Follow the Money
Incentives, the Hollywood API and Netflix
Hollywood is a giant API for creativity. The industry is a matrix of relationships organized to produce entertainment for giant distributors, be they media conglomerates, streaming services, or social media networks. As Netflix, followed by Amazon and Apple have proved, if you have the cash, you can call on the Hollywood API to produce. And what gets produced is driven by incentives. Entertainment may be a creative endeavor, but creatives respond to incentives all the same.
My friend and former colleague Matthew Ball has written extensively about power laws and how the biggest hits are increasingly worth exponentially more than the next biggest properties. This paradigm is changing incentives for streaming services, especially Netflix, which are in turn looking to align the incentives for their creatives to better match their own. In doing so, they are creating a new kind of back-end payout for streaming properties, placing renewed emphasis on the notion of incentive compensation. Everything old is new again, and that’s no accident because the incentives in today’s media business aren’t that different from yesterday’s.
For Netflix, a top 10 hit is exponentially more valuable than a middling program. Most important are the hits that drive subscriber acquisition and those that prevent user churn in an increasingly competitive space. As such, it’s not surprising that Netflix has reportedly, increasingly built more incentive compensation into its production deals, at least rumored to be structured around time spent in the Netflix Top 10. Of course, the company still maintains a largely cost-plus model, in which producers are compensated for the cost of the show plus a fixed markup. And the company has previously included metrics-based incentives, though in small amounts, in producing deals. But it appears that it is increasingly focused on creating more upside incentives for producers. In doing so, it appears to also be backing away from signing more top Hollywood producing talent to mega-overall deals, such as those it signed for $100mm+ with each of Shonda Rhimes, Ryan Murphy, Kenya Barris, and the creators of Game of Thrones.
Unfortunately, thus far, paying large guaranteed fees to producers with broad creative freedom, particularly to those well established in their careers, tends not to produce mega-hits. It turns out when you pay talent huge, largely flat fees (many of these deals do have incentives, but far fewer than the previous network model) and give them license to create almost whatever they want, they tend to produce passion projects and prestige limited series as opposed to broadly appealing, long-running franchises. Big-name producers and talent may have earned their deals by creating or starring in 4-quadrant network hits, but it’s unlikely, absent major incentives, that they would like to produce more seemingly never-ending, long (i.e. massive # of episodes per season), broad and frankly non-prestige programming. That said, Netflix hasn’t even done a great job marketing and promoting these projects either.
More importantly, even looking beyond mega-producers, an ecosystem-based on guaranteed fees with minimal upside tends not to attract the dreamers, kooks, and risk-takers who create outsized hits. Nor does it incentivize those in the field to take bold chances. Simply put, if your incentive is to chase extraordinary results, you shouldn’t be paying people for effort. So it should come as no surprise, that as the value of and challenge in creating hits rises, Netflix is shifting towards a model more aligned with creating that outcome.
As such, I’d wager that over time you will see more megahits on Netflix. And you will hear more about producers getting truly rich off of incentive compensation paid by Netflix and other streamers, even as the size and number of upfront overall deals may diminish. A mega-producer in the broadcast and cable network era could become a billionaire from the upside of a huge hit. That may not ever be possible again in the streaming era, but it should at least be a plausible inspiration. After all, the Hollywood API is very good at giving you what you ask of it, so long as you get the incentives right.