In the days following the recent Great Netflix Correction, its legion of haters in Hollywood have been treated to one negative media story after another—the low morale, the underwater stock options, the actual and impending layoffs, the executive blame game, the fact that not even Meghan Markle is safe from cancellation. Netflix once benefited from, by far, the most sycophantic coverage in entertainment; now every Netflix headline comes with an “Embattled” at the beginning or an “Amid Cutbacks” at the end. It’s like reporters are atoning for all those skepticism-free stories over the years.
Still, few of these articles actually delve into specifics—how the loss of 70 percent of a company’s market value in six months actually trickles down to the content. So today I decided to do that, using as an example Schitt’s Creek, one of Netflix’s signature hits, which, it was announced Wednesday, will defect to Hulu in October.
If you’ll recall, the dysfunctional family sitcom originated in 2015 on CBC in Canada. To fund production, the global distributor ITV, working with the family of stars and creators Eugene and Daniel Levy, sold the U.S. linear TV and streaming rights to PopTV, the little-known, mostly unwatched cable network that was co-owned by CBS and Lionsgate. True to its brand, no one watched. Despite some good reviews, I remember a rep for one of the actors begging me to check it out, and me stupidly thinking it wasn’t worth my time. This rep reminded me of that rejection when it swept the Emmys in 2020. We’ll get to that.
After Schitt’s’ third season, the U.S. network flipped streaming rights to Netflix, which got the show for a steal. Like other acquired series before and since, massive viewership and critical acclaim followed. Schitt’s regularly charted on Nielsen’s streaming ratings, hitting No. 1 in September 2020, right after those Emmy wins, and as the sixth and final season hit the service. In 2021, Schitt’s generated nearly 17 times the average demand of all shows in the U.S., according to Parrot Analytics, putting it in the “outstanding” category. Most viewers probably assumed the show originated on Netflix, which signed the breakout star, Dan Levy, to an overall deal that, in true Netflix fashion, was especially rich and designed to compensate for the fact that the platform had acquired the show so inexpensively.
Netflix re-upped its Schitt’s deal at a huge fee increase, but when the rights came up this time around, things had changed. Its offer, while fair, didn’t blow anyone away, and the other streamers could smell blood. Paramount Global, the renamed ViacomCBS, had taken control of the asset, but Lionsgate is the distributor, and Jim Packer, its president of worldwide TV distribution, drove a bidding war. Unlike in previous go-rounds, Netflix was eliminated, and the ultimate winner was Disney’s Hulu, which, according to multiple sources familiar with the deal, is paying about $1.2 million per episode (there are 80) for three years, but only two are exclusive. Paramount+, the Paramount streamer, will share that third year, and there will be a separate deal for free, ad-supported streaming rights. After three years, the rights will revert back to ITV and the Levys. And remember, that’s just in the U.S. Netflix still has the show in several territories.
A Netflix source argues that more than $1 million an episode is an insane price for an aging sitcom whose target audience already binged it on Netflix, as my wife and I did, during the depressing days of the pandemic. And indeed, Parrot Analytics indicates that demand for the show in the first quarter of 2022 dropped to 11 times average—still amazing, yet on a downward trend.
But that’s precisely the point. This wasn’t a Friends or The Office situation, where legacy owners yanked hot properties from Netflix to build their own streamers. Schitt’s Creek was available on the open market, was a proven (albeit past-its-peak) hit, and Netflix tried to keep it, but lost out to a rival. A year or two ago, co-C.E.O. Ted Sarandos would have probably stepped up to keep Schitt’s as part of his spend-all, be-all strategy. With that high-flying stock price and free-flowing debt and skyrocketing subscriber base, why not? But now it’s a different calculus.
It’s also fitting to see Lionsgate and Paramount—two of the supposed “losers” in the battle for globally scaled streaming services—score such an advantageous deal in a business that Netflix and its Wall Street enablers have mostly ignored: Licensing. Squeezing every last dollar from the hits—that is how you make real money in the TV business. Sure, that can mean generating subscribers for your sister streaming service, but in the case of Lionsgate (with Starz) or Paramount (with Paramount+) it can also mean auctioning it off to the highest bidder, even if you don’t own that bidder.
As Wall Street seems to have discovered last week, diversified content companies with scale and flexibility can monetize their stuff in a range of ways. Paramount+ certainly could have used a show like Schitt’s Creek that eats up hours, but it’s not quite a Yellowstone situation. That was a transformational property in its prime, and Viacom controlled the I.P. It fumbled by choosing the short-term benefit of licensing it to NBC Universal’s Peacock over its nascent sister streamer. By contrast, Schitt’s Creek has many stakeholders, and Paramount benefits from both a major share of the Hulu deal and that third year of shared exclusivity.
Netflix, which is amassing a large library of its own content, could be in the syndication business, and perhaps, given the stock dive and revenue goals, it will be soon. That market depends on a willingness to offload in exchange for cash, as well as reliable consumption data, which Netflix has so far been unwilling to share. We’ll see if that changes.
One thing that’s certain is we’re gonna see more examples of Netflix losing key shows and film libraries, especially in the competitive U.S market. We already have. Some are thanks to competitors wanting to starve Netflix and feast on their own content, but others, thanks to the Great Correction, will simply be Netflix coming up short in its ability to spend. That’s not something that Hollywood is used to, but as Schitt’s Creek shows, the old assumptions and hierarchies in streaming are mostly going away.