Netflix should try a cheaper model to pay creators

Minutes after Netflix reported its quarterly earnings last week, the entire entertainment business is having questions. Was these shares are soldoff really happening? What did this mean for the industry’s turn towards streaming? And, of course, this is Hollywood: Who was to blame?

Netflix, the great revolutionary whose algorithms and consumer-facing platform forced influential media activists to rethink their economic models, now appears to be in need of a major rethink in its strategy. The company lost 200,000 subscribers in the first three months of this year and expects to lose another two million in the current quarter. So now the technological Goliath and Wall Street darling is solving the same age-old problem that Hollywood has been wrestling with at least since the real Warner Brothers era: how to make mainstream movies and TV that its customers love, at scale and for a reasonable price.

It got me thinking about the simple idea that my Blumhouse film and TV company is built on: if you give artists a lot of creative freedom and some money up front, but a big share of the commercial success of a movie or TV show, more often than not the result will be both commercial (directors are interested). in making films that resonate with audiences) and artistically interesting (creative freedom!). Films as diverse as Get Out (made for $4.5 million, grossing over $250 million worldwide), Obsession (made for $3.3 million, winner of three Oscars) have been produced through this approach. ), “Invisible Man”. (made for $7 million, grossed over $140 million) and Paranormal Activity (filmed for $15,000, grossed over $190 million).

From the very beginning, the most important strategy I have used to get artists to work with me has been making radically transparent deals: we used to pay artists (“participants” in Hollywood jargon) the bare minimum required by union contracts up front, with the promise of healthy bonuses, based on real box office receipts – instead of the opaque “percentage points” usually offered to artists. Anyone can see box office results immediately, so the creators don’t argue with payouts. In fact, when it comes time for an artist to receive a box office bonus, I email a video clip of me giving the recipient a FedEx check.

To be sure, the “Bloomhouse model” has been especially effective in the horror genre, where low-budget production values ​​can give stories a sense of frightening realism. But I also noticed that other experiments with low-budget bet-on-yourself gambits worked: my friend, director Todd Phillips, turned down a big advance for The Hangover and brought in lesser-known actors (at the time) to shoot. a film with a small budget (by studio standards) in exchange for a large share of the profits. This deal worked out staggeringly well for all parties involved, with the film grossing nearly half a billion dollars and kick-starting a three-part franchise. Likewise, Deadpool’s creative team made this film for just $58 million – a deal unheard of in the glossy world of Marvel superhero films – and their condemnation paid off with a box office gross of $783 million.

The Blumhouse model is just an exaggerated and clearer version of the classic success-sharing system, the same deal that the publishing industry offers with royalties and that traditional Hollywood studios have always used and continue to use. When the financial incentives for people paying for movies and TV shows match the financial incentives for creators, the system as a whole becomes much more cost-effective—and movies and TV shows often turn out better.

So what does this have to do with Netflix and streaming? Streaming platforms have, Until recently, have abandoned any semblance of success for movies and TV shows on their platforms (although this could change at Netflix if it adds a layer of ad support). This is understandable: having spent hundreds of millions of dollars building their algorithms and distribution platforms, and billions more licensing Hollywood movies and TV shows to attract subscribers, they absolutely have the right to protect this sensitive information.

But the system leaves creators with very little information about whether their work will succeed in attracting viewers. Typically paying an upfront fixed fee, Netflix buys back the usual success-based incentive compensation (known in Hollywood as “the back end”). This effectively treats each creator as part of a hit movie or TV show even before the camera is even turned on. An actor who can normally make a million dollars upfront with a healthy backend, if the film is successful, will instead get $3 million upfront and not participate in the backend. This system makes the film and TV show production business very expensive.

As someone who has achieved both hits and flops, I have always found it fundamentally unsustainable for a company to treat everyone involved as if they were successful even before the project was launched. But for years, Wall Street has valued streaming companies based on subscriber growth based on massive amounts of content that was produced under a costly “buyout” model.

The streaming model has also increased the competition for talent, making it harder for Blumhouse and the rest of the industry to be creative in structuring our deals. Indeed, my film and television production company has occasionally (and profitably) abandoned our “betting on yourself” principle in favor of the generosity of streaming. Hey, if you can’t beat them, join them.

The drop in media and technology stocks last week suggests that investors are beginning to doubt that the streaming industry’s massive investment in content can continue to attract new subscribers and keep existing ones in the face of more intense competition. And it’s a startling indication that, in recent months, Wall Street has begun to doubt that streamer growth can outpace their astronomical costs. Netflix and other streamers have come to be seen less as tech companies than as media companies, subject to the usual attraction of quality and value for their entertainment films.

Streaming platforms need to use one surefire way to control costs while improving quality: reduce the financial cost of creators through the direct results of their work. This is not a radical idea. In fact, this is a compensation strategy that tech companies have always used for their employees, rewarding them with stock options, sometimes in lieu of huge salaries.

So, streamers: when the creators set out to make TV shows and movies for you, offer them a deal that will pay them well for their success. And share the internal performance metrics that drive that success. You will be able to pay less up front and you will find an increase in the quality of work. Be careful of those artists who prefer upfront compensation – this may mean that they do not believe wholeheartedly in the commercial value of what they are doing. Yes, your hits will be more expensive for you after compensation to all participants. But your misses will cost a lot less – and I believe you will have fewer of them.

This will require a lot of trust and transparency. And not every artist or production house is in the financial position to forego a hefty down payment in favor of an opportunity to earn more in the future. But streamers might be surprised at how many of us there are.

Whoever has the courage and foresight to bring about this alignment of incentives will be among the few winners in the streaming war. Being so transparent with internal numbers can be scary. But not as scary as being on a Wall Street whim (or being trapped in a Blumhouse movie).

Jason Bloom (ur.@jason_blum) is a three-time Oscar nominee and two-time Emmy Award winner. He is the founder and CEO of Blumhouse, a film and television company.

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