The sheer volume of Netflix deals with content companies these days makes any single accord easy to overlook, but the pact announced Thursday for programming from the CW is more for all involved than just another licensing arrangement.
For Time Warner, which splits ownership of the CW with CBS Corp., it’s a major entry into a rapidly evolving new supplement to the traditional syndication marketplace for its Warner Bros. TV unit. TW and CBS Corp. also buy themselves a potential marketing boost for the CW, not to mention some insulation from the financial woes for a joint venture that has struggled to be profitable since its inception.
For Netflix, this TV show agreement is unusually broad as it amounts to an exclusive output deal covering current and future CBS and Warner Bros. TV-produced series for CW. The deal does not give Netflix access to episodes from the current season; all shows will be available to CW on a one-season delay. The license term gives Netflix long-term access to the episodes that extends for a period of four years after each series ends its run on the net.
Analysts estimate the deal could be worth $1 billion, an expensive but necessary outlay from Netflix as it looks to put both a series of ill-conceived strategic moves and new competition behind it. Wall Street’s response to the deal was generally positive, but Netflix’s stock price was little changed on the news, climbing 3% to close at $117.01 on Thursday.
The pact gives Netflix more than 700 hours of programming but poses no threat to the network’s online strategy of airing new shows on CWTV.com three days after the on-air broadcast. The programs are exclusive to Netflix in the subscription VOD marketplace, but the studios retain the rights to sell the shows via traditional syndication, electronic sell-through services and, on a partial-season basis, through cable/satellite VOD services.
Programming will include the eight dramas on the CW’s fall 2011 schedule, including new series “Ringer,” “Hart of Dixie” and “The Secret Circle”‘ returning skeins “The Vampire Diaries,” “Gossip Girl,” “90210,” “Supernatural” and “Nikita”; and midseason series “One Tree Hill.” Deal covers any past and future series that bow through the 2014-15 season after the one-season delay.
The per-episode cost of the more successful, long-running series under the deal will fetch a license fee in the $700,000 range, while the less-proven shows will start out with a fee estimated in the low six figures, according to sources. Those fees are far higher than the studios could command for the shows in the traditional syndication market, because the youth-skewing serialized shows favored by Netflix typically don’t perform well in reruns. But the Netflix aud generally flocks to niche-oriented shows, particularly those that lend themselves to binge viewing of multiple episodes in one sitting.
While the Lionsgate deal earlier this year for “Mad Men” is said to have had a pricier per-episode total, that deal didn’t cover an entire slate of shows nor account for programming yet to be produced.
“We took what Lionsgate did with ‘Mad Men’ to the next level,” said Bruce Rosenblum, prexy of Warner Bros. TV Group.
The prospect of a deal with any Time Warner-owned property might have seemed unlikely less than a year ago given the jabs CEO Jeff Bewkes was throwing Netflix’s way on the competitive threat it posed. But that thinking has dissipated particularly in the second quarter of the year as content companies have hailed the subscription VOD category for delivering newfound profits that don’t cannibalize library assets as long as the shows are properly windowed.
“Time Warner has been criticized for lagging peers in collecting a Netflix check,” noted Barton Crockett, analyst with Lazard Capital Markets. “This deal narrows that gap.”
While Netflix and Warner Bros. have a previous deal of smaller scale that covered series including FX series “Nip/Tuck,” this accord was more complex. Netflix, WB and CBS negotiated for 14 months to reach this deal, and the package of shows was shopped to the two other key players in the emerging subscription VOD market, Amazon and Hulu, according to sources.
The CW’s deepening struggles may have been incentive enough for WBTV, while at Netflix, there’s increasing urgency to bolster the content supply in its streaming library at a time when the service is facing a serious backlash from subscribers over a price increase and an aborted segregation of its DVD and digital operations. Netflix has been on a tear as of late on the content side, announcing deals with DreamWorks Animation, Discovery and AMC in recent weeks.
Rosenblum declined to specify a time frame but explained that the studio made a calculated decision to sit back and let rival congloms go first.
“What we discovered was there wasn’t a first-mover advantage to licensing into these platforms,” he said. “While we didn’t move quickly, we kept our powder dry until the marketplace matured. Now we have a vast library of content that is meaningfully more valuable now than it was three years go because of increased distribution opportunities.”
Those opportunities include other entrants into the SVOD category including Hulu Plus and Amazon. While most Netflix licensing deals are on a nonexclusive basis, there are going to be more exceptions made as the company seeks to put more distance on would-be rivals.
CW fare is newly attractive to this new generation of buyers in the SVOD window because its style of serialized drama, with a narrow demographic target that has made its programming a challenging sell to TV stations and cable networks, is much more conducive to the on-demand environment, where episodes are more easily digestible in binge viewing patterns than weekday stripping.
The deal serves as a big band-aid for the CW, which has been a loss leader investment for both CBS and Warner Bros. since its launch in 2006. With the network’s primetime schedule down over 30% in ratings for the 18-49 demo season to date, Netflix represents an infusion that can offset shortfalls in the network’s primary revenue streams.
Michael Morris, analyst with Davenport & Co., estimates that this Netflix deal could reduce the losses the CW delivers to its owners by approximately $40 million.
No retrans issues
CW also doesn’t have to be as protective of its programming as the Big Four broadcasters because unlike them, it doesn’t get retransmission fees that would incentivize it to keep that programming around for TV Everywhere initiatives.
Previous seasons of “Vampire,” “Gossip,” “Tree” and “Nikita” will be available to watch beginning Saturday, with previous seasons of “Supernatural” and “90210” beginning in January. Episodes of all scripted series airing on the CW this broadcast season will premiere for Net-flix members in fall 2012.
The deal covers all CBS- and Warner Bros.-produced shows for CW — those studios are the only ones currently producing scripted skeins for CW — but it would not automatically cover a scripted project from an outside studio.
(Cynthia Littleton and Jill Goldsmith contributed to this report.)