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streaming strife

FX, Turner, and Netflix Face Off in a Battle of the Binge

Let’s say that your friends have become increasingly obsessed with a new TV show that’s already on episode eleven of a thirteen-episode season. You finally realize that you are missing out on something great and want to quickly catch up in time for the finale … but you’re out of luck. Most networks only have rights to stream the last five episodes of their series on their websites and VOD, and Netflix usually doesn’t post the whole season until a few weeks before the next season begins. But Vulture has learned that a couple of cable’s biggest programming powerhouses, FX and Turner, are fighting back on this industry standard, telling TV studios that they will not buy any new show unless it comes with the right to keep streaming every episode in a current season until it ends. Netflix has made its position on the issue clear: If studios give into these demands, the service could dramatically cut the price it pays for streaming rights, potentially denying producers millions of dollars in revenue. A battle of the binge is brewing.

Before getting into the clash, a quick lesson is in order for how streaming has changed the traditional economics of TV production. When a network picks up a show, it doesn’t own it; it essentially leases the episodes of a season for a pre-determined window (usually one year) from the studios that make them. Because the networks are renting and not buying, they usually pay around 60 percent of production costs and make their money back (and, presumably, a profit) by selling ad time. Studios try to recoup their 40 percent outlay via international sales or syndicating reruns. But in recent years, both sides of this financial equation have come under attack.

At the networks, ad revenue has been squeezed by the rise of time-shifting and other alternative means of watching shows. While networks love to tout how many viewers are watching a show a week after it airs (so-called "L+7" ratings), advertisers only pay for viewers who watch commercials, and then only if they watch within three days of an initial telecast (C3 ratings, in industry parlance). According to a senior cable network executive, it's not unheard of for that C3 number to be anywhere from 35 to 45 percent below the L+7. "That means we're losing [35 to 45 percent] of our ad revenue," says the suit.

Meanwhile, studios have been feeling the pain because syndication deals, while still a big part of their profit formula, are not nearly as reliable or lucrative as they might have been even five years ago. Some cable networks, like TNT, that used to rely on reruns of old network dramas have diverted more resources to creating their own scripted hours. And with comedy, some networks are finding it more cost-effective to create 100 episodes of a show on the cheap (like FX's Anger Management) rather than pay big bucks for a modestly rated network sitcom.

This is where Netflix comes in. At about the same time networks and studios were coming to grips with the respective threats to their business models, Netflix — facing the end of some of its movie rights deals — began a major push to add more TV series to its service, offering to pay top dollar to studios. In 2011, it worked out a deal with Warner Bros. TV and CBS Studios to funnel an estimated $1 billion over several years to the studios in exchange for the right to stream the shows they produced for the CW. The studios behind AMC's Breaking Bad and Mad Men also struck lucrative agreements with Netflix. Netflix is now paying as much as $750,000 per episode for top shows, a sum that can make the difference between profit and loss for a show. "It's put pure heroin into the veins of studio executives," a veteran industry insider tells Vulture, adding that Netflix money "has become the de facto domestic syndication window" for a number of shows.

For studios and Netflix, the benefits are clear: The program suppliers have found a new, reliable source of income, while the streaming giant gets premium content that it can use to drive subscription growth. (It's working: This week Netflix announced it added another 1.3 million customers over the summer, giving it more subscribers than HBO.) Many observers argue that the hundreds of millions Netflix is paying to acquire shows from studios is helping to fuel a surge in original scripted programming, since the Neflix money makes taking a chance less risky. Much has also been made about how Netflix is good for networks, too: Ratings surges for Breaking Bad, Scandal, and other shows have been linked to late adopters getting hooked via Netflix.

But FX and Turner don't believe it's win-win-win, which is why they want streaming and VOD rights to the entire current seasons of their series, not just the last five episodes. The main argument: that the incomplete set hampers a network’s chances of turning latecomers into regular viewers in a first season. "Unless you have the whole season up, you're not really letting viewers come into a series," our veteran industry insider says. What's more, unlike Netflix, networks sell unskippable advertising for their own streaming and VOD channels; the more episodes, the more potential ad revenue, and for a longer period. "They want people to be able to watch full episodes any time within a season, with commercials," the insider adds. Right now, industry execs admit the additional ad revenue doesn't amount to much. "But this is about the future," says the senior cable executive. "It's about finding a way to make the current system more viable as non-linear consumption becomes more and more important."

