In the past couple of weeks, Netflix made two huge deals that a) reminded everyone which company is still the global leader, by a lot, in subscription streaming; b) kneecapped a smaller competitor; c) gave lesser challengers reason to ponder the benefits of being Switzerland; and d) signaled that ambitious creative talents don’t need Hollywood middlemen to get projects made, or to get rich.
That’s a pretty good return on investment for the Big Red N, which continues to be a couple of steps ahead of its Hollywood competitors. Right now, the company seems to be turning up aces in a card game not everyone else has quite learned. And it just threw some very large chips into the pot, forcing everyone else to ponder whether they can afford to ante up, too.
The first of those “big chips” went to buy two sequels to the fabulously successful Knives Out whodunnit, starring Daniel Craig, and produced by Rian Johnson and Ram Bergman. Out of a paltry $40 million in production costs, the original grossed a remarkable $311 million worldwide and became one of the most profitable movies of 2019.
Lionsgate and MRC backed the original under a one-off deal. When it came time to re-up for the inevitable sequels, though, Netflix stepped in, cutting out both Lionsgate and financier MRC. Netflix signed directly with Craig, Johnson and Bergman for a stunning $469 million, deals projected to net each of them $100 million.
As shown in the deals for Knives Out 2 and 3 (Forks Out? Soup Spoons Out?), creators with good projects don’t need to rely on traditional Hollywood to get their projects made, nor for big money to eventually arrive as a studio slowly milks traditional global film and TV rights over years to come.
Proven talent may want to hold onto those sequel rights, as Johnson and Bergman did (while Craig made his detective character irreplaceable).
I’ve often said the world’s greatest fiction writers are Hollywood accountants, with their ability to make “profit” an ever-receding condition on hugely successful projects. So why wait endlessly for your participation points to arrive when you can bet on your project, get a movie made for a modest price, then parlay it into much bigger money from a streamer with immediate access to hundreds of millions of customers? It’s a safe bet that a lot of stars, producers and agents are busy figuring out how they can pull their own knives out without benefit of those Hollywood suits.
Meanwhile, Netflix’s second mega-deal also hit Lionsgate where it hurts. In this case, Netflix outbid the indie studio for post-theatrical rights to movies from Sony Pictures, which had been supplying those movies in the “pay 1”window to Lionsgate’s Starz premium cable network/subscription streaming service.
Beginning next year, Sony’s theatrical output heads to Netflix, which also gets first gander at Sony’s straight-to-streaming projects. The price: $1 billion over four years.
For a company like Lionsgate, sizing up that gargantuan price tag had to be a blow. The scrappy independent’s total market capitalization is only $3.2 billion. Netflix, with more than 203 million subscribers and a $245 billion market cap, can do these kinds of deals repeatedly. Just as importantly, it’s not weighed down by older distribution models.
As Ted Sarandos, Netflix’s co-CEO and chief creative officer, said in a recent podcast, the company has benefitted hugely from its lack of legacy film and TV distribution operations. That’s allowed Netflix to plow all its resources into streaming strategy, without worrying about the difficult segue out of still-lucrative but eroding older distribution channels.
“The one blessing that we’ve had in our business, in our professional existence, is we’ve never had to manage ourselves out of anything,” Sarandos said. “… Like, ‘How are we going to replace our movie theater business?’… We’ve been, ‘Just go where the audience is,’ and we were able to do it pretty nimbly. All these companies make all of their money on advertising and cable television fees. They are going to have to replace that with the revenue on their services in kind of some balanced way, or they’re gonna end up in these weird places.”
Those “weird places” include directly competing with Netflix in SVOD while also managing the increasing decline of broadcast networks, film distribution, and basic cable networks such as ESPN, MTV or HGTV.
In noting some of the lessons learned from the recent deals, the analysts at LightShed Partners wrote: “For independent studios, the market value of pay 1 rights is soaring to levels never imagined. Being an arms dealer is pretty compelling; we keep wondering how many new SVOD entrants will regret trying to do battle with Netflix, Amazon and Disney.”
Being an “arms dealer” (I prefer the more peaceable metaphor of neutral and prosperous Switzerland) can give smaller operators a more sustainable place in the streaming firmament. For these companies, the questions they face are becoming increasingly clear:
Netflix’s latest deals may encourage smaller companies to take another hard look at the hands they’ve been dealt, and figure out whether they truly can afford the ante for a very expensive poker game.
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