Hollywood talent agencies seek new deals tied to Netflix advertising model

The creative talent behind shows on Netflix’s new ad-supported service should earn more money if their series are popular with viewers, the chief of one of Hollywood’s top talent agencies has argued, a move that would represent a major shift in the streaming pioneer’s model.

In November, Netflix introduced a new subscription service in which viewers have access to a more limited selection of titles for a lower price in exchange for watching ads.

In an interview with the Financial Times, Jeremy Zimmer, head of the United Talent Agency, said this new strategy “changes the game” in terms of how the streamer should compensate creative talent.

“A show that does really well will get more advertisers and more revenue will flow to Netflix,” he added. “Therefore, our clients who created that show should be compensated for that additional revenue.”

Netflix, which launched its ad-supported service to offset slowing subscriber growth, has long resisted profit-sharing arrangements. Instead of offering traditional “back end” payments that allow talent to earn more from a successful show, Netflix buys out all rights upfront.

But Zimmer says Netflix’s launch of an ad-supported service has altered that formula.

“They’ve changed all the rules [by saying] it’s no longer an ad-free environment,” he said. “There’s a different revenue stream coming in that they had said wasn’t going to be there.” 

Netflix is likely to resist attempts by UTA or its rivals, including Creative Artists Agency and Endeavor, to seek new sources of revenue tied to performance. However, talent agencies are trying to use the streamers’ advertising push — Disney Plus also launched an ad tier this month — as an opportunity to persuade them that aligning artists’ financial interests with the performance of programmes is good for both parties.

The nature of the advertising business means that there will be more transparency on how shows perform than Netflix has allowed in the past. With the launch of the ad service, Netflix will now allow detailed data to be collected by Nielsen ratings — allowing talent to access more information about how well their programmes perform on the platform. In theory, this could give artists leverage to bargain for more money when they produce a hit.

However, analysts say they do not expect meaningful profits from Netflix’s advertising business any time soon. “They’re off to a slow start” with the advertising service, said Tim Nollen, an analyst at Macquarie Capital. “It looks like 2025 before we see any real benefit from it.” 

Netflix is missing its advertising viewership guarantees by as much as 20 per cent, according to a report this month in Digiday, which suggested the streaming service was returning cash to advertisers as a result.

Nollen noted that the ad service was still new, but he said he was surprised by a lack of promotion of the advertising tier. “Netflix is in a bit of a quandary,” he added. “They don’t want to dilute themselves” by incentivising full-price subscribers to switch to the lower-cost advertising tier.

Zimmer said there had not been serious discussions with Netflix about profit-sharing arrangements because it is “all relatively new”. But he said when clients launch new programmes on Netflix, “they will want to build in opportunities to get compensated for shows that are successful and are deemed successful by advertisers and audiences”.

The streaming industry itself is facing serious headwinds, including slower subscription growth and investor impatience with the billions of dollars that the traditional Hollywood groups have lost trying to build up their services. A potential strike by the Writers Guild of America when its contract ends in May could also deal a blow to studios.

Morgan Stanley analysts wrote this month that if the streaming services launched by traditional studios were unable to deliver “meaningful” profits in the next two years, some would need to “give up and/or consolidate”. 

Some could choose to emulate Sony’s “arms dealer” strategy of selling content to streamers or even traditional TV networks, the analysts added.

Zimmer said Netflix and other streamers would do well to sell their shows to rivals.

“All the streamers are now realising, ‘Wow, we could use additional revenue’,” he added. “Maybe those shows don’t need to just sit on our servers alone.” 

Syndicating their content to broadcasters would allow the streamers to generate extra revenue — and open another profit opportunity to the creative talent, Zimmer said. “The revenue they get from that would be a way to share proceeds from the creators.”