Netflix in Cannes: “It’s a Discounted Amount, but it’s Guaranteed”


On Friday, Netflix’s chief content officer Ted Sarandos gave a talk for the Marché du Film NEXT programme at the Cannes Film Festival to a rapt industry crowd including, in front-row seats, A-list supporters Jane Fonda and Harvey Weinstein.

The relaxed Sarandos came across as very earnest speaking of his own film fandom and long frustration about the under-distribution of feature documentaries. Growing up Phoenix, Arizona, the arthouse cinema that sometimes showed documentaries “for a weekend” was too far away.

“You would have had to taken the bus,” Sarandos said.

“As all Americans, you dislike public transport,” quipped one of the French moderators.

The atmosphere on the stage was friendly, but the room was more divided. Responses in the Q&A ranged from “Are you aware that your business model will ruin the film ecosystem in 5-10 years?” (this from a gentleman from the European Audiovisual Observatory) to “These guys are visionaries” (this from Weinstein).

Sarandos’s message was that Netflix’s ambitious original content strategy is good for the film industry at large and not very bad for any one else, except perhaps, and only sometimes, first-window theatrical.

This was received with a big lump of salt by European industry in particular, but in one way or another, elements of his session has been referenced in every talk or panel I have heard at the festival since. When Sarandos speaks, the industry may not always agree – but they certainly listen.

So, apparently, does the stock market. Netflix stock crossed the USD 600 line for the first time, in apparent response to the following vague comment: “We have no operating partners anywhere else… but if that’s the cost of doing business in China, we’ll figure it out”. And this: “…we expect to be fully global by the end of 2016.”

Below is my best attempt at a full recap, not always in the order things were covered in the room. I have pretty extensive notes, but I’m not a stenographer – if you have corrections, get in touch! My comments are italicised.


These Are Not TV Movies

A third of Netflix viewing today is film, two thirds is serialized television. Back when Netflix was a DVD rental service, 90% of the viewing was film. This could be seen as reflecting “a lessening of the importance of film” in the culture overall, Sarandos said.

If this is the case, it is probably at least as much a consequence of content relevance as of format.

“There are 300 films a year released in France alone. There are not enough screens or weekends to support them all”.

Netflix is stepping in as one alternative platform for film releases. It will have individual distribution strategies for all its features. For the Crouching Tiger, Hidden Dragon sequel, a collaboration with IMAX theatres was chosen.

“We wanted the consumer to know that these are not TV movies… It’s not just a movie, it’s a BIG movie.”

Many films on its feature film slate will be given a day-and-date relase. Others will not.

The word around Cannes is that Netflix only does theatrical releases for two reasons: to qualify for awards and/or because the film-maker has been in a position to demand a theatrical release. This may be an unfair assessment.

But what about the reluctance of filmmakers to release online only?

“I think for a certain generation of filmmaker, the story is written, in your head, to be played on big screen in a dark room with strangers. That’s what you want … When you say ‘Netflix only’, it’s really on us to make movies that are so great, theatre owners will also book them even though they are on Netflix. I think with the cinema experience, some of that is seeing the movie with people you don’t know, some of it’s the experience of just being able to see it …So on Friday night, if you want to go out on a date with your wife or your girlfriend, nothing on Netflix can compete with that, because you’re going out: that’s what you’re doing. If you don’t want to put your shoes on, nothing in the cinema can beat the worst thing on Netflix.”

“Nothing we are saying or doing is meant to be anti-theatre or anti-cinema…”

That said, especially the extreme French 36 month holdback between theatres and subscription services raised his ire.

“It doesn’t protect the cinema, it actually makes the cinema more irrelevant…  Because with that comes a huge discount in the television value of that film… With our original filmss, even if we make a day-and-date theatrical, we will not release in in cinemas in France … We don’t technically have to follow these rules, because we’re not a French company, but we choose to.”

To Sarandos, day-and-date is about “an expansion of choice”, which he thinks will make movies more profitable. Movie theatres might lose a little of the cake, but “in total the movie business will be bigger.”

