MRC's House of Cards

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 Netflix 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 The Adjustment Bureau. 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 David Fincher, Joshua Donen, and Eric Roth as executive producers, Beau Willimon as writer, and Kevin Spacey 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 Starz. 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 Comedy Central, 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 Comcast 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 bet 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 2 MRC‘s House of Cards 515-003 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.

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