Sundance: How Netflix Is Spending Huge and Annoying Studios

Netflix skiiing - H 2016
Illustration by: Lars Leetaru

"It becomes uncomfortable for a studio to go to its output partner and say, 'Sorry, I bought theatrical on this film, but Netflix has SVOD,'" says one top dealmaker on how the streaming giant is disrupting the acquisition game.

This story first appeared in the Jan. 29 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

Consider it an act of war with the studios. When Netflix spent a combined $12 million for worldwide SVOD rights to two of this year's hottest Sundance films — nearly $7 million for Paul Rudd's The Fundamentals of Caring and $5 million for Ellen Page's Tallulah — it set the tone for the festival (and dazed traditional buyers) before it even started.

Casual observers may note that the theatrical rights to the films still are available, unlike when Netflix bought all rights to Beasts of No Nation and partnered with Bleecker Street to release the film day-and-date. So why are these two deals considered so disruptive?

The reason is every studio has output deals in place with subscription companies like HBO, Showtime and Starz. Under the traditional model, a distributor typically buys North American rights to a film and is able to recoup some of its costs when its output partner airs the movie in the post-theatrical window. By taking those SVOD rights out of the mix, Netflix preempts those deals and cuts off a revenue stream.

"It pisses off the studios most of all — they rely on their cable output deals," says one top dealmaker. "It becomes uncomfortable for a studio to go to its output partner and say, 'Sorry, I bought theatrical on this film, but Netflix has SVOD.' "

Given that scenario, Fundamentals and Tallulah likely won't land at a Fox Searchlight, Focus Features or Sony Pictures Classics. But sales agents are becoming amenable to the Netflix SVOD deal, because they can still find a theatrical home with an indie distributor that will give it a traditional release and not day-and-date with Netflix.

"We are increasingly trying to figure out, 'Can we do a theatrical and partner Netflix into the deal,' " says ICM's Jessica Lacy. "We're no longer just thinking of all-rights deals with traditional distributors."

Still, the digital behemoth has to open its wallet — which doesn't seem to be a problem: Insiders believe Netflix's Fundamentals pact is the biggest prefest acquisition ever, including theatrical deals.

"There is definitely a Netflix factor. They've made themselves a player very quickly," says UTA's Rena Ronson. "They've shown that they can put muscle behind something to get awareness in the marketplace, and they spend money. I don't think anyone is surprised."

But that doesn't mean the studios like it.