TV's New Math: What if $100M Netflix Deals Actually Shortchange Creators?

Netflix_Catcher_Illo - THR - H 2019
Illustration by: Tim Peacock

Writers and talent reps sound off on the demise of backend profits and whether a wave of huge streamer pacts marks a boon for showrunners or leaves money on the table.

Wowed by the number of zeroes in his recent overall deal, one TV showrunner was surprised when his agent slipped him a final piece of paper to sign. It read, "I will never be upset about this deal."

What writer-producer in his or her right mind would be bummed about earning one of the seven-, eight- and nine-figure pacts now being doled out to such in-demand TV creators as Shonda Rhimes and Ryan Murphy? Well, the agent's unusual request illustrates a crucial caveat to these megadeals. Backend, historically the most lucrative piece of the TV profit pie and the reason hitmakers like Marta Kauffman (Friends) and Phil Rosenthal (Everybody Loves Raymond) are still raking in millions of dollars off their decades-old shows, is disappearing in favor of lump sums up front. Amid the eye-popping headlines, many insiders are concerned that history may not look back on these newer deals as quite so lucrative after all.

Sure, some believe such cream-of-the-crop creators as Rhimes and Murphy are likely to make out better than they would have if they'd stayed put in the traditional studio business. "Absolutely I'm being rewarded," says Murphy when asked whether he feels like the $300 million pact he inked with Netflix last year — which is said to include a substantial backend buyout — covers him should he create the next American Horror Story at Netflix. But the money that creators used to make from one hit show can still eclipse what many showrunners are now pocketing when expected to launch a slate of programming. A growing faction of creators and their reps wonder whether other tiers of creatives may be leaving money on the table with streamers. As Murphy himself admits, "I'm not everybody, and I get that."

"There's this notion that the push toward buying out ownership and backend may ultimately be not a great thing for the artist community long term," says talent attorney P.J. Shapiro, who notes that the allure of these deals is that both the studios and the creators are often guaranteed to see a good chunk of change from day one without having to worry about whether their project floats or sinks. "The downside, of course, is if you create Friends and sell it to Netflix and never have the opportunity to sell it into syndication," he says. "Those few precious home runs have been replaced with a bevy of singles, doubles and triples."

Historically, networks have paid studios a license fee to air a show in a specific territory for a window of time. After that expiration date, the production company would be free to resell the show to other parties. So when a studio had a hit show on its hands (think: The Simpsons, Law & Order), it would craft a litany of "second-window" domestic and international sales that eventually would generate tens of millions — if not hundreds of millions — for the show's owners and participants. But doing business with Netflix and the vast majority of streamers often means relinquishing those opportunities. Says WME president Ari Greenburg of the model, "It's bad for people who came into television trying to hit a lottery ticket."

As the business model changes, so does the studios' relationship with the streamers. Insiders believe Netflix's long-term plan is to bring most talent in-house. "I don't think Netflix ultimately wants to be in business with third-party studios," says lawyer Joel McKuin, who reps Noah Hawley and Stranger Things star Gaten Matarazzo. "They know Warner Bros., Disney and Universal are all building out their own OTT services, so everyone is retreating to their corners now and we're in this middle period where they kind of still need each other a little bit." But that push toward vertical integration may in the end constitute an existential threat for certain independent studios. It's why Universal Content Productions paid a premium to hold on to Mr. Robot creator Sam Esmail in a bidding war with Amazon: The studio wants to be able to continue to sell shows of his, like Homecoming, to Amazon and not have the streamer steal him away and render it obsolete. Netflix already has snatched a ton of talent away from studios, including Haunting of Hill House creator Mike Flanagan and Lost in Space showrunner Zack Estrin. "It's all about a race to sign up the best talent because that's all you have left to dangle," McKuin concludes.

This rapid shift in the TV model is fueling the new approach to talent deals. If studios and artists won't earn backend revenue in years to come, they need other up-front financial incentives. To that end, most streamers offer premiums to studios and advances to individuals. "What Apple, Netflix and Amazon are trying to do is say, 'Look, you're never going to have any of those other off-net sales. So we are basically going to fake it and give you money as if you had them,' " says Greenburg, who negotiated Greg Berlanti's recent $400 million Warner Bros. deal and Marti Noxon's Netflix pact. To do so, they employ what's known as a "cost-plus" formula that has the streamer paying the studio the full cost of a show from the start, plus a 30 to 40 percent premium. It's more money than studios are accustomed to getting from the start, as the traditional model has them deficit-financing a show for the first few seasons. But in the event of a runaway hit, that up-front money starts looking like a sucker's bet.