The traditional industry’s stance on day-and-date is also changing, he said, saying that they must be looking very carefully at the Mayweather-Pacquiao price fight which the previous week pulled half a billion dollars in pay-per-view revenue in one day. Sarandos also mentioned The Interview, still a relevant  reference.

“That movie’s ultimates will be well over $100 million without a theatrical release… It was an exceptional film and an exceptional release, but still.”

It did screen on 200+ screens in the US, but as we wrote about in our 2015 report, he has a point.

“Everything about how we consume culture has been changed by the internet except first-window theatrical.”

The Most Efficient Content Dollar

Sarandos had said earlier that by 2014, their goal was for 20% of his budget to go into original productions. He now confirmed this number is representative of the current situation – perhaps even on the low side – but that depending on success, it could grow to 50 or 60% over time. When asked whether that would equal USD 5bn, he said “there is a spreadsheet that could give you that number” – but that it would, obviously, be relative to subscription revenue.

He apologised for “a bit of Silicon-Valleyese” in his choice of the word “efficient” in the context of art, but that “a dollar invested in original content is more efficient than licensed content”. A US output deal for a major studio will cost him roughly $1bn. “So for that same billion dollars I think that we could invest in a slate of original films that would be competitive in terms of A-list directors, A-list stars, big production value films, that we would have for the entire world, and not have to wait the 10-12 months, and hold my breath and hope the studios market it well and all those things.”

The range of movies in Netflix’s first lineup (from award-winning documentaries to a four-picture Adam Sandler deal) makes an editorial line hard to discern. But then Netflix is programming for 63 million people, Sarandos said. That’s a lot of different tastes.

The French Connection

“Grace & Frankie is an enormous success all over the world. What does a global TV show look like? It looks like Grace & Frankie. It looks like House of Cards. According to CNN, the most popular TV Show in China is House of Cards [it is available there on a legal TVOD service].”

Netflix is producing a Spanish language TV series in Mexico and a French language in France. Movies in local languages will come “soon”. In most of their markets only 10-20% of their viewing is local programming, but here too, dollar efficiency plays a role.

“If we go into Brazil, we wouldn’t want to license a novela that 80% of the population has already seen.”

Sarandos would not comment on the New York Times’ claim that the service has 500.000 subscribers in France. But his foreign audience is 20 million, he said. Interestingly, he added that among the US Netflix subscribers, one million watches content in French.

Netflix is not currently present in all markets, but since they are expecting to be by the end of 2016, they are retaining all rights for their first batch of feature films.

The Light Touch

Netflix buys a lot of finished films at market. But even when the content is commissioned by them, they try to work with “a light touch” and “an incredible amount of artistic freedom… The collaboration needs to be invited … We are an input to the filmmakers. At the end of the day, they’ll break the tie, if we have two conflicting views on a piece of creative.”

It’s not just Sarandos saying this: producers of shows like Lilyhammer and House of Cards, that I’ve heard in different contexts, do tend to wax lyrical about this artistic freedom.

Time is invested in getting everything right. “Sometimes a series might have 18 month development period after the deal is signed. For a film it’s typically 12 months.”

Selling To Netflix

So what about the money? The Netflix model is paying a lump sum up front. The sum is calculated based on what the filmmaker could reasonably make in another kind of release, and if I understood Sarandos correctly, for a medium budget film both the theatrical window, where P&A would be deducted anyway, and the DVD window, are valued at (or close to) zero.

“Many movies in the $10-12 million dollar range have a difficult time making a profit… and God help you if you’re an Oscar contender, because the awards budget is recouped against the revenue… We’ll pay you a premium on your budget… All producers who work with Netflix will make a profit… It’s a discounted amount for sure, but it’s guaranteed.”

For a small film with the potential to break out in cinemas, this is not necessarily a good model. Also, calculating likely profits is even more complex than before since the whole marketplace is in flux. If Netflix and others succeed in disrupting the traditional film distribution (NB: this would not necessarily be to the detriment of niche genres or drama) the yardstick of what the film “could have made” becomes increasingly irrelevant. But Netflix  is never going to compensate filmmakers based on ratings (see more on this below).

