Netflix, Hollywood in a tense tango they can’t stop

Good news, Hollywood! Netflix is becoming less interested in buying the movies you make.

Also, bad news, Hollywood! Netflix is becoming less interested in buying the movies you make.

Ted Sarandos, the executive who spends billions of dollars each year to keep Netflix filled with streaming content, said on Monday that he would rather spend $1 billion on making Netflix’s own movies than spend the same amount to buy the rights for warmed-over Hollywood films that someone can watch on cable, on an in-flight movie or a zillion other spots that air movies after they exit theaters. “Some of the content is remarkably interchangeable,” Sarandos said at a UBS investor conference.

Mirroring its TV strategy, which features original series such as “House of Cards,” Netflix more recently has sought to finance its own films — including a Brad Pitt movie expected next year in theaters and on Netflix — in an effort to load up on programming that isn’t available anywhere else.

While Sarandos was talking about movies and not TV shows, the movie studios are largely owned by the same powers — including Disney, Time Warner and 21st Century Fox — that also create TV series. And the relationship between Netflix and the TV programmers has been about as warm as the camaraderie among Republican presidential candidates.

The media companies have been sending a message that they hope to sell fewer of their TV series to Netflix, which they now believe is bad for their business. Not coincidentally, Netflix has been sending its own message that it won’t plunk its money down to buy just any old junk programming. It has been a verbal sparring match over which side is less reliant on the other.

It’s understandable why media executives are starting to fear they have made a deal with the devil in helping to fuel the popularity of Netflix. It’s clear that online video services are stealing viewers from traditional TV and making cable networks less inclined to pay high prices for TV reruns. Both trends are bad for media companies’ bottom lines. The implication from Fox executive James Murdoch and others is maybe they should wean themselves from the Netflix cash and find places to sell their old shows — cable on-demand services, or Hulu, which is owned by media companies — that are less fundamentally inclined to break the traditional media business model.

Netflix’s estimated 2016 programming spending $5 billion

Yet it is tough to give up on Netflix because media companies have become reliant on the profits from sales to streaming-video companies. RBC estimated Netflix, Hulu and Amazon will spend a combined $6.8 billion in 2015 to buy rights to programming. Netflix alone expects to spend $5 billion next year on its original TV shows and movies and those it licenses from other companies. That is an undeniably appealing pile of cash for a media industry staring at declining TV viewership, slowly shrinking numbers of cable TV subscribers and tough film economics. For context, Time Warner’s net income was about $3 billion in the first nine months of this year.

Sarandos, not surprisingly, is dismissive of media executives who are having second thoughts about licensing their programs for Netflix subscribers. “The viewer has moved here,” he said at Monday’s investor conference. “So if you want to make money, you better sell it here.”

Still, Netflix’s backing of original movies and TV series is a way to keep its programming pipeline stocked in case those media companies don’t heed his advice. Sarandos said Netflix would double the number of original TV series it plans to put out next year, to 31. He also said Netflix had about 10 movies in production to be released by the end of next year.

What he didn’t say was the push into its own programming has been a mixed blessing for Netflix, too. Yes, having buzzy shows like “Jessica Jones” and “Orange Is the New Black” helps Netflix stand out from the growing number of streaming subscription options, including those from traditional TV companies like HBO and Dish Network’s Sling TV. It also gives Netflix far more control over its programming. Negotiations over licensing TV series and movies for Netflix’s international markets has proved to be particularly cumbersome.

But buzz and controlling your own destiny aren’t cheap. Netflix’s net income has been cut in half this year as it plows money into expanding its service outside the US and developing content. The company’s free cash flow was a negative $252 million in the third quarter. The costs are coming at the same time that Netflix has had a tough time luring net new streaming subscribers in the US.

At the moment, neither media companies nor Netflix are brave or foolish enough to live without the other. If the media companies are serious about weaning themselves off Netflix cash, would they unite to sell their choicest programming to Hulu? The reality is media executives are equally divided over whether Hulu is good or bad for them. For its part, Netflix can’t afford to make enough of its own programs to fully stock its service, nor can it bear the costs of persuading people to try a flood of unfamiliar series. For now, a small minority of Netflix’s programming spending is on the company’s originals.

At this point, then, media companies are Netflix are locked in an uncomfortable symbiosis.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners. Bloomberg