The theme of the week is “context”. For the second week, Netflix is spending hundreds of millions of dollars for film rights. To put that in context requires “ent-splaining” everything from “content arms dealers” to “portfolio theory” to “Pay 1 theatrical films”. (And if you don’t know what those terms are, I’ll explain that too.)
So let’s provide that context.
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Most Important Story of the Week – Sony Big Licensing Deal to Netflix from 2022 to 2025 (Roughly)
Last week, the most fascinating story was the tale of Knives Out, once a prestige film with Oscar ambitions, now a full-fledged franchise. If we wait, maybe one day we’ll have a “Knives Out Cinematic Universe” (KOCU). Apparently, Netflix is out hunting for “universes” since this week they acquired the distribution rights to another universe, the Spider-verse. Specifically, they entered into a “Pay 1” deal with Sony to get this:
– U.S. only film rights.
– For the Pay 1 (meaning first TV window after home entertainment) for all theatrical films.
– First look rights for all “straight-to-streaming” titles.
– Hundreds of millions of dollars per year, rumored to be over $250 million per year.
– Library titles from Sony’s vault are also included.
– The deal is four to five years.
Thus, since Sony still owns the film rights to Spider-Man—having sold toy rights back to Disney—Sony can sell the burgeoning “spider-verse” films to Netflix, including the films Venom, Morbius and Into the Spider-verse. Along with other future sequels.
One could be tempted to pair these two deals (Knives Out and Sony) looking for a trend. I’d say don’t do that. In this case, the temporal proximity of the announcement of these two deals is due more to PR strategy than actual business strategy. Both deals were negotiated for months, possibly by two different teams. The timing is more coincidence than convergence.
Not that we can’t evaluate this deal on its own terms. Whenever a deal is this big, between two big players, I think the best framework is the old, “Who won?” Was this win-win? Lose-lose? Or did one side come out on top? Let’s debate, with some big implications.
Did Sony Win This deal?
It certainly looks like it. A determination based on two things: the high price and their strategic plan.
Of all the traditional studios, Sony has decided that the streaming wars are not for them. True, they are trying to buy Crunchroll from AT&T to pair with ownership of Funimation, but that’s a niche streamer at best. Previously, Sony PlayStation had dabbled in the vMVPD world—who hasn’t at this point?—but found the economics wanting (as most non-Google/Disney companies have). And they launched the AVOD Crackle years ago. But a general entertainment “Sony+” streamer doesn’t seem to be in the works any time soon.
Instead, Sony is embracing the role of “content arms dealer”. As one of the sole remaining studios without a big streamer, Sony is properly positioned to demand the highest prices for TV shows like Breaking Bad, Seinfeld and Mad Men and its films like Jumanji and Spider-Man. That’s a good position to be in! Most of the titles in the last column in this Mike Raab visualization are Sony-owned TV series:
Thus, Sony knows its strategy and is basically executing it. The longer they can avoid the siren call of streaming, the more cash they’ll generate.
And they seem to have got a huge pile of cash from this deal. Notably, the leaks speculate that this deal is actually significantly more lucrative than the Disney output deal that wound down in 2019. (That deal was rumored to be $100-150 million per year, and this deal is rumored to be at least $250 million.) And no one would claim Sony’s slate comes close to Disney’s slate, now or then. Likely Sony was able to demand higher prices, as one of the last top tier studio output deals remaining.
(That and Disney likely should have charged even more. At the time of the first deal, even Disney likely didn’t realize how the triumvirate of the MCU, Star Wars and Pixar/Disney Animation would take over the box office.)
The Fun Sony Caveat: Being An Arms Dealer Works Best If You’re The Only One
Now, what I’m about to argue may seem contradictory, but here goes:
Different strategies could work for different streamers.
I know, I know, crazy. But honestly, reading the coverage—especially some media futurists—you get the idea that good strategy is “all or nothing”. Three or so years ago, famous analysts argued that every traditional studio should just submit to selling their content to Netflix and Amazon, since they had already won. At the time, I argued that traditional studios should launch their own streamers. Or more specifically, some studios should launch their own streamers. Because strategy is too nuanced to paint with a broad brush.
So how can I say, “Owning a streamer is good strategy,” and that, “Being a content arms dealer is also good strategy”? Is that rank hypocrisy or what?
Well, maybe, just maybe, different strategies can work for different companies?
Indeed, Sony was never set up to launch a traditional streamer. And the longer they waited, the harder it would be to catch up. (Mainly, their corporate parent was never prepared to lose billions to play in the streaming wars.) Thus, they’re leaning into licensing content to the streamers.
Even better, and this is key, they benefit from being the only content arms dealer.
Imagine a hypothetical world where Universal, Disney and Warner Bros. had given up on streaming and rolled over to Netflix, as the analysts/pundits I just referenced recommended. In that hypothetical world—where likely traditional studios would have seen stock price valuations plummet instead of grow—would Sony have commanded the same prices?
Doubtful.
This is basic economics stuff: the more bidders you have for less supply, the higher the prices for the suppliers!
That’s the situation Sony finds itself in. Right now, Disney, Warner Bros. and Universal (the three biggest studios) have their own streamers who will get their films. Disney bought Fox too, so really that’s the top four from the previous decade. Lionsgate puts its films on Starz. Paramount+ is being selective, selling rights one-by-one. That leaves Sony as the only studio who can sell its entire slate, including TV. Sure, there are smaller studios like MGM, A24 and STX, but they’re dramatically smaller in scope and scale than Sony.
Meaning, it’s a great time to be the lone major studio selling their content.
Long term, though, this will even out. At the end of the day, the value of Pay 1 films—the first window on TV for films, previously about 9 months from theatrical debuts, but now often down to 90 days, in the future maybe even shorter—will stabilize to something approaching a market standard, based on how well the films did at the box office. In the meantime? It’s great to be an arms dealer, as long as you’re the only one.
