Netflix’s $1 billion deal with Sony to acquire the exclusive licensing rights to its films starting in 2022 after they leave theaters — including those in the Spider-Man universe — is a sizable win for the world’s biggest streaming platform, but it’s an even bigger loss for Starz.
Sony currently makes up roughly 25% of Starz’s overall licensed film library, according to data obtained by IGN. While we can assume Starz is not going to lose all of its Sony movies, the list does speak to how much the company relies on its existing relationship with Sony to keep a robust library — even as Sony has licensed some of its other titles to streaming platforms like Netflix for years.
IGN has learned that Starz walked away from the Sony deal as part of an internal strategic decision that valued the multi-year Lionsgate deal announced in March more than Sony. This means films like John Wick, Eli Roth’s Borderlands, and future installments of the Saw franchise will go exclusively to Starz, a streaming service owned by Lionsgate. Part of the decision came down to Starz’s “Take The Lead” commitment, which focuses on stories told by and for women, as well as other underrepresented audiences, IGN has also learned. Internally, executives believed that the Lionsgate deal was a better value proposition for its target audience.
The question all comes down to what audiences demand more. In 2019, Sony’s films generated more than $3.5 billion at the global box office and included franchise blockbusters (Spider-Man: Far From Home) and Jumanji: The Next Level, as well as Oscar winning films like Little Women. Lionsgate’s films that same year generated less than half of that figure, coming in at just under $1.3 billion. More importantly, the Sony films that are available on Starz generated more than $10 billion at the global box office between 2006 (when Starz and Sony first signed a pay one deal) and 2020.
This is key. The streaming service has 14.6 million subscribers globally, with more than half of its total base coming from the streaming option, parent company Lionsgate announced during an earnings call in February. In the US, Starz’s streaming service has amassed 9.5 million subscribers.
A big part of why people might sign up for Starz’s streaming option is the number of licensed titles that are available from big studios like Sony. Box office performance for films can act as insight for audience demand on streaming services, and the importance of having an exclusive slate of movies. Or, to put it simply, box office data on top of streaming exclusivity helps explain why a company like Netflix would pay $1 billion. If the demand is high enough, having exclusive rights to first run movies could be worth more than just a percentage of the total library — it could ultimately become the difference between a customer signing up or not.
“We’re well on our way to our goal of 50 million to 60 million global subscribers by 2025. The vast majority of which will be high value streaming subs,” Lionsgate CEO Jon Feltheimer said, as reported by Next TV.
Sony is just the starting point. NBCUniversal is reportedly debating whether or not to pull its films from Netflix and HBO Max, and foregoing inking licensing deals with companies like Disney, Netflix, and WarnerMedia in the future to keep big films for its own Peacock service. Fox films may move exclusively to Hulu, Disney+, and Star internationally as Disney tries to bolster its streaming offerings.
And this is the heart of a big story that we’ll see play out within the industry over the next few years. How much do companies trying to turn their new streaming services into profitable sources of revenue value owning exclusive, high profile content versus how much do they need those important $1 billion-plus deals? There are three important questions that executives need to answer:
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Does the library being offered command a higher price than streaming is going to bring in over that same period even with the catalog?
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Does it weaken a competitor?
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Does using that revenue free up budget to pursue other bets that could bring in more subscribers? Alternatively, for a company like Netflix or Amazon Prime Video, does having big, theatrical films help with overall retention?
A paycheck is difficult to give up
The Sony/Netflix deal makes a ton of sense from every perspective. Unlike every other major studio that belongs to a larger conglomerate, Sony doesn’t have streaming ambitions. Instead, Sony just wants to act as a content arms dealer, as noted by strategist Entertainment Strategy Guy. Sony executives’ only concern is generating the biggest deal possible, no matter who bids. This allows Sony to command the highest price possible because there are multiple bidders interested in trying to build up their own libraries.
Risk almost always falls upon the buyer. The seller ends up with a check regardless of how well those films perform for the streaming service (or, once upon a time, the cable channel) they land on. Netflix is assuming that having Sony’s films will either increase the number of subscribers on its platform, prevent customers from canceling, or own people’s attention, or some combination of the three. If Netflix can stop consumers from spending more time on Disney+, Peacock, HBO Max, or even TikTok and YouTube, it’s a win.
Think of Avengers: Endgame, or movies like Moana and Frozen II. Each week, these films appear on Nielsen’s top 10 films list for streaming services in the United States. Acknowledging Nielsen restrictions (HBO Max and Peacock aren’t included, and mobile viewing still isn’t accounted for), these are movies that week after week command millions of watches. Until a few years ago, those views would have counted toward Netflix. Disney ended its deal with Netflix early upon deciding that having its films exclusively on Disney+ made more sense.
Disney took a massive hit ending the deal early, but has since grown Disney+ to more than 100 million subscribers globally. Executives decided that their library was worth more as an exclusive offer for their new streaming service than taking in close to $1 billion from Netflix over a set number of years. ViacomCBS, owners of Paramount+, are operating on a hybrid model. Some films are licensed out to other companies, but others will live exclusively on Paramount+ after they’ve left theaters.
