JUNE 10, 2019
Recently, anonymous sources have reported to various news outlets about the difficulty Hollywood studios will face attempting to take back its content from Netflix.
According to these sources, likely within Netflix, many popular titles that Disney, NBCUniversal, and WarnerMedia are planning to pull from Netflix to make exclusive on their forthcoming streaming services, will remain under contract at Netflix.
While there might be some truth to these claims in limited circumstances, this is likely just damage control by Netflix to calm the market about the strong headwinds facing the company.
Inside Netflix Licensing Agreements
While no two licensing deals are exactly the same, they do follow a similar formula. Typically, a studio will compile a list of ‘included programs’ to make available to Netflix each year. These will consist of newer films, current television series’ and library content. Netflix will then choose 50-100 of these programs from each category to license for what is usually a 12-month term.
However, when it pertains to popular titles, these deals are typically contracted ‘off rate,’ meaning the terms, costs, and licensing period are negotiated separately from the overall licensing contract as amendments to the original agreement.
FilmTake has reviewed hundreds of Netflix agreements and amendments, and can confirm that some shows that are currently available on Netflix will remain so for as long as the show remains in production. Yet in most cases, the Licensor (meaning the studios) has broad discretion for what content is offered and how and when it can be withdrawn.
The claims that most of such content will remain under contract by Netflix are patently false. There is a reason why they are being made anonymously.
In 2017, Netflix announced plans to produce ever increasing original content that would eventually comprise 50% of its streaming library.
Since then, Netflix has produced tons of original content to prepare itself for the seismic shift coming when the world’s largest content licensors start pulling content. The company spent $9 billion to produce and acquire films and series content in 2018, and plans to spend $10 billion on original content in 2019 – more than Amazon, Apple, HBO and other streaming services will spend on a combined basis.
Netflix has added hundreds of original shows, films, documentaries, and comedy specials. However, while Netflix spends boatloads on content, which is fuelled by junk bonds, very little is actually connecting with audiences.
While Netflix claims that its original programming propels new subscribers, it is certainly not translating to viewership. Of the content available on the platform, 72% of all viewership is for films and shows produced by companies other than Netflix.
Likewise, series content from the three largest content providers account for nearly 60% of Netflix’s programming in terms of minutes viewed (Disney 19%, NBCUniversal 19%, and WarnerMedia 17%).
Proponents of Netflix state that the loss of library titles will not slow subscriber growth; it will just force the streamer to produce more original content. This sentiment takes for granted that the content produced by Netflix will be as appealing as popular titles that already have a proven track record in theaters or on networks. Furthermore, most third-party films and shows have benefited from millions in marketing dollars before landing at Netflix.
Under this new climate, the studios will likely hold the most valuable content for their streaming service while offering Netflix second-tier shows and films. Netflix will have little choice but to accept this arrangement until if or when its original content is impactful enough to keep and attract subscribers.
The next major battleground in the streaming war will take place over exclusivity.
Even if most studio content is not pulled at first, Netflix will likely be forced to share the rights with the Licensor’s own streaming service and other services, such as Hulu.
As an example, WarnerMedia agreed to license Friends to Netflix for an additional year for $100 million, but after the deal expires, WarnerMedia can take back all rights to the show, or let Netflix share it and pay 25% less.
Studios have always dominated the leverage in their relationship with Netflix, but it wasn’t until Netflix became a direct competitor, did they realize how much leverage they actually held. Now that the studios know the true value of their content, they are headed towards an ugly divorce with Netflix that will take place over many years.
The battle over exclusivity will not only impact Netflix, but all licensees. For instance, WarnerMedia’s HBO relies heavily on films from Comcast’s Universal Studios and Disney’s Fox, which will likely change as current licensing agreement expire.
The future of licensing will only get more complicated as the major studios launch stand-alone streaming services. This complexity will provide independent producers more opportunities and leverage in licensing their content to multiple platforms.
For the first time since launching, Netflix will face direct competition from the major studios, some of which are already committed to pulling content from the service.
The major studios are stuck balancing efforts to bring more content home for use on their new streaming services with protecting reliable revenue by way of licensing fees.
One thing is for sure, the web of content available on multiple platforms will become more difficult for viewers to navigate.