When Disney CEO Robert Iger announced August 8 that he would withdraw the studio’s content from Netflix to launch streaming sites for Disney product as well as for ESPN, Netflix chief content officer Ted Sarandos barely dignified the move with a shrug. “I’m only surprised that it took them so long,” Sarandos said at the August 13 Sundance Next Fest Vanguard Awards honoring Dee Rees, writer-director of “Mudbound,” which he bought at Sundance 2017 for $12.5 million and marked the festival’s biggest sale.
Cocky? Sure, but the next day he proved to already be a step ahead: News broke that Netflix lured ABC crown jewel Shonda Rhimes to leave her television home of 15 years for an exclusive deal, giving her the freedom to make content of any length without the onerous creative and schedule restraints demanded by ad-driven networks.
Enlightenment was slow in coming, but it has dawned on Hollywood that little disruptor Netflix is bent on world domination. With 104 million global subscribers and 193 other markets around the world, Netflix is no longer viewed primarily as a source of licensing revenue; it’s direct and fierce competition, with an open wallet for content and talent.
Netflix has darted ahead of the slow-moving studio behemoths still hanging onto a rickety economic model. Disney is the first studio out of the gate because it boasts must-consume content from “Star Wars” and Pixar and Marvel and can afford to challenge the status quo. Others are obliged to surely follow.
Netflix has proved — as Steve Jobs did at Apple — that breaking the rules can wreak powerful change. And it’s pushing aggressively to make Netflix a habit that its subscribers will never break. Here’s how it continues to beat Hollywood at its own game.
Overspending. Netflix has allocated $6 billion this year to produce must-watch original content, making offers to talent that no traditional studio can afford. (That’s partly because they estimate and buy out future revenue streams in advance, so there’s no royalties or backend deals.) Ask Sarandos why Netflix spends so much when it doesn’t have to, and his reply is designed to inspire heartburn: “To make them comfortable, to come out whole,” he said. Who can compete with that?
Netflix has come a long way since network execs made a habit of telling Sarandos that he didn’t know how television works. “I wasn’t trying to get people to come back week after week,” he recalled in an interview at his airy new Sunset Studios office overlooking the Hollywood sign. “There was also a theory that if movies were on DVD the same day they were in theaters, they would be empty. I don’t believe that’s true, because people want to go out and have a differentiated experience. And if it is true, then everybody should be putting movies out on DVD immediately. In what other business do you know what the consumer wants and refuse to give it to them? In what other business has that ever worked?”
Added Sarandos, “If you lean into the customer, you will win every time. They’re telling us they don’t want to wait week after week for advertising.”
Sarandos is glad Netflix has spent its way to get ahead of the pack. The company admits to carrying $5 billion in long-term debt — an LA Times story on their $20 billion cash outlay conflated debt with content obligations — and boasts a $70 billion market cap; that’s low debt to equity for any industry player.
Hacking the Oscar business. “Mudbound” marks Netflix’s next Hollywood frontier — disrupting the movie business, as the streaming service seeks to hack some Oscar nominations without playing its day-and-date movies in theaters for more than a week. (Netflix has pacted with iPics, a luxury theater chain in 16 cities, to book its one-week runs.) The theatrical run isn’t necessarily for the audience; it’s to keep filmmakers happy, and for Oscar qualification. (Noah Baumbach declared at Cannes that he intended “The Meyerowitz Stories” for theatrical consumption.) The award is still the ultimate benchmark of quality, and a useful global marketing tool for this cinephile voting member of the Academy who has twice run for the Board of Governors. (The executive branch denied him.)
But many in Hollywood wish Netflix would recognize its proper domain as television, and stay away from movies and any pretense at theatrical distribution. So far, Netflix’s Oscar success has been limited to the documentary realm (“White Helmet” won the 2017 Oscar for Best Documentary Short). It remains to be seen if Netflix can successfully turn its would-be Oscar contenders into must-sees for Academy voters.
They have no investment in the status quo. In 1999, Sarandos was a vice president of product and merchandising for Video City/West Coast Video when Netflix CEO Reed Hastings asked to meet him; he’d read a trade interview about Sarandos’ then-groundbreaking revenue-sharing deals with Warner Bros. and Sony. “It turned into a pretty unbelievable first encounter,” said Sarandos.
The executive and his new boss both shared a “kind of contrarian thinking of being able or willing to challenge the status quo,” Sarandos said, “and just say, ‘Look, if the only reason you do things is because that’s the way you do them, that’s not good enough.'”
At the time, Netflix was a DVD-by-mail business with less than 100,000 subscribers; Netflix did not have a direct relationship with studios and bought DVDs from Costco and Best Buy. “We were burning through cash like crazy because we had to keep buying inventory to keep up with the growth of the business,” Sarandos said.
Back when the studios argued with exhibitors about who should pay to install digital hardware, Hastings and Sarandos agreed that they needed to focus on “how to match audiences to movies.”