The Netflix Backlash: Why Hollywood Fears a Content Monopoly
The streaming service is spending $6 billion a year on content, choking basic cable and brusquely rattling the relationship business of the town as fears of a Google- or Apple-sized dominance send a chill down the entertainment industry's spine.
Not many months ago, an original series landed on Netflix to some critical acclaim. Viewership, of course, was a mystery, but the launch seemed to make some noise. Yet the show’s creator — hardly a no-name player — began to fret. There had been no congratulatory call nor even an email from anyone at Netflix.
That’s a far cry from the way relationships long have been managed in Hollywood, but sources who do business with the streaming service say the silence was not atypical. “Really celebrating or valuing some of their successes — they just don’t do that,” says one agent.
Still, at a time when business is tough all over in the entertainment industry, there is a lot of gratitude for a deep-pocketed buyer that is snapping up an array of material, much of which might not find a home elsewhere. Netflix and its chief content officer Ted Sarandos are at once a savior, offering a giant gush of money to license shows that in some cases were past their prime or even out of production, and a terrifying competitor to studios.
“Out of the blue Netflix comes into the market and says, ‘We’re going to give you a number [to license a network show],’ ” says one television agent. “For the studios, it was, ‘Holy shit. Do we even need a cable sale?’ They all got addicted to crack. Nobody really thought they’d be a competitor on the originals market. They used stuff from the studios and became important. Now you see the backlash.”
The backlash is real but muted — mostly because few are willing to risk the wrath of a company that is spending $6 billion a year on programming and scored 54 Emmy nominations this year. But some executives, producers and agents who rely on deals with the streaming giant nonetheless increasingly view Netflix as an existential threat.
Studios and cable channels fret that the company, with its 83 million global subscribers, is sucking up so many eyeballs and bidding up prices for programming so high that they won’t be able to compete. And agents worry that as Netflix elbows out competing buyers, the company’s growing insistence on buying up all rights to its original programming around the world will do away with the profit participations that on breakout shows (such as Modern Family) provide steady income in an unsteady industry. “We love the money and we can still grow our clients [by getting them Netflix deals],” says one agent. “But I’m worried about the long term. If backends go away, what’s the future? This is why CAA and WME have diversified.”
Hastings and Orange Is the New Black creator Jenji Kohan at the 2014 AFI Awards Luncheon in Beverly Hills.
Netflix generally declined to comment on THR‘s questions but asserts that it and other streaming services have sparked the creation of “huge numbers of programs,” as one company insider puts it, generating more opportunity and money for the industry.
That’s one point of view. Another was offered by John Landgraf at the July gathering of the Television Critics Association in Beverly Hills, where the FX Networks chief warned that Netflix could be bucking for a Silicon Valley-style near-monopoly in entertainment, such as that enjoyed by Google in search or Amazon in shopping. “I think it would be bad for storytellers in general if one company was able to seize a 40, 50, 60 percent share in storytelling,” said Landgraf. The clear implication: If Netflix amasses such clout, the generous deals will start to evaporate and creative freedoms could be curtailed.
Some assert that the latter already has happened. Sources say, for example, that Beau Willimon, who adapted the British series House of Cards to give Netflix its first breakout original, was taken off the show after its fourth season because he pushed back hard on notes from Netflix execs. Willimon declined comment.
House of Cards producer Dana Brunetti also refused to comment on the Willimon exit, but the outspoken executive does say Netflix no longer offers the artistic freedom that lured the creators of the drama there. “There’s nothing special about Netflix anymore,” says Brunetti (who has stated publicly that he has shorted Netflix stock). “They had the first-mover advantage with digital streaming and giving artists more power, but now they’ve become like any traditional network or studio. And there are a lot of competitors.” (Worth noting: Brunetti now is an executive at Relativity Media, which has been in a legal dispute with Netflix over the streamer’s so-far-unsuccessful efforts to escape a rich deal for Relativity films after the latter filed for bankruptcy in July 2015 — before Brunetti was hired. Relativity emerged from Chapter 11 protection in March.)
Still, few can ignore the billions that Netflix has thrown around. Even though Landgraf said he’d prefer not to hand any content to Netflix, his company in July made a deal giving the streaming service exclusive rights to its American Crime Story series, pocketing what is said to be about $50 million just for the lauded first installment, The People v. O.J. Simpson.
Holland, Netflix vp original content, was flanked by actors Boyd Holbrook (left) and Wagner Moura at the season two premiere of Narcos on Aug. 24.
There’s plenty more where that came from. “Anybody who’s going to spend $6 billion or $7 billion a year on library and original content deserves to be applauded,” says ICM Partners’ Chris Silbermann. “Do you know how bad this business would be if their $6 billion went away tomorrow?” (For reference, HBO will spend a bit more than $2 billion this year.) Netflix provides the cash up front and orders two seasons of most series — appealing in a business in which many shows are canceled in the first season.
