Netflix is reaping the benefits as Hollywood studios turn to an old playbook

Licensing has historically been a mainstay of entertainment companies, except for a brief period when many hoarded content while they built up their own streaming services. It used to follow a predictable path, with movies running in theaters for long stretches followed by pay-per-view, DVD boxed sets, and the like.

Now, movies are spending less time in theaters if at all; boxed set sales have evaporated; and new streamers and free, ad-supported services have emerged.

Deals have gotten shorter and more fluid as streamers try to constantly freshen their offerings for fickle subscribers. Ten-year film deals are now more typically three years. A TV series might be licensed to multiple streamers at once.

Content sales execs also have a lot more data to sift through to figure out how to wring the most value out of each title.

“Licensing used to be a lot easier,” said Mike Pears, the EVP for distribution and content sales for AMC. Pears oversees the distribution of AMC’s content across its own streamers like AMC+ and Shudder, and FAST channels across nine platforms, as well as tie-ups between AMC+ and the likes of Apple TV+. “It’s not a sellers’ market anymore. You don’t just need a salesman; you need someone with a broader understanding of the industry.”

Why licensing is much more than a ‘Band-Aid’

Top execs at companies like Warner Bros. Discovery and Paramount are bullish on licensing, which has high profit margins and produces consistent cash.

“For the studios or the companies selling it, it’s a real benefit because they have cash coming in the door, which was billions of dollars of revenue that was foregone over the last few years,” said Jessica Reif Ehrlich, a media analyst at Bank of America.

Licensing may be from the entertainment playbook of the past, but there’s no reason it should stay there — especially since Wall Street is profit-hungry in an era of higher interest rates.

“It’s the future,” said Dan Cohen, the chief content licensing officer at Paramount. “Monetizing content across time has always been a staple of how content has been created and paid for.”

Streamers never should have pivoted away from licensing in the first place, Reif Ehrlich argued.

“I don’t think it’s a Band-Aid,” Reif Ehrlich said of licensing. “I think that they found over the last three years that they didn’t need to do everything in-house.”

Mitch Metcalf, formerly a research and scheduling executive at ABC and NBC, who now runs the media consulting firm Metcalf Entertainment Intelligence (MEI), agreed that licensing is the natural inclination of the entertainment industry.

“It’s always a mistake to hoard your content and think that, ‘I’m going to extract all the value I can out of this and deprive other people of what the benefits might be,'” Metcalf said. “It makes no sense. Content is just screaming to be played at multiple places, to expand the audience, expand the revenue.”

“You’re not going to cannibalize your audience,” Metcalf said. “You’re going to find new audiences, and you’re going to find new dollars.”

Streamers’ shortfalls made licensing a necessity

But every deal comes with potential tradeoffs, and there’s constant debate over how much and what to keep on a company’s own service versus making content more widely available.

“They always faced a Hobson’s choice of: Do they license and take the money now and risk not having anything exclusive or distinctive to put on their own services, or do they hold on to their rights in the hopes of future subscription or advertising revenue,” said Meeka Bondy, an entertainment lawyer at Perkins Coie.

Licensing can help a show reach a new, larger audience and sell associated consumer products. The downside is that making it widely available could dilute its value in the eyes of viewers. Putting a first-run movie on ad-supported platforms could turn off audiences. And if people think they can see your shows everywhere, it can undermine your own streaming business.

“If the streaming services were a massive home run — in my view — they would not be looking to license more content,” said John Hodulik, a media analyst at UBS.

While some like Paramount never stopped licensing, others are asking if the resurgence of licensing is just a short-term fix for their revenue problems.

“There’s a little bit of desperation,” said one exec at a major streamer.

Companies typically hold back their most brand-defining shows for their own services. Paramount licenses older seasons of CBS procedural “NCIS” to grow its audience but makes viewers come to Paramount+ to see the whole franchise, for example.

Netflix is licensing to kill

The biggest risk is that the studios end up undermining their own position by licensing to the biggest streamer.

“The bigger Netflix gets, the more other studios will want to license it content, which then puts them in the familiar quandary of how to grow their own DTC services successfully in response,” wrote Tim Nollen, an equity research analyst at Macquarie, in a note after Netflix’s late January earnings report.

Netflix has crowed on earnings calls about how it’s benefited from other companies’ newfound willingness to license. Its new engagement report covering the first half of 2023 showed that 45% of viewing came from licensed titles like “Breaking Bad” and “Suits.”

But don’t look for “Squid Game” to be on Hulu anytime soon — Netflix has said it’s not interested in making its originals available to other streamers.

The return to licensing is among many ways the pivot to streaming profitability has changed the business. Netflix and other entertainment companies that sought full ownership of content as they built up their streaming services are now becoming more agnostic about it. Streamers also are increasingly looking at bundling with other services to hook and keep subscribers.

“As long as they’re smart about it, they don’t have to be losers from it,” Nollen said of licensing. “But they are, at the same time, just kind of feeding the Netflix machine and making Netflix arguably that much more powerful.”

But, for now, the major entertainment companies don’t have much of a choice.