“There’s never been a better time to be a content producer,” said Netflix boss Reed Hasting during a visit to Paris for the unveiling of a new distribution agreement in France between Canal+ and the American streaming giant.
Already available in 50 countries, the Netflix platform offers a vast catalogue of films and series with unlimited access via the user’s television, smartphone, tablet device, computer or gaming console.
While the Netflix platform currently holds a global monopoly on the streaming market, with annual revenues surpassing $15.79 billion, competition is intensifying as rival companies prepare to challenge them for the top spot. In order to square off against the arrival of new competitors such as Amazon Prime, Disney+ and Apple TV+, the famous video streaming platform has decided to completely redesign the incentive compensation system it applies to content producers.
Its ambition is to convince Hollywood’s biggest directors and producers to collaborate with the platform by offering much more lucrative commercial bonuses. In this article, we’re taking a look at Netflix’s new incentive compensation strategy.
1) A streaming war that's intensifying market competition
New streaming platforms are challenging market leader Netflix head-on
Amazon, Apple, OCS and Disney are all investing millions of dollars to fill their programming catalogues with the most popular series and box office hits, which are an essential draw for these streaming platforms. Even more worrying for the US giant is the prospect of losing some of its most popular content, which is being claimed back by its original owners.
The platform has already had to remove all its Star Wars, Pixar and Marvel titles, for which it had hitherto held partial broadcasting rights but which ultimately belong to Disney. In addition, as of January 2020 the TV series Friends has once again become the exclusive property of WarnerMedia, which is preparing to launch its HBO Max service.
While Disney+ is banking on its impressive catalogue of films and series, available from next November for less than $7/month in the US, Apple TV+, whose content is more limited, is capitalising on a more aggressive marketing campaign, with a subscription fee of less than $5 per month - less than half of what users pay for Netflix in the same country.
While some streaming platforms are declaring all-out war on Netflix, other market players have opted to side with the US giant, which is notably the case for French audio-visual group Canal+. Since 15 October last year, Canal+ has been offering its customers a new bundle that includes access to the Netflix platform. This major event in the audio-visual sector shows the desire of traditional media platforms, which are seeing their viewer numbers decline, to move towards on-demand video and streaming services, which are soaring all over the world. The leader in online video streaming added over 6.7 million paying subscribers in the third quarter of 2019 alone, and took in over $5 billion in revenues over the same period (all countries combined). Speaking of the historic partnership, Maxime Saada, Chairman and CEO of Canal+, declared that it would be the “broadest offering of movies and TV series on the market.”
Given the tension present in its marketplace, Netflix has decided to implement a new system of incentive compensation for directors and content producers.
2) What are the differencences between Netflix's old and new incentive compensation systems?
Bonuses offered by Netflix: award-winning films and number of views
Netflix has opted to implement two different forms of bonus. The first bonus will directly reward art films and indie flicks, and will reflect the number of awards won by these prestige films. By way of example we may take the film “Roma”, by director Alfonso Cuarón, which was the first Netflix-financed film to win coveted awards such as the Lion d’Or at the Mostra de Venise and the Golden Globe for best foreign language film later the same year.
Indeed, the contracts signed between Hollywood studios, producers, actors and directors usually include an incentive compensation clause that’s linked directly to the film’s box-office performance. The more successful the movie is with audiences, the more its various stakeholders will take home in incentive compensation. For example, actor Robert Downey Jr, known around the world for his role as Iron Man in Disney’s “Marvel” franchise, has seen his compensation skyrocket and now earns more through his bonus system than his fixed salary. The second bonus Netflix plans to provide will be directly linked to the number of views a film generates on the platform. This bonus aims to reward productions that are more geared towards a wider audience, for which it’s more useful to measure the number of views than the number of awards won at international film festivals. This incentive compensation model, based directly on the number of views, is similar to practices already being used in the cinema industry.
The video streaming platform with its 150 million+ subscribers hopes to convince Hollywood’s biggest names to collaborate with it
The former compensation scheme offered by Netflix was less motivational in terms of potential gains. Moreover, Netflix would cover the cost of production and also offer an additional bonus to the producers, thereby ensuring they would receive a payout regardless of the film’s success, and before it had even gone online. This old way of doing things, which might be described as a “fixed-rate” agreement, provided producers (notably less well-known ones) with a certain level of reassurance, but also directly capped their potential earnings.
In this former system, in which the director was paid “per task” and not based on their success, even if a film enjoyed monumental popularity on the platform, the producer’s earnings stayed the same. As such, the world’s leading streaming service had rethink its incentive compensation policy if it wanted to face off against its deep-pocketed market competitors who were ready to seduce the top directors. By bringing in these new bonuses, firstly for the number of awards won and secondly for the number of views, Netflix is showing its generous hand and hopes to peel talent away from traditional cinema.
Facing heightened competition, Netflix’s reaction has been to introduce incentive compensation where it was previously lacking
Incentive compensation therefore represents a useful solution in a fiercely competitive environment. Here we may draw parallels with the market for executive recruitment in France, which is becoming increasingly tense in certain sectors experiencing a shortfall in expertise - such as digital and data sciences, in which companies find themselves fighting over talent.
3) A commission system that has its limitations
Netflix opts to implement a traditional “commission” system that rewards contribution to an overall result
The incentive compensation model developed by the streaming giant falls within a purely “contributive” approach. This model is highly entrepreneurial, and rewards tangible successes, inciting producers and directors to make sure their work performs well: it is qualitative in terms of its bonuses for awards won, but also quantitative in that it rewards success in terms of numbers of views for “mainstream” films.
The commission-based approach has been in use for several years, including in the film industry in which certain actors and directors are incentivize according to a film’s “commercial success”, i.e. directly based on the number of tickets sold. Nevertheless, this method of calculating incentive compensation based on the number of views, developed by Netflix, was completely disruptive in the on-demand video and streaming sector.
The limitations of Netflix’s incentive compensation system
The additive limitation
The bonuses offered by Netflix are additive, which means that a director of art films or prestige TV series will go after the first bonus, while a director of movies or series aimed at a much wider audience will be looking for a bonus based on the number of views. As such, this incentive compensation scheme doesn’t encourage content producers to do both, even though this is the kind of performance Netflix is after. We might look at other calculation methods for this compensations system that would enable these two bonuses to be interwoven, such as Primeum’s “Surface” system, which is explained in this article on the modernisation of incentive compensation.
The equity limitation
We might also raise questions about the promotional measures applied to certain films or series:
some are pushed hard by the platform’s advertising, such as Money Heist which had a poster campaign prior to the release of its third series.
some are recommended for viewing by the platform, and encouraged by its algorithm. What happens when an algorithm highlights one piece of content to the detriment of another? Without proper consideration of equality of opportunity, the incentive compensation system can become lopsided, much like the YouTube algorithms which are being hotly debated by Youtubers at the moment.
This raises the issue of equality between films and series which are strongly pushed by the platform, and which will therefore gain much more views than films or series which might be high quality but didn’t receive the same visibility.
The creative freedom limitation
What about the issue of diversity of content? Isn’t there a risk that directors will be encouraged to always make the same type of content?
This would mean that more eclectic programs, not intended for mainstream audiences or international film festivals, could be relegated to secondary status to make way for “more profitable” content.
The arrival of new operators like Disney or Apple on the market is good news for directors, who will have the chance to increase their earnings due to the competition between the various operators - however, the end user, consumers of original series and films that are out of the ordinary, may wind up feeling they got the short end of the stick.