NBCUniversal, for example, can demand a higher premium than years prior where Netflix and Hulu were the only real streaming competitors looking to bite into cable’s apple. If parent company Comcast and NBCUniversal executives decide they want to be a content arms dealer, like Sony, then continuing a relationship with Netflix and HBO makes sense.
Strengthen one company, weaken another
When Netflix executives agreed to pay $1 billion over the course of five years for access to Sony’s movies, it wasn’t just paying to take those films (including a few streaming exclusives) away from Starz and beef up its own offering. Netflix also ensured those movies wouldn’t appear on Hulu, HBO Max, Peacock, Amazon Prime Video, and potentially Apple TV+.
If the bets paid off, not only will Netflix command more attention, decrease churn, and potentially increase its overall subscriber numbers, but customers may actually cancel their Hulu or HBO Max subscriptions in the process. Netflix wins two times over.
To try and better understand what’s really a competitor and what isn’t, we have to break the various streaming services into more distinct categories: premium, niche, supplementary, and free.
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Premium: Netflix, Disney+, Paramount+, and HBO Max
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Niche: Crunchyroll or Discovery+
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Supplementary: Apple TV+ or Amazon Prime Video
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Free, ad-supported: PlutoTV and IMDb TV.
Metrics for success change with each tier, even if the overall goal is the same. A niche platform like Crunchyroll or Discovery+ doesn’t need to have Universal or Sony’s movies right after they leave theaters. They’re appealing to a very specific audience, who will subscribe and pay each month for content that isn’t a new action or comedy movie.
Free platforms like PlutoTV and IMDb TV might want those movies, but their entire business strategy is based around leveraging older content people want to re-watch, bookending it with advertisements, and offering it for no cost. It’s not worth spending $1 billion in either category.
Supplementary services are add-ons to bigger selling points. Apple wants to sell you an Apple TV+ subscription in hopes that you’ll join their bigger services bundle (Apple Arcade, Apple News+, Apple Fitness+), which is just a way to ensure customer’s upgrade to an iPhone or iPad instead of a competitor. Alternatively, Apple is hoping that if customers use Apple products for any reason — maybe you love iMessage and use Apple Music and Apple Arcade), TV+ may be another add-on that cements your loyalty.
Amazon Prime Video is a benefit for Amazon Prime customers. These companies have the advantage of seemingly unlimited cash, with each touting hundreds of billions of dollars on hand. They can afford to buy it and, for a streaming service like Amazon Prime Video, having that library might be worth the spend. The formula then comes down to how much licensing that library will keep people within the Apple or Amazon ecosystem — can they accomplish the same goal for less?
Finally, and most importantly, is premium streaming services. Their entire business is based on having a continuously growing slate of original titles and fan favorites to help their customers justify spending $10 to $15 a month. For Amazon, not having Sony movies like Spider-Man might suck, but people still need toilet paper; Amazon Prime growth continues. For Netflix, facing a wave of new competition and slowed growth in the United States, and looking for movies that people will re-watch, $1 billion for Sony’s films that show clear interest from box office performance is a no-brainer.
The streaming landscape ultimately boils down to who commands the most attention at the fairest price. For $14 a month, Netflix is going to offer a slate of original series, library titles, and a barrage of top Sony films. That may be a better deal for some customers than HBO Max at $15 or Paramount+ for $10 a month. Netflix bolsters its offering, and just so happens to weaken its competitors.
One tough judgment call
Ultimately, the final decision comes down to whether or not signing that deal and pocketing that revenue frees up budget to pursue other bets that could bring in more subscribers for growing services.
Nearly 60% of Netflix’s revenues are consumed by “content costs,” analytical firm MoffettNathanson found; Netflix is also profitable, and on path to be debt-free by the end of 2021. Effectively, Netflix executives can point to the content spend as working up until now. There’s no question that Netflix has an expansive line of originals, just as there’s no question that Netflix is focused on developing more originals to one day create its own deep library.
As strategist and venture capitalist Matthew Ball notes, spending more doesn’t always equal more hits and wins. What Netflix does not have is a slate of new theatrical blockbusters grossing upwards of $1 billion at the box office. This is, however, what companies like WarnerMedia and NBCUniversal have. What NBCUniversal and WarnerMedia need is a freed-up budget to pursue new originals or more elaborate spinoffs of certified hit makers (Game of Thrones, Fast and Furious, Harry Potter).
Pocketing an extra $1 billion for a few years and investing in new franchises or finding new works to adapt that could take off and bring in subscribers, with those movies eventually coming back to HBO Max and Peacock if WarnerMedia and NBCUniversal want, is potentially the best move for these companies coming out of the pandemic.
If big titles attract subscribers and libraries retain them, the most important question executives at WarnerMedia, NBCUniversal, and ViacomCBS will have to answer is whether or not they can hold out for a few years during a key growth moment. WarnerMedia has made it clear that having big films on HBO Max is a quintessential part of the strategy. NBCUniversal, again, less so.
All this amounts to a pretty interesting next couple of years as deals are made and strategies are cemented; it also means that sites like JustWatch are going to become instrumental in keeping up with where everything lands. Nothing is certain yet.
Julia Alexander is IGN’s top streaming editor. Have a story tip? DM her on Twitter @loudmouthjulia or request her Signal number by emailing julia_alexander@ziffdavis.com.