The Hollywood Reporter - 30.10.2019

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The Report

THE HOLLYWOOD REPORTER 14 OCTOBER 30, 2019

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W

hen the Melissa McCarthy comedy

Superintelligence was jettisoned

Oct. 17 from Warner Bros.’ New

Line label to the upcoming HBO Max service

— weeks before its Christmas Day release —

agents all over Hollywood took notice.

Although a handful of films already have

morphed from the cineplex to the living

room at the eleventh hour, including the

J.J. Abrams-produced The Cloverfield Paradox

(Paramount to Netflix) and the Michael

Peña-Lizzy Caplan sci-fi feature Extinction

(Universal to Netflix), Superintelligence

marked a first for the Bob Greenblatt-led HBO

Max. To reps, it also offered a stark sign of

things to come. “We’re all proceeding with

caution and skepticism, but ultimately, this

is the new world and we need to use leverage

when we have it to make the best of it,” says

talent lawyer Ta r a Ko l e, noting that backend

compensation and box office bonuses typically

disappear in such a move.

Despite McCarthy’s clout, Warner Bros.

opted not to buy out her backend, a source

familiar with the Superintelligence dealmak-

ing tells THR. “They tested this movie. If it

had been a crowd-pleaser, they would have

and Elizabeth Debicki initially were denied

contractual theatrical bonuses. But after

the stars’ reps complained, Netflix wrote

checks to cover the lost income. In late 2018,

Paramount Players offloaded the horror film

Eli, weeks ahead of its Jan. 4 bow, to Netflix,

which released it nine months later. The

Anna Kendrick holiday-themed film Noelle

was pulled from a theatrical release and will

instead bow on Disney+ on Nov. 12, the day

the streaming service debuts. The trend is

expected to pick up steam as major studios

move to a tentpole-only diet and

labels like New Line shift to fill

HBO Max’s pipeline.

Still, reps are now seeking ways

to protect clients against stream-

ing pitfalls. Those with actors

appearing in independently financed films

are including streaming bonus language. And

if the sale of a film eclipses a certain amount,

talent bonuses increase (think HBO Max

acquiring Hugh Jackman’s Bad Education in

September out of Toronto for $20 million).

Kole adds, “Of course, people are nervous

because it’s new, but being nervous doesn’t

help your clients.”

When Will Netflix Finally End Its Content Cash Burn?

T

o chill or not? Netflix investors

are debating the streamer’s out-

look more than ever after it lowered

its subscriber growth forecast for

2019 on Oct. 16 ahead of November’s

launch of competitors from Disney

and Apple. At the same time, the

company steadied its

U.S. sub growth after

a negative quarter.

One key question is

when Netflix can get

to a point where it can

self-fund its spending — including a

record $15 billion budget for content

this year — which is set to exceed

the company’s cash generation by

$3.5 billion, an all-time high for the

Reed Hastings-led firm.

Netflix has so far relied on debt

to fund this so-called negative free

cash flow amid its spending spree,

ending September with $12.4 bil-

lion in long-term obligations and

on Oct. 22 selling another $2.2 bil-

lion in bonds. Management said it

expects to “slowly” narrow this gap

starting in 2020, without noting

when it hopes to turn free cash flow

positive. Analysts surveyed by THR

forecast the firm will do so between

2021 and 2024. Cowen analyst John

Blackledge predicts the company

will turn free cash flow positive, to

the tune of $305 million, in 2021.

Moody’s Neil Begley forecasts

Netflix will reach 200 million subs,

led by growth overseas, by 2021 and

reach the free cash flow break-even

point by 2023.

But not all are convinced. Fitch

analyst Patrice Cucinello asked in

a report “if the company can indeed

reach a point where it can fund

required content investments with

internally generated cash.” Wedbush

Securities analyst Michael Pachter,

one of the biggest Netflix bears,

warns that despite price increases in

recent years, “cash burn continues

to grow.” Pachter notes, “We expect

the company to continue to increase

its marketing and content spending

over the next several years in order

to maintain the pace of its sub-

scriber growth.”

Contracts haven’t kept pace with studios’ stepped-up efforts to forgo theatrical releases for D-to-C options: ‘There is no recourse’

BY TATIANA SIEGEL AND MIA GALUPPO

When Movies Shift Over to Streaming:

‘Bonuses Just Go Out the Window’

Spending $15 billion on film and TV in 2019, the streamer may need to hold on to debt until 2024 — or longer BY GEORG SZALAI

When It Could Be Back in Black

Despite Netflix’s widening negative free cash flow, Wall Street is mostly optimistic

Source: Guggenheim Securities (2019-23 figures are estimates)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

-$3.02B -$3.52B

-$1.66B -$2.02B

-$16M -$127M -$921M

-$3.11B

-$1.88B

$300M

$2.92B

Hastings

released it theatrically and paid the $30 mil- Greenblatt

lion to market it,” the source says.

A typical talent contract offers no protec-

tion if the film bypasses theaters. Instead,

stars can be stuck with terms similar to if the

movie were shelved, flopped at the box office

or got a day-and-date release. “There is no

recourse,” says an agent with a client caught in

a theatrical-to-streamer crossfire. “Potential

bonuses just go out the window.”

Cloverfield Paradox stars like Daniel Brühl