Monday, December 17, 2018

What would you trade for Friends like these?

I always feel like I should open these Netflix posts with an apology. Much like the Elon Musk thread, I get tired of hearing myself make small refinements on the same points over and over. What's worse, the consistently negative tone probably leaves the wrong impression. Like SpaceX and Tesla, Netflix does more good than harm, providing a very reasonably priced service, producing some fine content, and pumping a great deal of money into the industry.

But one of our main areas of interest here at the blog is the way hype and bad conventional narratives shape our conversation and, again like Elon Musk, Netflix is simply an inescapable example.

I don't know whether the inability to ask the right questions is the result of PR driven narratives or a necessary condition for those narratives to work (or perhaps some combination of the two). Whatever the direction of causality, however, the correlation is certainly remarkable, and never more so than with this company.

Any serious coverage of the viability of Netflix pretty much has to start by asking three things:

What content is driving subscriber growth, pre-existing or original?;

With the original content, exactly what rights has the company acquired?;

Can it ever be anything more than marginally profitable under this model?

On the first point, Netflix has gone to great lengths to suggest that it is their originals that are bringing in the customers. The vast majority of people covering the story have accepted this position uncritically, parroting the PR flacks' talking points. Journalists and analysts gush about the buzz and awards while ignoring the unprecedented promotional budgets. They pass on the company's press releases about viewership for various shows without ever noting that these are self-reported and easily cooked metrics coming from a notoriously opaque company with a history of promoting misleading narratives (go back and check out how many reporters were fooled into thinking that Netflix owned House of Cards).

The press has so internalized the original content narrative that they can report on a story that completely undercuts it without ever noticing the contradiction. 

[Using the Marketplace link because it's a good write-up, not because they're an example of the credulous coverage.]
Fans of the hit TV show “Friends” were relieved last week to see the sitcom’s 236 episodes will continue streaming on Netflix through 2019. This was made possible by the behemoth of a streaming deal between Netflix and WarnerMedia, which cost the former $80 million to $100 million, according to some reports, to continue licensing the show for 2019. However, some media sources are saying the deal could continue for multiple years after that.

Netflix has licensed “Friends” exclusively since 2015, but the new agreement will remove the exclusive part, allowing WarnerMedia to broadcast the show when the movie and TV company launches its own streaming service next year.

It’s now been more than 14 years since the show’s last air date, but the series is still raking in the dough. That got us to thinking: Just how long has “Friends” been a major moneymaker? So, let’s do the numbers on one of the most successful sitcoms of all time.

The cast’s per episode paycheck wasn’t the only dough they were receiving from the show. After season six was over and it was back to the negotiation table, they all started receiving a portion of the show’s syndication profits.

Today, all six of them still receive 2 percent of syndication income, or $20 million each per year, since the show still brings in $1 billion annually for Warner Brothers. Plus, now that the Netflix deal is going through, Aniston, Cox, Kudrow, LeBlanc, Perry and Schwimmer can expect to see even more on their checks from Warner..

Though there are other potential benefits, the main argument for an independent streaming service such as Netflix making a major investment in original content is that it would bring a degree of independence from the major studios and, among other things, prevent them from extorting huge checks from the company. (You know, like demanding $100 million to license a show for one year.)

The trouble is not only that Netflix isn't there yet, but that it doesn't seem to be getting there. Once again, this is another instance where following the PR dictated narrative is so dangerous. By keeping the conversation focused on the previously mentioned buzz, the huge amounts of money being spent, and the sheer quantity of programs, attention has all but completely been diverted from the actual value of the IP being generated.

The Friends deal suggest a useful way of framing this question: what does Netflix own outright that is worth more than the most valuable properties of Disney/Fox, Warners, and the rest?
For our purposes, most spectacular IP falls into three categories. Friends falls into the first, the previously discussed TV shows with legs. These are series that developed large followings of viewers who have a seemingly unlimited appetite for watching the same episodes again and again often over the space of decades. A Seinfeld or a Big Bang Theory or a Law and Order can bring in hundreds of millions of dollars annually.

This can go on for an amazingly long time. It is entirely possible that the post 2018 IP value of the almost 70-year-old I Love Lucy is worth more than that of any current Netflix or Amazon Prime original. Arguably, the closest contender would be Kimmy Schmidt which appears to be owned largely by NBC/Universal.

We've also discussed the second category, children's programming. Historically, you could make a pretty good case for this being the most lucrative area of television, especially in terms of ROI. It has also been the backbone of every video delivery platform since television became a mass medium in the late 40s. This is always been an underdeveloped area for Netflix. More importantly and in direct contradiction to the official narrative, it is dominated by licensed properties completely owned by major studios.

To date, the highest profile Netflix children's original is the reboot of She-Ra. There is obviously a substantial PR budget behind the show, presumably coming from Netflix despite the fact that it probably doesn't own any real share of the character.

This is a natural segue to the third category of franchises/characters/universes. With a handful of exceptions, the company hasn't even tried to compete in this space despite it being the most talked about and (in terms of absolute numbers if not ROI) by far the biggest.

The closest attempt I can think of was the Will Smith vehicle Bright. That one was launched in 2017 with a big marketing budget and was immediately declared a huge success with the announcement of the sequel coming mere days after the premier. Then, curiously, the normally fast-moving Netflix which desperately needs its own slate of blockbuster franchises decided to put the follow-up on what appears to be a relatively slow track with filming not starting until 2019.

Over the past few years we have seen God knows how many breathless accounts of the billions upon billions of dollars that Netflix has spent on original programming, in articles lousy with references to disruption and visionary leaders, but almost none of these journalists have taken the next obvious step and considered what the company was getting for all that money.

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