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Netflix on a Crossroads: Hollywood's Dominant Disrupter Adapts to Growing Pain



With a subscriber miss, balloon costs, competing circles, and an existential need to produce more internal hits, the dominant streamer may look like – gasp! – one of the entertainment giants whose world it turned on its head.

Over the course of a few days this spring, every top talent agency was called to Netflix's extravagant room for your Hollywood appreciation, where reps were filled with snacks and drinks before content manager Ted Sarando's dizzying presentations on the streamer's growing original programming needs.

It was the second time that Netflix had hosted this series of flashy rallies, and several attendees noted a stark contrast between 201

8, when executives were confident of the point of brag, and this year projecting a more humble air. The message received by several participants: We are at peace.

Netflix is ​​at an inflection point. After half a decade of almost uncontrolled dominance in the premium streaming video space that allowed it to aggressively tap the top executives and creative talent on the A-list, the company is now under attack. Threatened by its rise, and recently picked up by a series of mergers and acquisitions, the legacy studios of Disney, WarnerMedia and NBCUniversal have begun pulling the programming of Netflix and prepping the launch of their own streaming services. Add Apple's planned TV platform, and four very well-funded, contentious new rivals will hit the market over the next year.

"Competition is changing business," says MoffettNathanson partner Michael Nathanson. "They are moving to a more uncertain model. They need to create more original content, and it must be as good as ever."

With a market-leading 152 million global subscribers, 10 percent of TV screen time in the United States and a multi-year lead, Netflix may be too big to fail. But that has not stopped a growing chorus of questions about how long the "Netflix bubble" can last. Its balloon costs – analysts estimate they will spend between $ 10 and $ 15 billion on content this year – mean it's burning through cash ($ 3 billion in 2018). Its current debt burden is $ 12 billion.

Concerns were played up on July 17 when the company reported its first subscriber loss in the United States in eight years. The high-flying stock fell 15 percent, erasing $ 24 billion in value in less than a week. "It's remarkable that they lost subscribers before they lost a meaningful amount of content, and before there was direct competition from their suppliers," said Wedbush's Michael Pachter, a well-known Netflix bear. "This suggests that they will face further pressure when they lose content later this year and when their current [licensing] contracts with Warner Bros., Fox, Disney and NBCU expire."

Assembly costs and an insatiable need for hits – if these problems sound familiar, well, that's because it is for most media owners. As it matures, Netflix looks less like a high-flying technical interlocutor and more like the entertainment company it has thought of itself as. As one insider sums it up, "In a world where Netflix is ​​no longer the sub dog and no longer needs to prove itself, it behaves just like the studios."

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Netflix refused to play Hollywood's rules – dropping episodes at once, not releasing ratings, paying too much for creative talent in exchange for no backend profits – has been a source of external tension and envy. But the studios have got savvy ways and have begun to strike back. With $ 71.3 billion in Fox assets now in its portfolio, Disney wields significant firepower in the negotiations (it has also begun eliminating many backend deals); and with the support of AT&T, WarnerMedia doesn't have to think twice about waiving $ 500 million to keep J.J. Abrams & # 39; Bad Robot in the family.

With Apple in the mix, and Amazon and Hulu both increasing their spending, sought-after creators have more opportunities than ever. "The kind of shiny, new toy quality Netflix had a couple of years ago, I don't feel like it on the market," says ABC Entertainment President Karey Burke. "People who really care about telling stories that last for many seasons, they are beginning to switch back to cable and broadcast as truly viable, if not optimal, alternatives."

One reason, sources say, is that Netflix trades aren't always as lucrative as they once were. The cost model, where it pays a premium for full ownership, may be a good deal for a mediocre show, but cuts the winners out of the big payout that once came with a long-running hit. "We don't make a lot of money when we make a deal on Netflix now," grabs a producer with a streamer show. "They don't throw around cash like they used to."

Netflix doesn't hold their shows for very long either. It has become common practice for the streamer to cancel a project after a second or third season, cutting creators from bonuses that do not kick in until later seasons – although Netflix insiders claim that someone who creates a hit for the streamer will eventually be paid nicely . Cancellation decisions have been difficult for creative partners to understand because viewership metrics have historically been opaque. The talks in dealmaking circles have centered on Netflix's internal metrics – called "efficiency" – to determine if a show is worth renewing. The simplest definition of efficiency, per sources, is the ratio of the show's costs to the number of viewers, although Netflix is ​​said to add more value to luring new subscribers or retaining those who appear to be in danger of canceling.

Still, the lack of transparency has led to confusion surrounding the cancellation of critical darlings such as One Day on a Time and Tuca & Bertie . " T&B is critically acclaimed and has repeatedly been named one of the best new show of the year," Tuca & Bertie creator Lisa Hanawalt tweeted July 24 after she was told the show was coming to an end. "None of this makes a difference to an algorithm, but it's important to me."

While there are frustrations at Netflix as it is in any studio, the streamer is still one of the most talent-friendly places in town, which explains why everyone from the Obama to Beyoncé to the Game of Thrones creators David Benioff and Dan Weiss to Adam Sandler were offered deals there. "It's a strength of the creative process on Netflix that is truly unique in my experience," says Stranger Things executive producer Shawn Levy, who signed an exclusive TV deal there in 2017. "During a dozens of feature films and TV shows made for more traditional studios and networks. I've never encountered such an absence of committee thinking, so little bureaucratic disruption. "

Netflix has been particularly aggressive with Disney thieves prior to the launch of Disney +. In addition to showrunners Shonda Rhimes and Kenya Barris (both of whom were on ABC), it has signed agreements with Gravity Falls creator Alex Hirsch, High School Musical director Kenny Ortega – "They gave me a voice" – and Doc McStuffins creator Chris Nee, who says, "Netflix offered me a creative home where I could [tell stories] that didn't necessarily fit in with Disney freedom felt like an opportunity I couldn't refuse. "

Talent will continue to work with Netflix as long as it is capable of writing big checks," says Pachter. "I'm optimistic that Shonda Rimes, Ryan Murphy and Kenya Barris will make good shows," he adds, "although each of them is likely to produce more than one or two over the next five years."

