Netflix is still the 800-pound subscription-video-on-demand gorilla, but rival services Amazon Prime and Hulu Plus are coming on strong in a market that is getting more competitive by the minute.
Hulu—the U.S.’ No 3 SVOD player—last week announced its first major original: 11/22/63, a limited series from J.J. Abrams and Stephen King about the day of JFK’s assassination, based on King’s best-seller. Amazon also got lots of ink with its Sept. 26 debut of Transparent, starring Jeffrey Tambor as a transgender woman named Maura, whose family is confused about this drastic late-in-life change.
While these flashy originals demonstrate how competitive the SVOD market is right now, the real money in SVOD is in the selling of highend serialized dramas. Netflix paid Sony upwards of $2 million an episode to acquire The Blacklist, in a deal announced Aug. 28, while on Sept. 2, Warner Bros. said it had completed a multi-territory deal for Gotham at similar or even higher pricing levels. In February, CBS sold Elementary to Hulu Plus, WGN America and broadcast for nearly $3 million an episode, according to sources.
Those are only the latest deals in a market that’s been heating up for months. Three cashladen buyers are racing to snatch up the market’s buzziest shows while building their overall libraries, and Netflix is also aggressively acquiring multi-territory rights as it expands globally.
It all equals a huge boon to producers of dramas. The number of buyers in the market, and their desire for binge-inducing, subscriber-luring programs, has never been greater. That’s given production companies— especially the ones with the greatest understanding of the SVOD market—a unique opportunity to cash in.
“What’s making this market even hotter—or at least appear hotter—is that these buyers are buying shows that have not yet been on the air,” says David Bank, managing director and equity research analyst at RBC, citing Hulu’s acquisition of Manhattan, Netflix’s multi-territory acquisition of Gotham, and Netflix’s acquisition of CBS’ Zoo, which will premiere on broadcast next summer and then be almost immediately available on Netflix.
“The market is so competitive that you have to place your bets before the show even goes on the air,” says Bank. “Buyers are having to sell themselves to sellers. Even when you are the guy with the money, you still have to convince people to sell to you.”
While the highest bidder usually wins, other factors also come into play: How much off-air marketing can and will the SVOD service provide? How much will the SVOD service push back on network stacking of on-demand episodes? What sort of exclusivity is the provider willing to pay for? When does the provider want to put the show on the air? And the biggest question of all: How many territories is the SVOD service buying for?
“The money is going to drive the deal,” says one studio executive who requested to speak on background. “But for most shows with multiple bidders, two or three of the bidders will be very close [in what they are willing to pay.] At that point, your decisions are more strategic than financial.”
As SVOD pacts move into the global arena, they are getting progressively more complicated. Even crafting domestic SVOD deals is far trickier than selling shows to cable networks and TV stations once was. Nowadays, each buy/sell decision requires considering—and strategically working—these top factors into the deals.
1. NUMBER OF EPISODES AVAILABLE
For a show such as The Blacklist, much more was in play than the $2 million per-episode price, but that fee—considered to be the all-in, in-absolute-success figure—depends on several variables.
First, SVOD providers agree to pay certain prices depending on how long the show is produced. So if Netflix buys The Blacklist, which launched its second season Sept. 22, or Gotham, which also premiered on Sept. 22, it agrees to pay a certain rate for season 1. That price goes up with every season through which the show lasts. If the show makes it through season 4, the seller receives 100% of the agreed-upon price.
Shows also get more expensive as they get more popular. For example, “if we are currently in season 4 of a very popular show and you are getting season 3, that is potentially more expensive than season 2,” says Dan Cryan, IHS research director of digital media. “These deals are structured so that people can hedge against the future success. Both parties need these deals to be sustainable, scalable and ideally mutually beneficial. Both buyers and sellers are trying to maximize their positions, and to an extent, those interests are aligned.”
It follows that selling shows into syndication— whether on SVOD or cable—early gives them a better chance of remaining in first-run production. The promise of those increased syndication dollars allows studio sellers to be more flexible with first-window network buyers in order to keep a show on the air.
For example, NBC likely kept Sony’s Community— which was low-rated but much-loved by loyal fans—on the air as long as it did because Sony gave it a good price on the show while it sought syndication deals. Eventually, Community was sold to Comedy Central, Hulu Plus and TV stations. And in a last-minute deal, Yahoo acquired a sixth season after NBC canceled the show—which means more episodes will air on all of those platforms.
This is true for any platform, but if an SVOD service wants exclusivity on a show, it will pay more. The buyer must make up for what the seller would have received from other platforms in exchange for keeping the show for itself. However, the buyer also can agree to allow the studio to sell the show to a cable network, and if a buyer is found, the SVOD service will pay a reduced price. That’s likely the case with The Blacklist, say sources, although no cable deal has been announced for that show.
That said, cable networks are becoming less interested in buying serialized dramas, which don’t tend to repeat well, while SVOD providers, whose bread and butter is binge-viewing, have become more interested. Sellers of high-end serialized dramas are now going first to SVOD providers, then to cable networks, instead of vice-versa.
3. MARKETING MUSCLE
Another advantage that’s growing in importance is the buyer’s ability to market a show. For example, studioowned Hulu Plus goes the furthest in marketing its acquired shows, and that’s becoming increasingly attractive to sellers.
“Hulu is massively stepping up its spend” on acquisitions, says RBC’s Bank, and its marketing pushes are intensifying accordingly. “Of all of the players, the biggest step up in absolute dollars in the SVOD market is going to be Hulu.”
Agrees the studio executive, “All other things being equal, I will lean toward the platform I believe will best help me market my show.”
