The rise of streaming has changed the way people watch television. Now companies such as Netflix are reshaping how TV production is financed.
As the company snaps up the most sought-after scripts and ideas, it is signing longer-lasting rights deals than traditional broadcasters and staggering payments for shows over several years, according to people familiar with the strategy.
Regulatory filings show that over the next five years Netflix will drip-feed a total of $19.3bn to producers for new shows and to license TV that has already been made.
For producers, this is a departure from old norms of accounts being settled in full on delivery, and it means having to take out longer-term loans to finance new shows.
For the banks providing that financing, this is also new territory: longer-term loans are inherently riskier than short-term ones and Netflix, as the ultimate payer, is a riskier proposition than traditional broadcasters. Its credit rating, double-B, deems it below investment grade — but banks are proving enthusiastic about getting exposure to the streaming revolution.
“Historically we have lent against the likes of ITV or BBC, where we were lending on a shorter term and with a counterparty that had a strong credit rating,” said Lorraine Ruckstuhl, head of media at Barclays Corporate Banking. “When you are dealing with a growing but levered business like Netflix the external ratings are not as strong, so you need to really understand the strategy of the business and manage the risk. Which we do.”
Barclays in London is one of the banks stepping up to provide this longer-term credit, often between three and four years in duration versus a few months under the old model. Its biggest public loan was £17.5m to Forgiving Earth Ltd, a co-producer of Black Earth Rising, a legal drama series that takes place during the Rwandan genocide.
JPMorgan and City National Bank of Los Angeles are also among the willing lenders to producers of streamed content.
Typically, loans have been for between £3m and £30m, bankers said, and syndicates of banks have combined for larger financings. Smaller productions are rarely financed by banks because the legal fees, interest payments and other associated costs become prohibitive.
Neil Begley, vice-president at Moody’s, says Netflix is “strong-arming” producers to avoid adding more debt to its own balance sheet. “One way to do that is to say: we’ll pay you, but we want you to do the financing until it’s ready.”
Netflix declined to comment, but a person close to the company said: “Netflix pays market, and often top of market, to work with the best producers. This is a seller’s market for them with more competition than ever before.”
Last year there were 495 original scripted series released, compared to just 288 in 2012 — and the vast majority of these new shows were made for streaming services.
For lenders to production companies, a central concern is the creditworthiness of Netflix and the other streaming businesses that are buying all this content. The terms on offer suggest optimism about the sector despite the fast-shifting media landscape. Loans for shows produced for Netflix have interest rates of 5 to 6 per cent, bankers said, only a nudge more than Netflix’s corporate bonds, adjusted for relative maturities.
“The risk is if they were to lose subscribers and go downhill, they’ve locked themselves into a certain amount of expenditure for years to come,” said Mr Begley. “Can they let that burn off fast enough before destroying their margins? I’m not as concerned about it today as I was three or four years ago.”
Producers say the staggered payment system suits them just fine when financing is available at relatively modest interest rates. Mick Pilsworth, a veteran TV executive who commissioned programmes such as Midsomer Murders and a Jeremy Clarkson chat show, said that “increasingly now there is a market for lending for productions . . . It is ramping up because of Netflix”.