While it remains an open question whether Netflix will become the Google of Hollywood, there’s ample evidence that it already presents a tough corporate tech culture that doesn’t cater to sensitive showrunners and others who are used to being handled with more care. In many cases, Netflix is a black box for show creators and producers who have business at the company. Several say they have no idea how their show will be marketed, if at all. They get no feedback on how their show is received. There are no metrics, so rewards for success aren’t built into a deal (though compensation may be increased if a series’ budget goes up).
Few in Hollywood have the courage to speak publicly about Netflix, and those who have projects there say they are subjected to unusually onerous restrictions on what they are permitted to say, if anything. Retired NFL player Trevor Pryce, who sold the animated series Kulipari: An Army of Frogs to Netflix, jokingly references Fight Club — “The first rule of Netflix: You do not talk about Netflix” — in an interview that soon will air on my KCRW show, The Business.
In its sole response to THR, a Netflix spokesperson offered this: “We are doing something that’s never been done before; bringing great stories to people all over the world at the same time and at unprecedented quality and scale. In doing so, we are disrupting traditional business models and creating new norms. Not everyone likes disruption, but we’ve hired executives with extensive Hollywood and international media experience who are thriving at Netflix, and we are working successfully with a wide variety of creators and studios who understand and appreciate our approach. Most importantly, consumers and viewers like what we do, and we plan to keep doing it.”
How times have changed in the six years since Time Warner CEO Jeff Bewkes dismissed upstart Netflix as “the Albanian army.” Netflix’s revenue since it launched its streaming service in 2007 grew from $1.2 billion to $6.8 billion in 2015. It has 47 million subscribers in the U.S. and 36 million abroad (by comparison, ESPN has roughly 90 million subscribers). It is in 190 countries, with shows in 20 languages. Netflix expects to release more than 30 original series, or 600 hours of original scripted programming, this year — stunning when one remembers that the service’s brilliant opening gambit, House of Cards, only premiered in February 2013.
Says HBO chairman and CEO Richard Plepler: “I have nothing but respect for Netflix. Anybody who does not tip their hat to what they’ve done in the last six or seven years is not being fair.”
Next year, Netflix, with 2,800 employees, will move the 600 now packed into offices on Maple Drive in Beverly Hills into more than 200,000 square feet in the 14-story Icon building under construction in Hollywood at Sunset Bronson Studios. The company is expanding at its Silicon Valley headquarters, too.
The only thing growing faster than Netflix’s footprint is the hope among many in the town’s establishment that some combination of factors will slow the juggernaut. Maybe the studios will hold back programming. Maybe well-funded competitors — especially Amazon — will find a way to block Netflix. Maybe key talent will become wary of doing business there. Maybe Netflix will spend itself to death as it rebaits the hook to keep subscribers and lure in more.
The stock market noticed when the company revealed in July that growth in the second quarter was not as robust as anticipated. The company added 160,000 U.S. subscribers and 1.52 million in overseas markets, far fewer than the 500,000 it had projected in the U.S. and 2 million abroad. The company said price increases were to blame for cancellations that drove down its numbers, but price hikes had yet to go into effect for more than half of its U.S. customers, whose rates changed in the second half of 2016. On an analysts call, CEO and co-founder Reed Hastings apologized for the volatility and declared, “The big picture is very much intact.”
Certainly Netflix is far cheaper than cable, and subscribers can access a cornucopia of content, from an intense drama like Narcos to a comedy as weird as Maria Bamford’s Lady Dynamite. There are documentaries, children’s programs, Adam Sandler movies and Beasts of No Nation. “They’re like a giant shopping mall,” says one agent. “They’re trying to fill those spaces with something for everyone. They literally are trying to fill every space.”
Despite the company’s ability to know exactly what is being watched and for how long, the service isn’t immune to the unpredictability that’s made Hollywood a pretty crazy place for a century or so. Sarandos acknowledged during a recent THR roundtable that Stranger Things, which was spurned elsewhere but became a summer hit, was a “big surprise.”
A less happy surprise, it seems, was Baz Luhrmann’s musical drama The Get Down, said to have cost in excess of $120 million for 12 episodes. Despite generally positive reviews, the first six episodes landed in August almost silently. Production troubles are said to have strained Netflix’s relationship with its partner on the project, Sony Pictures Television (which shouldered some of the cost overruns). Subsequently, Netflix cut the third season of Bloodline — another series on which it partners with Sony — from 13 episodes to 10. It also notified Sony that the show’s third season would be its last, though it had been anticipated that the series would have a fourth season. Netflix also slashed licensing fees on the show. Both Netflix and Sony deny there are tensions between them, and Sony television still has a lot of business with Netflix.
If Netflix was daunted by the big spend on The Get Down, it is keeping its game face on. At the THR roundtable, Sarandos hinted that an upcoming series about the royal family, The Crown, might be even more expensive. And in a recent interview with The Economist, Hastings further rattled his already nervous competitors by suggesting that his company might be willing to spend a lot more. If shows like The Get Down or HBO’s Game of Thrones cost $10 million per episode, Hastings mused, “what does $20 million-an-hour television look like?”