Netflix—which still reaps more than 80% of subscriber revenue in this market, according to IHS— doesn’t contribute to a show’s marketing at all. While that doesn’t seem to be hurting Netflix’s chances in the market now, that could change.
Netflix markets its own originals and acquisitions, but does nothing to push people back to the originating network—something Hulu does, since it’s owned by companies that also own networks.
4. VARYING PREMIERE WINDOWS
It wasn’t so long ago that a show premiered in syndication four years after its first-run network debut. That gave the acquiring network or TV stations somewhere between 88 and 100 episodes to run, and that amount was necessary, particularly if the buyer planned to run the show five days a week.
That “four years to syndication” model has changed dramatically in recent years, with studios and networks allowing shows to go to cable early in an attempt to drive up viewership for the show’s original airings.
With on-demand and binge-viewing, viewers now want to be able to catch up on a show when, where and how they want to. They don’t expect to have to wait for years to watch the first season of The Blacklist in order to join the party in season two. And most studios and SVOD players are working to serve the customer, making shows increasingly available on a short time frame. Thus, season one of The Blacklist premiered on Netflix two weeks before season two premiered on NBC.
In other deals, such as CBS’ with Amazon for Under the Dome and Extant and Hulu’s for Manhattan, the SVOD provider is getting the show just days after its first-run premiere. Amazon made Under the Dome and Extant available four days after they first aired on CBS, while Manhattan was available on subscriptionbased Hulu Plus the day after it aired on WGN America, and three days later on free service Hulu.
Today, there are no rules as to when a show will air on SVOD or other platforms. It’s all a matter of the deal.
5. USING STACKING IN YOUR FAVOR
As this market gets increasingly competitive, SVOD providers may no longer have as much sway over how many episodes networks can make available on-demand and for how long, a trend known as “stacking.”
Sources say Netflix won’t pay as much for shows if their airing networks are making more than five episodes at a time available for on-demand viewing (although networks such as FX and Turner are pushing back on that, saying they won’t buy shows from studios unless they have the on-demand rights for all in-season episodes). But if Amazon or Hulu is willing to allow stacking, and will pay the same or close to the same price as Netflix, sellers are likely to opt for the more flexible buyer. Neither Netflix, Amazon nor Hulu agreed to be interviewed for this article.
“An SVOD operator in a second window would prefer there to be as little stacking in the market as possible, but there are reasons and rationales for networks to want to have as much stacking as possible,” says another studio executive who requested anonymity. “That’s a balancing act that will continue to evolve.”
6. THE VALUE OF GLOBAL PLAYS
With Netflix rolling out in France, Germany, Belgium, Switzerland, Austria and Luxembourg this month, the company is starting to buy global rights to shows. Netflix acquired Warner Bros.’ Gotham earlier this month in a multi-territory deal that’s the first of its kind.
Netflix won’t have Gotham in every market internationally because in some markets broadcasters already will have bought the show in existing output deals with Warner Bros. Other markets don’t yet have an SVOD provider, and Netflix is acquiring rights for shows in anticipation of that eventually being the case. Doing multi-territory deals is incredibly complicated because different rights exist in every market.
While most don’t expect multi-territory deals to become immediately common, the Gotham deal does herald things to come, with one source saying perepisode global prices could rise as high as $5 million.
“What is super interesting to us is that Netflix is buying globally and locking up really long-term rights for shows in a way that they historically hadn’t,” says Bank. “They are playing for a global land grab, buying shows way ahead of rolling them out. Our sense is that Netflix is legitimately willing to offer what it deems to be market rate for global rights, but how do you determine what that rate is when there’s no market? Netflix is becoming more of a ‘frenemy’ to studios, and the lines are blurring. They are starting to eat into the potential upside if a show hits.”
In some markets, such as the U.K., Canada, Germany and France, there are already more than one SVOD provider in the market. In the U.K., Amazon Prime, which incorporated LOVEFiLM earlier this year, has a head start, while the BBC offers iPlayer. In Canada, Rogers Communications and Shaw Communications are teaming on a new SVOD service, called shomi, which is expected to debut in November, while Bell Media earlier this month acquired streaming rights to HBO’s library in Canada with plans to launch an SVOD provider in 2015.
“We are seeing Netflix or Amazon enter countries and then seeing a strong response from incumbent broadcasters or pay platforms who don’t want to yield the space,” says a studio executive.
Hulu, currently available only in the United States and Japan, isn’t yet playing for international SVOD rights, stating on its website that, “While one of our long-term goals is to make Hulu’s growing content lineup available worldwide, we don’t have a timetable or any news regarding expansion beyond Hulu Japan at this time. Expansion requires working with content owners to clear the rights for each show or film in each specific region, and those agreements can take a while to be established.”
Big broadcast shows sold in these multi-territory deals could go for as high as $5 million an episode, says one source, although others say that figure is aggressive.
Selling a show prior to premiere into undeveloped markets presents risk to sellers. Both The Blacklist and Gotham got strong starts to their seasons, with The Blacklist scoring its second-highest rated episode ever (3.4 rating/10 share among adults 18-49 and 12.5 million viewers), while Gotham opened Fox’s Monday night with a 3.2/10 among adults 18-49 and 8 million viewers overall, the network’s best drama premiere in years.
Warner Bros. sold Gotham to Netflix under certain assumptions about the market. Should Gotham grow into a giant worldwide hit, an upfront multi-territory deal with Netflix means that Warner Bros. won’t be able to sell the show on a market-by-market basis, potentially leaving some money on the table.
Studio sellers say they understand that risk, and their vast experience with dealing shows internationally means they are used to pricing shows for sale prior to their U.S. debut.
“You never know,” says an executive. “We could look back later and realize we left money on the table, or we could look back and say we got a value that could not have been otherwise achieved.”
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