I am generally very happy being an independent journalist. But there are times when I miss having the heft of a major news organization to help provide PR assistance and help getting booked onto podcasts. Being an industry outside can be good for the soul, but it’s not always a great business model.

Over the past month or so, there has been another round of discussions about the health of Hollywood, the economics of streaming and all of the typical topics that come up when you get more than a couple of industry people together.

I’m sure you have a read a few pieces arguing that the binge release model is killing creativity, that the reason Netflix is having problems launching follow-up seasons of some of their shows is that they refuse to move to a weekly release schedule with longer seasons.

Before I write anything else, let me suggest that whether or not you think a specific business decision is a wise one, ask yourself why that decision is being made. Are the executives involved all buffoons? That’s a prospect that is not entirely out of the question. But consider that perhaps there are factors at play that you haven’t considered.

As I have worked through the various ways that I could frame this discussion, it occurred to me that the cleanest way to think about the business model of Netflix is to see them as the streaming industry's Costco. It's a membership (or in the case of Netflix, subscription) based business model and as a result, every decision they make is in the service of that goal. Which is diametrically opposed to how a traditional studio (or store chain) does business.

Traditionally, studios focused their efforts on making sure each individual movie or TV series was a success. They set the budget, spent money advertising and marketing it and worked to maximize the revenue in each window. And at the end of the day, the financial success or failure of that project was fairly easy to determine. And except in very rare cases, the efforts put towards each individual title don't bleed over into other projects. No one is out there making sure they see every film made by Universal or Paramount. Any more than breakfast lovers are out there sampling every cereal made by General Mills. For traditional media, the projects are the product.

But a pure-play subscription-based business such as Netflix more closely resembles Costco. Each decision it makes is based on increasing revenue from subscribers, lowering new customer acquisition costs, preventing subscriber churn and building the overall brand. Costco cares less about the profitability of individual products. It's more than willing to lose money on $4.99 Rotisserie Chickens and cheap gasoline if the money is lost in the service of maximizing membership revenue. Sure, Costco could make more money on chicken if it raised the price. But the company's calculation is that it helps drive membership satisfaction and that lost money can be retrieved by selling higher-margin products once customers are in the door.

While this idea sounds unfamiliar to many people in Hollywood, the idea of “customer lifetime value (CLV)” is so familiar that it’s one of the first things taught in business school.

In the abstract, CLV is determined by this equation:

Customer Lifetime Value (CLV) = (ARPA × Gross Margin) ÷ Churn Rate

In other words, you estimate the average revenue per account by the gross margin and divide by the estimated subscriber churn percentage each month. 

That is the equation that drives Costco’s strategic decision making and Netflix's often inexplicable decisions and priorities begin to make sense if you see the company's strategy framed through the lens of Costco and its attention to CLV. Netflix executives look at current subscriber numbers and set upcoming targets. They're tracking where growth might come from and what things increase subscriber engagement. The decisions about what Netflix orders, cancels and renews are almost always driven by that subscriber based-calculation. 

Netflix sets an overall content spend budget each year and that is what they are going to spend. So a new $150 million live sports deal means that $150 million less is being spent on original content. It's a Moneyball-driven zero-sum game in which executives try and find the best mix they can of originals and licensed programs that will help them achieve subscriber goals. A TV show might have a rabid fan base. But if that base isn't big enough or if the fans live in a territory that Netflix's isn't currently emphasizing, then the show has less value than one whose viewers better fit corporate strategy.

That is why Netflix executives continue to resist full theatrical releases for its originals films. Could those releases bring in extra money to the streamer? Maybe. But the theatrical business is notoriously difficult to predict and either Netflix would have to build a theatrical release division or contract with someone else. And either option brings additional costs with the potential for increasing the financial downside.

The theatrical business is also notoriously difficult to predict and the substantial costs of moviemaking ensure that a studio ends up being forced to make a series of very expensive of bets, based on an uncertain reaction from the audience.

