring) Linda Vasquez – Walker’s Chief of Staff. A woman and a Latina to boot – choices are made. Yes, I got her hired. She’s tough and effective, and she always looks me in the eye. I like her even less than Walker, but she’s the gatekeeper to the White House now, just where I intended for her to be. If you

24 MRC‘s House of Cards 515-003

don’t want to the left standing in the cold, you need to know the person holding the keys.

Francis continues to weave through the crowd.

FRANCIS (CONT’D) As for me – (false humility) I’m just the House Majority Whip. I get things done in a Congress paralyzed by pettiness and gridlock. It takes a special touch to make a cripple walk.

Francis pauses for a moment. Stops and focuses only on us.

FRANCIS (CONT’D) But I won’t be there much longer. I’ve earned my stripes, I’ve backed the right man, and soon I’ll receive my just desserts. Give and take.

Francis finds his wife Claire. Whispers in her ear. She nods. As they exit, he turns to us once more.

FRANCIS (CONT’D) Welcome to Washington.

Source: MRC company documents.

25 515-003 MRC‘s House of Cards

Exhibit 8 Sample Economics for a Premium Television Series with Deficit Financing

Estimates, Per Episode Item Lower Bound Upper Bound

Costs Production Costs $3 million $6 million

Revenues First Run on Television Network 65% of production costs 70% of production costs AVOD, SVOD, EST, and DVD $0 $1 million Syndication $0 $200,000 International $500,000 $3 million

Source: MRC company documents, case writer estimates.

Note: The estimates assume a season consists of 13 one-hour episodes. MRC‘s House of Cards 515-003

Endnotes

1 “Broadcasting, Cable & Satellite Industry Survey,” Standard & Poor’s, February 17, 2011.

2 Television Audience 2010-2011,” Nielsen, November 30, 2011, “State of the Media Trends in TV Viewing: 2011 TV Upfronts,” Nielsen, April 21, 2011; “Information and Communications,” United States Census Bureau, 2012.

3 “State of the Media Trends in TV Viewing—2011 TV Upfronts,” Nielsen.com; Kantar Media, “Ad Spending (Full Year 2010- 11),” Television Bureau of Advertising, Inc.

4 Jon Lafayette, “How ‘The Shield’ Changed Cable TV,” TV Week, August 29, 2008.

5 Bernard Weinraub, “Police Show Has Humans, Not Heroes; In FX's Hit 'The Shield,' Means Justify Ends,” The New York Times, April 3, 2002.

6 Jon Lafayette, “How ‘The Shield’ Changed Cable TV,” TV Week, August 29, 2008.

7 Brian Steinberg, “Why 'Mad Men' Has So Little to Do With Advertising” Ad Age, August 2, 2010; Brian Stelter, “‘Modern Family’ and ‘Mad Men’ Win at Emmys,” The New York Times, August 29, 2010.

8 Brian Steinberg, “Why 'Mad Men' Has So Little to Do With Advertising” Ad Age, August 2, 2010.

9 Derek Thompson, “How AMC Explains the Brutal Economics of Cable Television,” The Atlantic, May 23, 2011.

10 AMC press release, via “AMC's "The Walking Dead" Is The Most Watched Drama Series Among Adults 18-49 in Basic Cable History,” The Futon Critic, December 6, 2010.

11 Michael Janofsky and Andy Fixmer, “`Sopranos' Wins Best Drama Emmy; NBC's Shows Win Seven Awards,” Bloomberg, September 17, 2007.

12 Lauren E. Schuker, “Medieval 'Thrones' Unites Thrusts of HBO's Strategy,” The Wall Street Journal, April 11, 2011.

13 Robert Seidman, “HBO Wins 25 Emmy Awards, The Most of Any Network,” TV by the Numbers, August 30, 2010.

14 “The Winning Streak: HBO and the Future of Pay-TV,” The Economist, August 20, 2011.

15 Lauren E. Schuker, “Medieval 'Thrones' Unites Thrusts of HBO's Strategy,” The Wall Street Journal, April 11, 2011.

16 Nellie Andreeva, “‘Dexter’ Finale Ratings On Par With Last Year,” Deadline, December 13, 2010; Press Association, “Dexter stars win Golden Globes,” TV.com, January 19, 2010.