Netflix chief content officer Sarandos and actress Winona Ryder after the Los Angeles premiere of Stranger Things on July 11.
Netflix also is unafraid to spend big on movies. It is said to be paying Brad Pitt $20 million to star in the satire War Machine. And it recently committed $90 million to make Bright, with David Ayer directing and Will Smith starring. Netflix knocked two or three studios out of the bidding for the film, which sources say would likely be tagged with an R rating if it were released theatrically. As that not only would have narrowed the film’s prospective audience in the U.S. but also would preclude a run in China, no other studio wanted to spend more than $60 million on the project. Sources say nearly half of Netflix’s $90 million will go to buy out profit participations. And Ayer will reap about $10 million for directing, a big step up from the roughly $5 million he got to handle the writing and directing on Suicide Squad.
Netflix also is making smaller movies that otherwise might be homeless. “As sellers, we’re glad they’re on the block,” says producer Michael De Luca, who recently set up a film based on Sarah Pinborough’s YA novel 13 Minutes at Netflix. On such projects, says another film producer, Netflix buys out the backend and offers about 20 percent over production costs — “equivalent to what [profit participants] would have gotten from a studio on a modest hit.”
With Netflix offering no metrics, it’s impossible to know whether the upfront compensation is a windfall or falls short of what a film would have earned through a conventional theatrical release. The upside is that money is assured and there is no risk of reading horrifying box-office numbers on a Saturday morning. But for some filmmakers, a theatrical run still has meaning, and a deal with Netflix means giving that up. Unlike Amazon, Netflix has refused to open up an exclusive window for exhibitors — one reason why Nate Parker chose to sell The Birth of a Nation to Fox Searchlight in a Sundance auction even though Netflix offered millions more.
Netflix’s huge appetite isn’t limited to content. Some in Hollywood believe the company keeps a tally of how many promising young execs it poaches from competitors around town.” They’re trying to staff up and they’re overpaying executives to go there and they’re working them to death,” says one agent. The company’s infamous “statement of culture,” posted online, declares, “Adequate performance gets a generous severance package.” It also says the company isn’t right for those who “feel fearful at Netflix” or who’d be “bitter if let go.” Yet turnover, at least among creative execs, appears to be low.
With exceptions at the uppermost levels, sources say many Netflix execs don’t have assistants. They run their own phone sheets, which may explain why many calls go unreturned. That doesn’t sit well with those who sit at the top of the Hollywood pyramid. “I can get Les Moonves, Steve Burke or Bob Iger to call me back,” exclaims one senior agent. “I can’t get [Netflix vp content] Cindy Holland to call me back. It’s unbelievable!”
The big question that fascinates those who do business with Netflix in Hollywood is how long the company can keep spending at such an astounding rate. “The first stage was obviously to get into the world and own the streaming space, which they did,” says an agent. “The question is, is that sustainable with well-capitalized competitors like Amazon and Hulu and potentially Apple?” (Or, one might ask, does all the competition make it more imperative to keep spending?)
Guillaume de Chalendar, Bank Leumi’s global head of media and entertainment, wonders whether the day won’t come, in just a few years, when Netflix needs an alliance. “Because they do not have the benefit of having a strategic shareholder — like HBO, Sky or Canal Satellite did when they embarked on a similarly aggressive investment program in the late 1990s — Netflix is in a situation where their spending on programming could become challenging, unless they maintain the steady growth in subscription levels we have seen to date,” he says.
Wedbush Securities analyst Michael Pachter, a longtime Netflix critic, thinks the company’s spending will drive it to keep raising prices, which will take a toll. “At $15 a month,” says Pachter, “Netflix is not as appealing as at $10 a month.” And he dismisses the notion that its data on consumer habits ensures that it makes better choices than competitors. “HBO is a disciplined content creator,” he says (though it, too, has had major stumbles, including Vinyl). “Netflix made Marco Polo. Are you kidding me?”
For every bear, there is a bull. BTIG’s Rich Greenfield sees cord-cutting as the future and long has been a Netflix proponent. Still, with Netflix having missed its projections for subscriber growth and with increasingly aggressive competitors in the game, he sounds a note of caution. A key question, he says, is how well Netflix can do in tough overseas markets. “Can they be successful in Europe and Asia?” he says. “To be determined.”
But a leading agent thinks Netflix will stay in the game, though perhaps not as the dominant player that it is today. Right now, he says, “Netflix is like David Geffen’s yacht. It’s amazing! HBO has a seaworthy boat. John Landgraf also has a beautiful boat. I think they all get over the wave. We’re going to have five strong players, and it won’t necessarily be the players that we’re used to. But Netflix will assuredly be among those companies.”
This story first appeared in the Sept. 23 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.