Over at Variety, Andrew Wallenstein has a very smart piece about how a central piece of Netflix’s business strategy may actually work against the company. One of the things Netflix facilitates is binge viewing, which in my case means watching an entire season of 30 Rock in a single day, but for most people means watching a couple of episodes of television at a time, instead of once a week the way they’d be released in their timeslots on television networks.

But when it comes to the shows it’s creating, rather than the ones it’s licensing multiple seasons of at once, that’s a problem. Netflix is releasing every episode of its seasons of Arrested Development and House of Cards at once. And at 14 episodes for Arrested Development and 13 episodes for House of Cards, that’s few enough episodes for people who are interested in just those shows, but untempted by the rest of Netflix’s offerings, to sign up for a free trial of the service, watch everything they want, and then quit before they have to start paying. Wallenstein explains:

A relationship with a program that might otherwise drag out over months on a linear channel is telescoped into hours. And therein lies the paradox inherent in Netflix’s business model: Allowing consumers to consume at their own speed contradicts the company’s financial imperative to keep them on the service paying the seductively cheap flat monthly fee of $8 for as many months as possible. Sure, it’s possible Netflix has assembled a library so vast — over 40,000 episodes of TV and counting — that a subscriber can fill countless months hopping from one binge experience to the next.

But let’s not forget that the whole point of Netflix embarking on an original programming strategy is to bring in new subs by offering a different value proposition. These are consumers who didn’t feel compelled to sign on to binge on library programming, but they’re interested in seeing a buzzed-about new show like “Cards,” and other originals still to come….It’s not like another original series will be waiting for them as soon as they’re done with “Cards.” The next series on Netflix’s slate of originals, Eli Roth’s “Hemlock Grove,” isn’t due until April and the revival of Fox’s “Arrested Development” doesn’t begin until May. Thus, getting new subs to pay for a second consecutive month of services becomes at least a little less likely.

This strategy gets even scarier given Deadline’s reporting that Netflix isn’t financing its original content development from original revenue streams, but at least partially from debt:

About $225M of the proceeds from the $500M offering it announced today — senior notes due in 2021 paying interest at 5.375% a year — will be used to retire the company’s $200M in 8.50% senior notes that are due in 2017. But with Netflix’s first original series, House Of Cards, making its debut on February 1, some investors wonder whether the company needs the remainder to help it handle its steep content payment commitments. Some $2.3B of Netflix’s $5.6B in streaming content obligations will come due in the current fiscal year, Wedbush Securities’ Michael Pachter says. The new debt, he believes, “is necessary to solve near-term cash flow problems, and indicates the low likelihood of positive cash flow for the year.” Netflix’s debt, along with its investments to expand overseas, make it “a risky investment.” Moody’s Investors Service also considers Netflix’s new debt to be risky, giving it a Ba3 rating. The debt assessment firm believes that some of the cash will be used to pay for “investments in original programming, which require more up-front cash payments” than library titles.

It may make sense for Netflix to bring in different tranches of customers with original and licensed programming. But to do it, I’d bet that long-term, the company’s going to have to raise its prices. And to keep up with escalating costs of licensing—particularly as Amazon continues to expand its efforts in this space, Netflix will have to pay just to keep a basic content library, rather than for exclusives—and of content production, those prices will have to keep rising. Netflix, like Hulu Plus, has largely been able to keep its prices stable, rather than subjecting customers to annual price hikes or hikes at the end of contracts a la most cable providers. Negotiating that shift may cost the company customers, too. But Netflix isn’t Amazon: it can’t subsidize its purchases and creation of content with a ton of other merchandise, or with a board that accepts essentially no profits. It’s going to have to come up with the money somehow.

The headline out of Netflix’s first appearance at the Television Critics Association press tour in Pasadena is that the streaming video service has produced 14 more episodes of the beloved cult hit Arrested Development, and will release them all in a single day on a to-be-announced day in May! But we already knew that the episodes were under production. The real news is that Netflix might have found its purpose as a creator of original programming with the Arrested Development experiment. Not resurrecting dead-but-beloved-or-even-merely-liked series, as seems to be the case every time a Terra Nova or a The Killing bites the dust. Not providing an employment program to Steven Van Zandt in between Springsteen tours. Rather, Netflix might just have found its niche in taking the logical step beyond the subject matter innovations of the Golden Age of television, and providing structural flexibility to television storytellers as well as room to tackle new subject material and in new tones.

To back up for a moment, the two most interesting things that Mitch Hurwitz, Arrested Development’s creator, explained about the Netflix episodes had nothing to do with what story they’d tell. Rather, he said first that the episodes would each focus on a different character, that they could be watched in no particular order, and that events in each episode would become clearer as viewers watched more of them. And second, he explained that some of them were different lengths, though they are all roughly thirty minutes long.

That first development is very significant. Television, for all that it’s developed beyond an episodic structure to tell long-arc narratives, is still a fundamentally linear storytelling mechanism. You may be able to marathon The Sopranos just fine, but you can’t shuffle up the order of episodes and have things make sense. A willingness to treat episodes like a series of interlinked short films that can be watched in multiple orders is something Netflix can do particularly because of its strategy of releasing all of the episodes of its shows at once, and because it doesn’t have to build and retain viewers episode to episode the way a network does to keep a reliable stream of advertising revenue flowing. And it means that Netflix could position itself as much better-suited than networks of any type to adapt not-strictly linear narratives with multiple perspectives. Before yesterday, my dream scenarios for Jennifer Egan’s novel A Visit From The Goon Squad involved the HBO adaptation, and for World War Z involved a series of stand-alone movies or mini-series episodes. Now, I’m excitedly thinking about what they might look like as Netflix series, a thought that has literally never occurred to me about any material before.
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I’ll remain skeptical that Arrested Development is actually coming back via 10-odd new episodes produced for an outlet like Netflix or Showtime and a movie until the actors are actually on a set filming somewhere. But if that blessed event does come to pass, I’m curious to see if the family will still be in the same business. In a weird way, the creepiness of the Bluths’ model houses is a marvelous foreshadowing of the dramatically overheated housing market, and the shells of developments depopulated by foreclosures. So will the family be crushed by the downturn? Actually sort of protected by the decline of their business prior to the 2008 crash? The show was always sort of loopily brilliant about politics, so I’m hoping the show comes back if only to see what they’ll do with this new set of circumstances.