And streaming-only releases fit into Netflix's corporate mandate to maximize subscriber growth and engagement. Could Netflix make some money releasing some movies into movie theaters first? Yes, in the same way that Costco could make more money by raising the price of its Rotisserie Chickens. But neither move serves the core corporate goals of the respective companies. So it's unlikely that we'll see $6.99 Costco Rotisserie Chickens or a widespread Netflix theatrical release schedule anytime soon.

This Netflix is Costco framing also helps explain why the streamer makes some of the decisions it does when it comes to original TV shows.

Take, for instance, the streaming standard of much more compressed season orders than you'll typically see on linear television. It's a topic that brings out strong emotions from Hollywood's creatives, in large part because there is a formidable pay difference between a 23-episode season and one that runs 6-8 episodes. But you'll also hear from writers that those longer seasons allowed shows to focus on more nuanced story arcs and secondary characters.

But the reasons why Netflix produces shorter episode seasons is a combination of financial and strategic factors, and both components are driven by its subscriber-centric revenue model.

From a revenue standpoint, producing longer seasons of a show adds a lot of expenses without a clear way for Netflix to recoup the spending. In traditional broadcast television, the networks would pay the producing studio a fixed production fee per episode. That episodic fee generally didn't come close to covering the actual cost of the episodes. But if the show stayed on the air long enough to reach around 100 episodes, the studio could take the reruns into syndication and essentially print money. So there were a lot of financial incentives to crank out a bunch of episodes per season in case the series did well with audiences. And the broadcast networks were able to get additional episodes of a successful show while still paying a fee priced below the costs of production.

But the cost structure of streaming is very different. There is a definite downside to producing long seasons of a show. There is no direct way to recoup the costs of the longer episode order, due to the ways in which Netflix values television shows internally. And based on what I've been told, longer seasons don't boost engagement for Netflix very much. What does boost engagement (and indirectly all of the subscriber-drive metrics) is a steady stream of new titles. Which means that generally speaking, three 8-episode TV shows provide more value than one 24-episode season.

There is also the strategic CLV component of this approach. When you look at the results of user studies - both internal to Netflix and from external analytics companies - one of the factors subscribers value highest when asked about Netflix is the sense that there is always something new to watch. It might not always be what the subscriber is looking for. But I think every Netflix user has experienced the moment when you find that you've just watched three or four episodes of a show you were pretty sure that you wouldn't enjoy before you watched it. Netflix's breadth of content and variety of genres helps make it sticky and that directly impacts metrics such as subscriber churn.

That engagement question is also one of the primary factors behind Netflix's belief in binge-dropping most full seasons of television. Yes, there are exceptions to that rule and the reasons range from delayed productions due to the dual Hollywood strikes to release dates for licensed shows that are the result of broadcast schedules on the originating network (think The Great British Baking Show).

But most original series continue to receive binge releases because Netflix believes - and there is evidentially a lot of data to support this - that stretching most shows out to a weekly release approach when Netflix is releasing multiple new shows each week would lead to a near impossible mess where new weekly episodes of several dozen shows would be premiering each week. It would be confusing, frustrating and guaranteed to lead to a lot of unhappy subscribers.

That's not to say that Netflix can't tweak that policy when the viewing data suggests a better approach. I've been told that early on Netflix was releasing full seasons of some of its unscripted dating and relationship shows, believing viewers would prefer that familiar approach. What executives learned was that few subscribers were binge-watching full seasons. A typical viewer would watch a handful of episodes at one time, then often not return to the show for days. After some experimentation, Netflix discovered that breaking up the season of the shows into small groups of episodes matched what viewers of those shows tended to do unconsciously. And data showed that as long as the gaps in release dates weren't too prolonged, most subscribers who enjoyed the shows would make sure to tune in again.

There are many decisions made by Netflix that I don’t agree with.

But despite what many people in Hollywood seem to believe, the streamer is making decisions based on solid business principles that provide a solid mix of gut reactions informed by well-established data-driven decision-making.