THB #167: The Sagansky Thing...

Jeff Sagansky (former President of CBS, Sony Pictures, and Paxson Communications) riled people up with his NATPE speech last week.

Let me simplify it for you. He doesn’t like the buy-out system that Netflix pioneered when they started making their own shows and has now become a new normal. The system has, with variations, expanded out to almost every other streaming company… which is now, pretty much, Netflix and every full-service legacy media company but Sony.

He feels, correctly, that the major financial upside for producers, along with the risk, has been eliminated by this system.

Quote: “This should be the greatest time in the history of our business to be a producer, (but) in my 47 years in our business I don’t think there is a more rotten time to be a producer in terms of being paid fairly for the work you are doing…. We are in a golden age of content production and the dark age of creative profit sharing.”

True. Can’t argue.

Except… remember the “along with the risk” mention a couple graphs ago?

“Creative profit sharing” was also non-creative loss avoidance by the network side.

For the 3 decades (and more) before the Netflix Buy-Out plan, there was a load of risk. For every single show that went to pilot and then, to series. Even most running series operated at a deficit, anticipating the hope of making money in syndication, domestically and worldwide. Only the superhits got to the point where the networks were paying more than the cost of production, usually after Season 4 or 5.

Sagansky goes on to compare the Buy-Out System to the moment just before Fin-Syn was enacted. (Fin-Syn, basically, disallowed networks - the almost-exclusive content buyers at that time - from making a majority of shows themselves, forcing them to be reasonable with outside productions in order to fill their weekly needs in prime time.)

But that is kinda bullshit, really. It is true that Netflix and the rest are closely controlling (financially, for the sake of this discussion) both the means of distribution and the content itself. And this is an increasingly normal behavior. And the government is looking the other way.

But the difference here is that back in the pre-Fin-Syn and Fin-Syn days, there was an established, profitable revenue structure in place and the network owners were finding new ways to expand on that profitability.

This situation is much worse. Much.

Streamers are not yet profitable (or consistently profitable, in Netflix’s case). There are no profits to share.

And I am not talking about the accounting tricks that studios have used forever to screw profit participants.

When the streamers do become profitable - and even now, to a degree - there is no way of assigning cash value to any one program on any subscription streamer. Ad sales are not involved to be the measure.

Keep in mind, before streaming, some shows got more in ads because of the specific audience they reached… even that wasn’t an even playing field in terms of how the overall number of eyeballs were valued.

Not only would streamers need to expose the numbers of any given show to the producers… they would need to expose ALL the number from ALL the shows, because in a subscription environment, the popularity of any one show in any period may or may not have a direct effect on subscriptions being added or kept. And that is where all the money is.

And unlike the days of broadcast yore, there is no clear, measurable future for any of the series. No question, Squid Game 2 will be a very, very popular show for Netflix. But will there be new subs? Will they stay with the service if they sign up for that binge? Or is Cocomelon, some Adam Sandler comedy, and some soft core porn from a swarthy country just as important as that Squid buzz to keep that consumer?

None of us know. And Netflix doesn’t really know.

Again… Sagansky is not wrong within his context. And other questions he brings up, like where the unions are in protecting their members… legit. Netflix has been playing possum in some kind of cahoots with content makers and distributors for most of their operational life. Remember when the WGA and SAG were sold a bill of goods about how there was no money in streaming and then, 6 months later, Netflix started making deals for content at $100 million a year per production company? Hmmmm…

But there is also this thing…

Buy-Out has created a massive boom in production at the same time when content ownership has proven, in the cases of most of the most valuable library content, not to be a clear line to control of the content. If a streamer is paying “fair price” for Friends or Seinfeld or The Office or whatever, they have an advantage from the start of negotiations… but they are paying massively for their “own” content. With pre-Buy-Out content, owning it is not an assurance that you can distribute it.

The Buy-Out system fixes that problem moving forward. So spending on new content like drunken sailors feels safer because if you get your percentage of legit hits, you own them forever and you win, in theory… except for the 90% of content that sinks to the bottom of the digital sea.

It’s not all lollypops.

So from the producer/talent perspective, no one is getting rich like they used to (or poor like they used to), but 3x as many people are working and everyone is getting paid reasonably. Well-funded Communism comes to Hollywood and a lot of people are happy to embrace it.

The content gold rush was never going to last for more than a few years. At some point, the journey to building subscriber bases was sure to give way to the need to show some profitability. But now, with Netflix’s fairy wings being clipped by Wall Street, the dip has accelerated… kinda… maybe…

But if Sagansky got his way in a hurry - and we will see more companies playing by old rules moving forward, including Netflix on some deals - it would constipate Hollywood production instantly.

Sad as I am for Sagansky and his ambitions…. I can’t say I have an absolute opinion on this. For him to win more, others will have to lose. If I am familiar with anything, it is the unexpected consequences of this industry moving in a direction of which it is absolutely sure.

Rarely pretty.

Finally…

There is only so much money.

This is what people forget - media, Wall St, the risk-takers - when dealing with new technologies and especially with streaming.

There are only so many hours.

It’s a giant pot of money… make no mistake. Hundreds of billions a year.

But there isn’t more than an incremental amount of MORE money. The money just moves around.

Likewise, there are still only so many hours in a day. 50-60 hours a week of televised consumption. Chop it up as you like.

When cable landed in the 70s, people adjusted their household budgets to add it. But it was also being controlled by the government and pricing was reasonable.

VHS was primarily a rental business in its first 20 years, until DVD arrived and was primarily a sell-thru business. But the amount of money to buy in was still modest.

The price of keeping popular channels on your cable system flipped on the cable industry and the prices there started growing, frustrating consumers. But the ever-growing prices were incremental.

The DVD business lasted 4 amazing years as a massive cash cow… a muscular tail wagging the dog. But as Netflix created the subscription model and people’s shelves filled with unopened discs, the momentum died and died fast.

Then, Netflix started the streaming model, but like it’s DVD model, the $10 a month number and the feeling that you got access to everything for that $10 was a big winner and households added it to their month budget. But it was just $10.

As you look back at all of that, the amount of cash money running through all of these operations, including the channels (b’cast and cable), pretty much stayed the same. This is why Wall Street has never really been in love with the filmed entertainment business.

There have been winners and losers. Cool kid companies and flailing nerds. But what hasn’t happened is the childish thinking of many on Wall Street (Hi, Rich). It is not a bottomless pit of money. There are not an endless number of households willing to pay even $10.

As I have written repeatedly, the only real upside for legacy companies in streaming - which is most of the companies - is international subscriptions generating more money than these companies made licensing non-domestic territories individually.

To my eye, cable companies will eventually fall as wi-fi improves worldwide. The technology is the horse… streaming is the cart. That former cable money will reassert itself in the streaming market. But no one can be sure when that will actually happen. As a result, someone will get a big benefit out of timing just because that is where the chips fall. But mostly, the entire eco-system, of home entertainment will start to really express itself fully at that point in ways we can only guess at now. Could be 5 years… could be 10.

And international is hard. Very, very hard.

Honestly, it would be really good for the industry to be as collusive as Sagansky suggests. Reset 75% of the whole thing and then let the players fight it out for the last 25%.

Right now, we are seeing over-caution and wild swings in equal measure, though the Netflix stock drop over the waterfall has slowed the wild swings for the moment.

So yeah… Sagansky is right… it’s not as fun to be him as it was 5 years ago.

But we are in the Noah’s Arc era of filmed entertainment. It’s not going to be a luxury cruise for most of the passengers. And we will get to land… but no one really knows when. Advocate away. Roll those dice.

Until tomorrow…