17 Marisa Guthrie, “Exclusive: Showtime Finalizes Cast for ‘Homeland’,” The Hollywood Reporter, January 2, 2011.

18 “The Winning Streak: HBO and the Future of Pay-TV,” The Economist, August 20, 2011.

19 John Dempsey, “Starz brakes for ‘Crash,’” Variety, September 26, 2008; Ginia Bellafante, “Trafficking in Intimate Deceptions,” The New York Times, October 17, 2008; “Netflix and Starz Entertainment Announce Agreement to Make Movies From Starz Play Available for Instant Streaming at Netflix,” Netflix, Inc. and Starz Entertainment, LLC, October 1, 2008.

20 David Goetzl, “Liberty Delivers Strong 4Q, Starz Stops 'Crash,'” Media Post, February 25, 2010.

21 Nellie Andreeva, “Starz To End Both ‘Party Down’ & ‘Gravity,’” Deadline.com, June 30, 2010.

22 Brian Stelter, “Starz Has High Hopes for Its Original Shows,” The New York Times, March 18, 2009; Philiana Ng, “Starz's 'Spartacus' Prequel Delivers Record Ratings,” The Hollywood Reporter, January 24, 2011.

23 Amy Chozick, “Small Screens, Big Budgets,” The Wall Street Journal, July 23, 2010.

24 “The Winning Streak: HBO and the Future of Pay-TV,” The Economist, August 20, 2011.

25 “comScore Releases October 2010 U.S. Online Video Rankings,” comScore, November 15, 2010.

26 Michael Learmonth, “Hulu's New Economics: $240 Million In 2010 Revenue,” Ad Age, November 10, 2010

27 Jason Kilar, “Stewart, Colbert, and Hulu’s thoughts about the future of TV,” Hulu, February 2, 2011, blog.hulu.com/2011/02/02/stewart-colbert-and-hulus-thoughts-about-the-future-of-tv/.

27 515-003 MRC‘s House of Cards

28 Nat Worden and Stu Woo, “Amazon Adds Streaming-Video Service For Prime Members,” The Wall Street Journal, February 23, 2011.

29 Netflix, Inc. Company SEC Filings, “Form 10-K,” Netflix Inc., March 31, 2003; February 28, 2007.

30 Miguel Helft, “Netflix to Deliver Movies to the PC,” The New York Times, January 16, 2007.

31 Glen Dickson, “Web Movies Ready for Prime Time,” Broadcasting & Cable, October 3, 2008.

32 Paul Bond, “What Hollywood Execs Privately Say About Netflix,” The Hollywood Reporter, January 14, 2011; Brad Stone, “Starz Gives Netflix Fans a Reason to Stream,” The New York Times, October 1, 2008.

33 Netflix Inc. Company SEC Filings, “Form 10-K,” Netflix Inc., February 28, 2007; February 18, 2011; April 27, 2011.

34 Verne G. Kopytoff, “Shifting Online, Netflix Faces New Competition,” The New York Times, September 26, 2010.

35 Cynthia Littleton, “Netflix cuts ‘Nip/Tuck’ deal,” Variety, July 16, 2010.

36 Netflix, Inc. Company SEC Filings, “Form 10-K,” Netflix Inc., February 18, 2011.

37 Jason Mittell, “Television and American Culture,” 2009, Oxford University Press.

38 Jason Mittell, “Television and American Culture,” 2009, Oxford University Press.

39 Todd Spangler, “Netflix the “New HBO’? Get Real,” Variety, July 19, 2013.

40 Georg Szalai, “HBO to Top $1 Billion in International Revenue this Year,” The Hollywood Reporter, April 11, 2011.

41 “Top-Selling DVDs in the United States in 2010,” The Numbers, www.the-numbers.com/home-market/dvd-sales/2010.

42 Amanda D. Lotz, “The Television Will be Revolutionized,” 2007, New York University Press.

43 “Babel,” Box Office Mojo, www.boxofficemojo.com/movies/?id=babel.htm.

44 Michael Cieply, “Tilting Hollywood’s Balance of Power to Talent Agency Clients,” The New York Times, March 19, 2007.

45 Nikki Finke, “MRC Cancels Two Shows on TheCW,” Deadline.com, October 31, 2008; Josef Adalian, “CW Takes Backs its Sunday Nights, Sets ‘Jericho’ Reruns,” TVWeek, November 20, 2008.

46 Ian Younge, “Richardson’s Rule in House of Cards,” BBC News, February 9, 2007.

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