Studios, however, are balking — at least for now — at letting networks pile up all episodes of a season on streaming and VOD, or “stacking,” as it's called in the industry. Studio execs say Netflix has made it clear that it will pay significantly less for streaming rights to stacked shows.  This, even though the networks say they only want to stack current seasons of a show for a window that wouldn't even overlap with when Netflix takes it over. (FX, for instance, is looking to run a season online and on VOD until 30 days after the finale.) These executives say Netflix brass have said they believe that any expanded online exposure of a season makes it less special when it finally goes live with them. Last month, the streaming giant's chief content officer Ted Sarandos all but confirmed this to The Wall Street Journal, saying, "The less exploited shows are through on-demand services, the more valuable they are to us." The amount Netflix penalizes producers for stacked shows varies widely: In some cases, it might go as high as only paying half as much as it otherwise would for a show that's been stacked, but one person familiar with Netflix deals says that the penalty is frequently about 20 percent per episode. That means if a thirteen-episode unstacked drama fetches $500,000 per episode from Netflix, a studio could lose out on $1.3 million for the season in Netflix revenue if the network is given full-season streaming and VOD rights. A studio exec who has previously worked on the network side was incredulous at the FX/TNT demands: "Why would we do a show with them when we're limiting our upside?" he says. 

In conversations with studio execs, Landgraf has been very clear about why he thinks studios need to be willing to walk away from the extra Netflix dough: survival. The FX exec is not anti-Netflix: Many of his shows, like Louie and Sons of Anarchy, thrive on the service. But multiple industry sources who've heard Landgraf's take say the FX chief believes that networks and studios need to work together to preserve as much of the current advertiser-supported entertainment ecosystem as possible rather than blindly chase a few extra digital dollars. With neither Amazon nor Hulu yet able to prove an effective streaming competitor, the fear is that Netflix is becoming too much of a monopoly, one building its brand on the back of cable and broadcast network programming it snapped up for a relative pittance (compared to the millions spent to produce and market the shows). "He's worried Ted [Sarandos, Netflix's content chief] is going to destroy the business," a studio executive who's heard Landgraf's pitch says. Some also suggest the networks' new tough line may be related, at least in part, to jealousy over  Netflix's sudden transformation into an original programming player with shows such as House of Cards and Orange Is the New Black.  

Landgraf and the Turner execs may not only be girding for this fight for themselves: At least two industry executives Vulture spoke with for this story suggested that this battle is actually being waged on behalf of the cable and satellite companies that distribute these networks. After all, Netflix has been seen as something of an existential threat to the TimeWarner Cables and DirectTVs of the world since it offers a ton of content for a fraction of their price. In response, cable companies have been demanding networks make as much of their content as possible available for their video on demand platforms to entice (or hold on to) subscribers. One of the big issues in the nasty spat between CBS and Time Warner Cable, which kept CBS and Showtime off Time Warner systems for more than a month, was Time Warner's desire for more on-demand content from CBS networks, as well as limits on how the Eye sold its content to platforms like Netflix. And earlier this year, when Fox and Comcast announced a new deal to keep Fox's networks on the cable system, Comcast issued a press release touting how full seasons of Fox and FX shows would now be available via its Xfinity service. "This is all about cable companies exerting enormous pressure on the networks … telling them, 'If you want your big carriage fees and your increased retransmission fees, we need to be able to offer all of your content everywhere, all the time,'" the veteran industry insider says.

Whatever the rationale, FX and Turner's push to land stacking rights for new series has already sunk some projects. Two sources familiar with the situation say that Turner's TNT and TBS "have walked away" from pilot deals because of differences over VOD. Likewise, I hear from two industry sources that FX has lost out on at least one potential pilot deal because of stacking demands, while another project is currently in limbo while FX and executives at the studio involved try to see if a compromise is possible. One studio executive, however, insisted to Vulture that FX will not be able to get stacking rights unless it agrees to make up for any lost Netflix revenue: "None of the big studios is going to go for this … they're going to have to pay for stacking if they want it," he says.

In the short term, all of the skirmishing among studios, networks, and Netflix probably won't have a negative impact on viewers, and might even have an upside. Viewers who don't subscribe to Netflix or don't want to wait until a series lands on the service may have more, and cheaper, viewing options to catch up. But it's also easy to see these battles playing out in a way that harms consumers. If, as Landgraf argues, Netflix poses a threat to the status quo, we could be headed toward a world where annoying advertisements are replaced by higher cable and broadband bills. Or perhaps the anger FX and TNT feel toward Netflix's strategy leads to networks and studios trying to weaken Netflix by putting more of their content on Amazon, Hulu Plus, or some as-yet-developed platform. It's also possible that all parties involved will come up with a way to make sense of TV's brave new world, and traditional networks and streaming services such as Netflix will come to the conclusion they can coexist while still making millions and millions of dollars every year. "There will be a solution," says the veteran executive who compared Netflix's money to heroin. "Just not today."