Netflix is ​​also changing the way it talks about viewership on its platform. Although it is nowhere near the level of available data on originals as it is on traditional broadcast and cable shows, the company has begun releasing selected, unverified viewers – as when it reported in July that nearly 41 million households had watched at least one episode of the third season of Stranger Things for the first four days. "The show numbers for our show, and the openness of how the numbers rank in relation to other shows and movies, was exciting information," says Levy.

Per sources, one month after launching a program, Netflix often schedules a conversation with the creative team to discuss how many people watched one episode or the entire series after the first week and the first month of service. "We're trying to get to a place where we can be much more transparent with both our manufacturers and our customers," Sarandos told investors in April.

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In 2018, when Netflix received more Emmy nominations than HBO – then bound for most wins – it seemed to signal a shift in guard. But one year later, July 16, HBO was at the top with 137 nominations, 20 more than Netflix. The following day, the company received another hit, reporting that it had added fewer than expected 2.7 million subscribers, including a loss of 130,000 US members, during the second quarter. CEO Reed Hastings told investors, adding that he expected to add significant 7 million subscribers during the third quarter.

A cited explanation for the missing was a price increase that came into effect in the spring, increasing the cost of the standard US plan to $ 13 per month (increases have historically impacted subscriber renewal for a period). Hastings also blamed the content for the quarter, which didn't attract enough new subscribers.

After years of lead time on the wave with cord cuts, it seems that Netflix is ​​rubbing up against saturation in the US, where it has over 60 million subscribers. "Those who haven't moved [to streaming] yet are less likely to move in the near future," explains media consultant Matthew Ball, an alum of Amazon.

International is where most of the company's growth comes from years to come – experts have linked the potential market to between 700 million and 800 million outside China, where Netflix does not operate – but it is in the United States that Netflix will face the most competition from an influx of new streamers. The story will be whether they can maintain their US subscriber level, if not try to push it up a bit, in the face of this growing competition, "says Macquarie analyst Tim Nollen.

The rivals don't come easy on Netflix. Disney took the first shot with the news that it would stop licensing its films to the streamer as it prepares for an October launch of its $ 7 per month Disney +, which will be loaded with IP from Marvel, Pixar and Lucasfilm, when WarnerMedia and NBCU withdrew The Office and Friends for their services, Netflix says no show represents more than one percent or two of its total viewing time, but overall, the loss of that programming can change the brand identity.

"I can tell you what an HBO show is," says Watchmen showrunner Damon Lindelof, who has a joint deal with Warner Bros. TV, about one of the benefits that a legacy business has in streaming the wars. "What is a Netflix show versus a Hulu show versus an Amazon show? I can't answer that question. "

Few analysts expect Netflix's subscriber base to hit when consumers have more options, but they predict that people will be more likely to switch subscriptions on and off based on what they want to see." If you want to interrupt HBO and Showtime in a linear fashion, you spend an hour on Sunday calling your cable provider, "Nathanson says." Now churn is just a click away. "

All this competition has also had a less publicized effect : It makes Netflix executives more poachable – Fully trained in the ways to work for a streamer, they are desirable candidates for top jobs in upcoming services – although it is difficult to match the soaring wages that Netflix has used to entice executives in recent years Disney + recently recruited two such executives, including Matt Brodlie, who focused on YA acquisitions such as To All the Boys & # 39; m Loved Before .

Netflix is ​​proud of that transp arent, decentralized corporate culture it has created, and executives credit employees' freedom for their ability to move fast and grow so quickly. But that environment has also been tested when Netflix ballooned to 7,100 employees by the end of 2018. The company's quarterly two-day management meetings have grown so large – between 600 and 800 employees – that only a few spaces can hold them, often Langham Hotel in Pasadena (although it was an event in July that the staff were flying to Iceland). For creative partners, the large number of development leaders has made it a challenge to know who to call with a hot show. A creative partner did not have a strong vp clear answer when asked how to put a specific project to the company.

These agency collections in ours were to address such issues. But one participant said he went away more confused than before: "I didn't get a great understanding of the Netflix mission other than world domination."

Lesley Goldberg contributed to this report.

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Netspeak

Efficiency (n.) Netflix & # 39; term for a show's cost-benefit analysis. There is a relationship between the project's budget and viewership, with more emphasis on new subscribers and those at risk of canceling the membership.

Keeper Test (n.) When leaders ask who they would fight to save. If you fail, you are given a generous ending and replaced with "a star."

Sunshining (v.) When a Netflix employee acknowledges a mistake or explains his decisions in front of colleagues in an attempt to be transparent.

One : One (n.) The way Netflixers refers to a one-on-one meeting. Employees organize the days around these frequent check-ins.

360 Review (n.) Employees go through colleagues – including their bosses – through a non-anonymous software tool called 360. There are even "real" 360 reviews where a team will go around the table at a meal and give feedback on everyone else.

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A version of this story first appeared in the August 7 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.


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