Did Netflix Win This Deal?
They’re much closer to winning this deal than they were with Knives Out last week. The main reason is that Netflix bought a film portfolio, not an individual title.
That concept (portfolio versus film) is basically central to entertainment, but so often missed in the day-to-day focus of trade coverage. It’s fun to judge each film’s success or failure, but studios know the uncertainty in making films or TV series, so they make lots and hope the overall trend is positive. Just like stocks, where owning a portfolio is less risky than owning only one stock.
That’s why buying a whole portfolio—called an “output” deal as in “the entire output”—is safer than buying one film at a time. It ensures you get the hits and the misses. If you just buy films one at a time, like producing two Knives Out sequels, you may miss. (Indeed, that’s why Netflix produces a hundred films a year.)
Arguably, Netflix grabbed the best available film output deal from competitors like Prime Video and Hulu. Is the price too high? Maybe, but Netflix has much better data for optimizing prices for Pay 1 films, so it’s likely closer to the true price than some of their other high-priced deals.
The Fun Netflix Implication: Theatrical Pay 1 Films Must Be Really Valuable
Again, this seems obvious, but I keep seeing arguments that Netflix’s original film slate performs better than all second run, theatrical films. If that were the case, why do they do this deal?
My contention is that the most popular movies in the world are movies released in theaters that become global blockbusters. Like Avengers: Endgame, Venom or Jumanji. The challenge is proving this. (I know this to be true from my experience at a major streamer, but I can’t show you that experience.) The data that I leverage every week in my “Streaming Ratings Report” has some unique quirks to it. One of those quirks is that it started mostly in March of 2021. Meaning that the weekly top ten lists and Nielsen data didn’t start until after Covid struck. And shuttered theaters. Meaning we have very few examples of films releasing in theaters and then appearing on Netflix, Hulu or Prime Video.
(The good news? We’ll start to get this data by the end of the year!)
Netflix muddies the waters by then selectively releasing datecdotes to portray the idea that their original films dominate viewing. And a lot of coverage implies that. If a film like Extraction got 99 million global households to watch, but we don’t know how many folks watched Avengers: Infinity War or Jumanji, presumably they’re less popular than Extraction.
This deal implies, maybe not?
Again, why pay so much—in the billions potentially—if these films are no better than the Netflix Originals released every weekend? Because likely theatrical films do really well on Netflix, especially the blockbusters.
Result? It is Closest to Win-Win, but Netflix Has the Riskiest Position
I like the deal for both sides. Netflix gets a few tremendous Pay 1 window films. Moreover, the optionality for some straight-to-streaming series gives Netflix some choices. Meanwhile, Sony gets a paycheck few of the traditional streamers would have provided.
Like last week, though, this deal is risky. Netflix paid a lot of money to rent films for 9-12 months at a time, which means the Sony movies do need to perform to justify the cost. Sony can just bank the paychecks; Netflix needs films lots of people want to watch, especially to fill the Disney-licensed-film-sized hold that must exist in their catalogue.
Data of the Week – Nielsen’s Pandemic Advertising Controversy
Nielsen is a divisive topic in the streaming community. On the one hand, all the streamers have much better data individually than Nielsen can ever hope to have; on the other, they don’t share any of that data, and especially not with each other.
The best way to describe Nielsen is as a pollster. Yep, a pollster for TV viewing behavior. As polling has shown us for two, non-consecutive election cycles, sometimes polling can go wrong, which seems to be the case for Nielsen in linear ratings for the last year or so of the pandemic. Essentially, some ratings may be off—if the Variety exclusive is accurate—by up to 10% in the last year. That 10% is real money for advertisers paying to reach customers.
But consider that: 10%. For all the sturm-und-drang, we’re not talking about 25% errors. Or 50% errors. But errors of 10%. In digital media—as Facebook likes to repeatedly demonstrate—sometimes up to half the advertisements are delivered to non-existent viewers. Connected TVs are rife with fraudulent advertising statistics, where dummy devices deliver thousands of fake ad views. Nielsen’s methodology tries to fix those easily gamed systems.
My recommendation for the streaming wars? Acknowledge that Nielsen isn’t perfect—no pollster is—but a great source to use with other data sources.
Other Contenders for Most Important Story
We’re running long as per SOP (standard operating procedure), so let’s go quick.
NFL Approves 17 Game Season
This will be news to linear channel ears. The NFL will expand their season by one week, giving lots of extra inventory to their broadcast partners. The upside is all for the broadcasters, and the downside is for the players.
Verizon Will Expand Yahoo Subscription Brand
Axios reported that Verizon plans to expand consumer-focused internet media into the Yahoo brand. As always, be skeptical of Verizon digital initiatives, but overall this could make sense. Yahoo has a few assets that could benefit from more focus, but we’ll see.
Univision Free Streamer
The streaming wars for Spanish language programming will heat up in the next few years as well. At the end of March, Univision announced a free streamer based, it looks like, on the Pluto-esque FAST model. At some point, I’ll have to do a deep dive into Spanish language streaming. Univision has some of the most risk of the cable channel groups, since it doesn’t have a studio to back it up. So this type of launch will be key to their future.
Entertainment Strategy Guy Update – Disneyland Prepares to Reopen
This week, Disneyland in California will allow folks to begin buying tickets and reserving spots to go to the happiest place on earth at 25% capacity. Folks expect demand to be sky-high, and I tend to agree. Thus we’ll probably see splashy headlines about the Disney-owned websites crashing and that could help Disney’s stock price. As I’ve been saying, I expect the return to normal to be slow, then all of a sudden. The sooner Disney can get back to normal in theme parks, the tougher a competitor they will be in the streaming wars.
