There was a time when streamers — led by Netflix, burning a hole in its balance sheet with annual negative cash flow in the billions — were banking on double-digit subscriber growth. And they were spending on content like there was no tomorrow.
Well, tomorrow came.
In the past 18 months, Wall Street has become laser-focused on the profitability of streaming services, not just their subscriber growth potential. The trigger: Netflix’s first-quarter 2022 earnings report, which for the first time in a decade showed a sequential subscriber loss. Suddenly, bam! Investors wanted to see a consistent monetary return on streaming. The ripple effects were felt across the sector, as Disney, Warner Bros. Discovery, Paramount Global and Roku took content write-downs for pulling underperforming content.
Now Hollywood’s dealmakers are confronting the latest economics of streaming. Netflix has resumed its ascendance, posting strong positive cash flow this year and reaccelerating top-line growth. Players like Max, Disney+, Paramount+ and NBCUniversal’s Peacock continue to play follow-the-leader.
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Adding to the disruption: This year’s twin strikes by actors and writers largely put TV and film deals in a holding pattern. Now, with the work stoppages resolved, there’s a flurry of activity underway.
But going forward, streamers are being more selective about the projects they greenlight. “Everybody is coming out of this thinking about cost containment,” says David Eilenberg, head of content for Roku Media. “Some degree of austerity is likely to impact content spend over the longer term.”
In this environment, deal volume will be much lower, chimes in one top TV agent: “There will not be as many gambles.”
As part of the shift, streamers have become far more receptive to co-productions and co-windowing deals than in the past. Where once they demanded perpetual, global rights, those aren’t table stakes anymore.
“Streamers have tighter budgets, but they want to offer the same amount of programming,” says Robert Darwell, senior partner in law firm Sheppard Mullin’s entertainment, technology and advertising practice group. “So we’ll see more openness to co-productions.” Eilenberg says co-windowing, when it works well, has the net effect of raising the visibility of a series or movie without cannibalizing audience from each party’s distribution outlet. “One way to keep new content coming is to share,” he says.
With the rise of streaming, “windowing was tossed aside in favor of a misguided belief that every piece of content needed to be exclusive to one platform,” says Dan McDermott, AMC Networks president of entertainment and head of AMC Studios. Now companies are pivoting back to windowing their content across the global ecosystem, on a variety of owned and third-party platforms and networks. In some cases, they’re taking just North America rights and divvying up the rest of the world with partners. “It just makes sense to pay for something once and then monetize it repeatedly,” says McDermott.
The attitude change extends to back catalogs, too. WBD, for one, has licensed a handful of HBO originals like “Six Feet Under” and “Insecure” to Netflix, as well as to other streamers — a once unthinkable prospect. In November, Disney CEO Bob Iger told investors the company was in talks to license additional titles to Netflix (but not from “core brands” such as Marvel, Pixar or Star Wars).
The streaming retrenchment also has prompted a rethinking of overall deals with talent. Once, the jockeying was fierce to secure showrunners or filmmakers to massive multiyear deals. “There was a boom in all these platforms trying to get exclusive deals at the highest levels — and even below that, for talent that wouldn’t normally have been getting those overall deals — because there was so much competition,” says WME COO Dan Limerick.
Now there’s a greater emphasis on overall deals being productive, with compensation based on the execution of successful projects rather than being front-loaded, industry execs say. One insider says “showverall” pacts tied to a specific franchise (like “Stranger Things”) are more typical. “The days of making a giant deal without anything at its base are pretty challenged,” the source says.
During the WGA and SAG-AFTRA strikes, entertainment companies stepped up deals to acquire adaptation rights to books, per Joel Lubin, head of CAA’s motion picture group. “It has felt like a very robust space,” he says.
With the months-long strikes over, “The doors are opening up. You can feel the flood starting to come in,” says Limerick. At the same time, the higher residual rates for streaming productions the unions won from the Alliance of Motion Picture and Television Producers will add to the cost structure. And that will put downward pressure on the number of shows they are going to make — “but they were already under pressure about making better choices,” Limerick notes.
