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Netflix changes course, bets the future on original shows

By CLIFF EDWARDS Bloomberg News.

Publication: The Day

Published February 02. 2013 4:00AM

Netflix Inc. will test whether Machiavelli and math are a winning formula as the world's largest subscription-video service debuts "House of Cards," its most ambitious step yet into original online-TV programs.

Netflix is making the political thriller, starring Kevin Spacey, available to its 33 million streaming subscribers worldwide. Chief Executive Officer Reed Hastings, looking to extend the company's lead in online TV, likens the show to "West Wing," the NBC series that ended in 2006, if it were done by Machiavelli.

"We're on the cusp of something that will change television forever," Hastings said in an interview at Bloomberg's New York headquarters. "Our view is that over the next couple of years as Internet TV really grows, people will look back and say that this was the turning point."

Hastings, 52, is placing big financial bets to secure Netflix's future as the dominant player as more viewers move online. He says efforts like "House of Cards" and the revived "Arrested Development" cement relationships in Hollywood and help fend off competitors like Amazon.com. Netflix's Silicon Valley roots analyzing viewer habits also give it an edge as cable channels like HBO move online, he said.

"Relative to HBO, we're much deeper on the tech side, and relative to Amazon, we're much deeper on the creative side," Hastings said. "We're able to do more and more calculations and big-data statistics so that what we do is represent Netflix more and more as a place where you come for relaxation, escape."

Hastings, whose company has 27.2 million U.S. subscribers, says Netflix can grow to as many as 90 million over the next two decades-a challenge made harder as online competitors like Amazon, Hulu and Redbox Instant by Verizon pile in, and traditional channels expand with digital offerings like HBO Go from the Time Warner Inc.-owned channel.

To stay ahead, Hastings is sacrificing short-term profit to spend more on original content. The company said this week it would borrow $500 million to refinance about $225 million in debt and spend more on original programming. The company has committed more than $5 billion to streaming content.

There are risks. Standard & Poor's changed its outlook on Netflix's speculative BB-minus level debt to negative, citing cash flow levels this year and next, increasing debt leverage and "risks associated with original programming."

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