Most filmmakers are looking for three things, Sarandos observed: awards, audiences and impact. If Netflix can deliver on these, and guarantee an income, many filmmakers will – and perhaps should be – interested.

Productions budgets are on the feature film level.

For any film under the “Avatar, Titanic level” where you’d need a $60-70 million marketing budget, Sarandos says Netflix is potentially a contender.

The upcoming documentary What Happened, Ms Simone (which opened Sundance and Berlin) could not have funded if it needed to make money on its own – the music rights are just too expensive.

“But it’s a wonderful piece of art. And it is a film that tells a really important story of the role Nina Simone played not just with her musical history but with her role in the civil rights movement.”

“Projects reach us all kinds of unlikely ways,” Sarandos answered a question on how to pitch to Netflix. The old-fashioned system still works best: go through the agencies, just as you would with any studio. But the company is for instance also present at pitch sessions at festivals.

The Secret

Netflix does not release its ratings because “the ratings are so different from how ratings work in [broadcast television] … There’s no reason for us to run our apples-and-oranges number … I don’t know what end it serves except just curiosity.”

Premiere ratings are irrelevant for subscription-model OTT businesses. The important thing is for the content to be watched eventually.

“The economics are such that un the life of the license you want it to drive a big audience”.

This means films aren’t designed to titillate for an opening weekend.

“We want to make things that people will love and cherish over the long shelf life of a film or TV series… I also think the ratings system itself on TV has been very bad for the quality of television. Tracking these numbers has made people increasingly risk-averse, forcing people to yank things off the schedule because it didn’t do well in its first weeks out”.

Netflix also does not release ratings to filmmakers or producers, nor will it. Agents and many other people would soon be in the loop and then the numbers would be out. Also, click-based compensation models are absolutely not happening.

Defending projects from media coverage claiming, perhaps falsely, that they’ve performed under expectations is a reasonable wish. But the argument also seems more than a little disingenuous. Netflix has an enormous financial incentive not to release ratings to filmmakers who could leverage them in negotiations. Currently Netflix knows to a T whether a project makes a profit over its lifetime – but the filmmaker has no way of knowing whether the she could have made a better deal somewhere else, or should hold out for more the next time around.

Premium competitors like HBO do release ratings. Sarandos said they never should have.

“But I think they did it because they were proud [of the performance of The Sopranos] … We don’t want to get into an arms race against ourselves. Some shows that have had low ratings on HBO have been very important for HBO.”

Big Data Commissioning

Creative decisions at Netflix still seem to be made by humans rather than algorithms. Data is relevant to answer questions like how big a market for a project could be, or what genres Netflix needs more content for.

Sarandos used Adam Sandler as an example.

“He’s made 20 films in 20 years, and in every country, in every window, they do well.” This is why Netflix nabbed him for a four-movie deal (the films will not have theatrical releases). “But without the intuition what to look for, you wouldn’t find it [in the data].”

Building An Audience

The marketing campaign for Daredevil here in France had apparently been quite impressive; the interviewers asked how much Netflix invests in marketing. Some campaigns become very large scale, Sarandos explained, because they’re not just marketing the show, they’re marketing the service. The costs for the Daredevil campaign would have been on par with a major Hollywood film.

But typically, with Netflix, marketing budgets would grow as seasons progress.

“We are the opposite of Hollywood. We create the IP through the watching, and market the excitement for the sequel.”

The Controversy

So, should Netflix be forced to contribute to production in European markets? Things got a little heated during the Q&A but Sarandos’s position seems to be that Netflix complies with local regulations – implicitly: you go convince your lawmakers, then we’ll have this conversation. He did argue that Netflix, on the other hand, is also not taking one cent French tax money on its local project, while expanding the market for French talent.

Towards the end Harvey Weinstein got up an gave a paean to his friend and collaborator Sarandos. “We took less money to go with Ted [for an output deal] because they’re visionaries” who love movies and care about things like documentaries and independent cinema. An interesting tidbit from Weinstein was that the last foreign-language film sold to a US network was Z in 1970.


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