There are caveats for the artists, too. Backend has always been awarded based on the number of profit participation points given to a show's creative team. But the points tend to end up being worthless if you can't resell the show. So Netflix and other SVOD platforms have started assigning a minimum guaranteed value to each point that they then pay out to talent when a show hits a certain season, often starting in the third but typically only really lucrative in the fourth and beyond. The catch? Most shows aren't going to last that long. "They're often cutting these shows off before the backend asymptote really hits," says talent lawyer Lev Ginsburg, who notes that many believe a key factor in the streamers' cancellation decisions is the fact that the financial outlook becomes much more talent-friendly the longer shows go. Plus, shorter runs mean fewer opportunities to renegotiate, another frustration for reps.

At Netflix, such long-running shows as House of Cards and Orange Is the New Black have become anomalies, and at least one source says he has heard anecdotal evidence of internal analytics that suggest the streamer doesn't gain any additional subscribers when a show goes beyond two seasons. "No one is sitting there going, 'Ah man, I can't wait for Lost in Space to come back on.' It's one of 500 boxes on that screen, and when they pay $130 million to put 10 more episodes up, all that happens is there are 10 more episodes behind that box," says one insider. "Ted Sarandos has to decide, 'Is anybody going to subscribe to Netflix because of more episodes behind that box?' " (Netflix declined to comment.)

To be fair, even on a traditional network, the issue of backend applies only in a small percentage of cases. "In all of broadcast television in the last four years, I can count maybe five shows that will hit a backend period," says Greenburg, referring to Young Sheldon, The Good Doctor, Black-ish, This Is Us and potentially 9-1-1. Veteran producer Lynda Obst says she's only ever had one series, TV Land sitcom Hot in Cleveland, hit the backend zone. "The number of shows that actually earn out is such a fraction of what we make that your upfront fees turn out to be the ones you're living on."

Even some of the shows that do generate sizable backend profits can ultimately be, in the words of one rep, "a giant fucking pain in the ass." For many, the recent Bones profits lawsuit was a PTSD-inducing reminder of Hollywood studios' proclivity for sketchy accounting tactics. With creative math like that, it's no wonder so many writers, producers and stars never see as much as a penny in backend until an audit and, often, legal battle forces a studio's hand. "In the past system of Hollywood, sometimes it's been very hard as creative people to get what's owed to you. You have to do audits, you have to sue," adds Murphy. "And in the case of [the Netflix] model, what I love about it is at least it's up front. You know what the rules are, so you remove the mystery. You just have transparency. And for creative people, transparency is everything."

Not to be overlooked is the reality that several shows wouldn't be as successful — or even exist — if they weren't on a streaming platform. Take You, for example. Sources say talent reps attempted to renegotiate after the drama, a flop at Lifetime, broke out in its second window on Netflix. "You can't just go, 'Well, now it's doing well for you, so give me more money,' " says one person close to the series, noting that the streamer's pickup of the drama was critical to, if not the sole reason for, its newfound watercooler status. "Netflix made the show a hit." And there's no denying that the streaming platforms have provided a venue for the type of niche shows that other buyers long have been forsaking. "What's clear is that if you're swinging for the fences and want the biggest possible payday in success, that would be a broadcast or cable hit that sells into syndication and international," says ICM Partners' Ted Chervin. "But if you want to take less risk, have more creative freedom and still make a nice payday, then these streaming service deals are very attractive."

Attorney Michael Gendler, who crafted Rhimes' megadeal, can't help but feel a sense of deja vu about the time three decades ago when creators had all the leverage after the repeal of the financial syndication rules, and he capitalized on it with a wildly lucrative deal for David E. Kelley. "It was a Brave New World that ended eventually, and that's what I think we're going to see happen again soon," warns Gendler. "Once they lock up the key talent needed to brand themselves and get into the game, the streamers' enthusiasm for unconventional deal terms will diminish. We'll see them pushing back, knowing their competitors are also sticking to very similar deal templates."

In other words, he says, take the cash while you still can.

This story first appeared in the April 24 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.