Meanwhile, the way Netflix or any other streaming service determines value is still murky. In October, Netflix co-CEO Ted Sarandos told analysts he expects the company to be “more and more transparent” about streaming metrics — and this week, the company released its biggest trove of data yet, covering more than 18,000 of the most-viewed titles for the first half of 2023 and encompassing 99% of total hours viewed globally over that period. “This is probably more information than you need, but I think it creates a better environment for the guilds, for us, for the producers, for creators and for the press,” Sarandos said at a press briefing Tuesday.
Paul Bernstein, entertainment transactions chair at law firm Venable, believes there needs to be a paradigm shift toward giving creators equity incentives in the streaming platforms themselves rather than simply tying payments to views of specific content. “There are many ways for a show to score for the platform, but they only give points for 50-yard touchdown passes,” he says.
WME’s Limerick considers the way success is measured to be a moving target. “We need to figure out new language for this world we’re in,” he says.
From a historical perspective, the rise of Netflix and the slowness of traditional Hollywood players to adapt to the new streaming reality isn’t at all surprising, says Jason Squire, professor emeritus at USC’s School of Cinematic Arts. “Every time the movie industry has encountered a new technology, it has delayed or buried its head in the sand … and outsiders take the
plunge,” he says.
Since 2020, Lisa Katz, NBCUniversal Television and Streaming’s president of scripted programming, has overseen the company’s slate across broadcast, cable and streaming. She claims that NBCU has been strategic — and cost-conscious — about its content curation for Peacock, a newer streaming entrant, from day one. Its original content for streaming, she says, was never about pumping out a ton of material.
Katz and her team determine the right home for an original project not based on its budget (i.e., cost per hour) but on the optimal monetization potential. Those better suited for linear TV tend to be “lean-back, drop-in,” while for streaming they skew toward “lean-in, binge-able” story arcs. “We partner with talent to decide which platform can best support their storytelling,” she says.
As media companies vie to truly compete with Netflix globally, financial analysts expect some to more intently pursue M&A deals — and get in a more favorable position to spend on par with the market leader and achieve sustainable streaming cash flows. (Netflix’s content spending forecast for 2024 is $17 billion on a cash basis, up from a strike-impacted total of about $13 billion in 2023.)
MoffettNathanson analyst Michael Nathanson cites speculation that consolidation would involve Paramount, Warner Bros. Discovery and/or NBCU. But he doesn’t see anything transpiring on this front next year, especially with an unchanged regulatory climate. Moreover, “We still have our hesitations that a digital company or other large media player will try to catch a falling knife,” he wrote in a Nov. 21 research note, suggesting there could be further deterioration of their legacy businesses.
Erik Hodge, partner at the Raine Group, who leads the bank’s entertainment and content efforts, definitely expects to see M&A in the media landscape. In 2023, several factors “really slowed down dealmaking,” he says, including higher interest rates, the two strikes and ongoing struggles at media companies. However it all shakes out, at a high level, the streaming wars have already established the new normal, he says.
“Streaming as a disruptive force has already largely done the disruption at this point,” says Hodge.
One lasting effect of the streaming era is that there now are many more buyers in the market, and that generally provides more options to sellers. As fewer films are released theatrically, more are coming to streaming platforms. A decade ago, there were perhaps half a dozen avenues for independent producers to distribute their movies in addition to the studios — and “now there are multiples of that,” says Andrew Kramer, chair of law firm Willkie Farr & Gallagher’s motion picture, television and entertainment finance practice.
Still, regardless of the platform, deal terms always come down to the creative value of any given project, CAA’s Lubin says. While it’s true buyers are exercising more fiscal restraint, he says, “There will always be demand and competition for talent and material that is rising to the top. All bets are off when somebody wants something.”
Great storytelling, Lubin observes, “is timeless.”