There have been a lot of reports this week about The CW and Netflix negotiating a new deal and the possibility of CW shows being pulled off of the popular streaming service.  From what I’ve read from the reactions, there’s also a lack of basic understanding as to why this could be happening, so in continuation of the article I did back in October, “TV’s New Business Model: Can Supernatural Survive?” , I’ll take a look at what online streaming has done for The CW historically and why the possibility of changing their future streaming options is just part of the ever changing climate.


The Dawn of Netflix

In 2007, when a lot of entertainment companies were dragging their feet and humming and hawing over how to best monetize their valuable content for online distribution, Netflix boldly went in the direction of offering through their service a variety of movies and TV shows via online streaming.  They cut deals with content providers that were big and lucrative and improved their technology, especially with their user interface and streaming capabilities,  Yes, the deals were more in favor of the entertainment companies, but those were done with the design of growing their value and brand through the years.  Short term pain for long term gain.  As a result of their efforts, they set the “binge watching” revolution on its ear so to speak, making it easy for people to access a variety of TV shows whenever they wanted to watch.   If you wanted to watch season two of “Sherlock” at 2 am in the morning after a bender, at the click of a button you were there.  Who couldn’t resist that?  

Netflix’s model for content distribution has proven to be a huge success.  By charging a monthly fee to watch shows, they weren’t at the mercy of advertisers to fund their operations and expansion.  However, they saw the writing on the wall pretty early.  Eventually, these entertainment companies were going to figure out that they could distribute their content through their own in-house services, especially when agreements eventually expired and Netflix had to the power to command more money given their established name and value of service.  Netflix devised a backup plan should this happen, make their own shows.  They announced at the TCA’s on Sunday that they were planning on spending six billion on content this year. 

Also discussed at that Netflix panel, a lot of their profitability and future success will come from international expansion.  Wait, did he say international?  Oh yes, Netflix is going for that coveted piece of the pie, the pie that entertainment companies for years have been using as their hidden and understated boon for profits.  A company like Disney or Warner Brothers could instantly make money or break even on a TV show, no matter or good or bad in the US, by just selling it internationally.   Now Netflix is threatening to cut into that business as well.  The Netflix model has already drastically changed the landscape and rules in the US, so going for the international market is most definitely perceived as a big threat to some.  

Online Test Case - The CW

Ten years ago The CW network was formed.  It was a combination of the then fledgling WB and UPN networks, a partnership between two unlikely giants in the entertainment business, CBS and Warner Brothers.  The synergy of one youth skewed network as opposed to two was supposed to be a win/win for both companies as it gave them an outlet for less mainstream TV programs that they could make instant money on while saving on that operating bottom line.  The joint venture got off to a shaky start though.  When The CW started broadcasting back in 2006, it was very clear that they were not going to be able to compete as a traditional network.  The big four had a stranglehold on the evening time slots and DVR ratings weren’t being counted yet.  Cable was also competing as well, and this was before every cable network offered their own original programming.  When that happened, things got really bad.  Their ratings and revenue plummeted and the network was bleeding money.  

Enter Mark Pedowitz, current President of The CW.  When he took over the network 2011, he abandoned the idea that The CW could work as a traditional network.  (Of course he also abandoned the idea that one network could only survive on going after women 18-34, but that’s another story).  With DVR and online streaming gaining popularity, he saw right away that their target market wasn’t going to watch their shows live.  To him the philosophy was simple, he wanted people to watch their shows.  He didn’t care HOW people watch their shows.  In late 2011 they cut a monster deal with Netflix, one that was said to be in the billion dollar range.  For a money losing network such as The CW, this deal would drastically improve that bottom line and essentially make The CW a player in the TV market.  That’s a very big deal for a small network that barely pulled in $400 million in ad revenue each year.  The deal secured that all shows that aired on the CW for the next four years and their back catalogs would be available to Netflix subscribers.    

Other networks since then have been forced to stream shows online as their TV ad revenue dried up because of less viewers watching live.  NBC, Fox, and ABC all have a stake in Hulu.  CBS started their own online service in 2014.  In order to feed such services, networks now are giving preference to their “in-house” shows as opposed to shows from other studios.  The results have been mixed from a TV viewer standpoint.  This is good news for creative shows that struggle in live ratings but manage to find an online audience, like The CW’s “The 100.”  That show is owned by Warner Brothers.  

However, the Warner Brothers also owns a critically acclaimed show that always did well in the ratings, “Person of Interest.”  That show aired on CBS, who has boldly declared that they are giving their limited time slot availability to their in-house shows, aka shows produced by CBS Television Studios.  Naturally there are exceptions like in the case of “The Big Bang Theory,” their number one and highest profile show, which is also owned by Warner Brothers, but the shift was really noticed this season in other cases.  “Person of Interest” was replaced by “Limitless,” which is doing no better in the ratings but it is more cost effective for CBS.  To this day “Person of Interest” has its supposed final season sitting in the vault, just waiting for a chance to be aired.  Many don’t understand not only why isn’t this show on the schedule, but why it’s a final season.  Business and network politics are killing it, a victim of this new revenue model.  The same also happened to recently cancelled “Mike and Molly,” another Warner Brothers show on CBS.   

Back to the CW though, whose shows have mostly found audiences because of their easy accessibility online presence on Netflix.  This has resulted in a rise in ratings for most shows.  For example, “Supernatural” has actually been experiencing ratings increases since season eight (when live, DVR and online ratings are combined).  This is because a new generation of audiences that were too young to watch the show when it started are catching up on Netflix and TNT where it runs in second run syndication.  Just a few years ago it was estimated that one-third of the CW audience watched online and it is believed that number is higher now.  Aging shows like “The Vampire Diaries” are seeing audiences more than double now when DVR and online is factored into the equation.  It only makes sense, since CW shows are mostly genre shows that fare better with the binge watching crowd.  The same crowd that doesn’t watch live. 

The problem is the CW/Netflix deal has expired.  At the recent TCA’s Mark Pedowitz confirmed that their current negotiations with Netflix are not going well and they are considering other options.  That doesn’t mean that CW shows are being pulled from Netflix, just that new shows this season are not eligible for airing.  Old seasons of shows like Arrow, The Flash, and Supernatural can still be shown on Netflix, but new 2015-2016 shows are not eligible.  Trust me when I say that Crazy Ex-Girlfriend is worth a binge watch.  Sadly, it doesn’t have that opportunity currently and it’s struggling to find an audience.  The CW needs a longer term and reliable option. 

One rumored option is that The CW would start their own online streaming service, charging around $2 to $4 per month.  Granted this is just a possibility being tossed around and not a firm reality.   The reports of this new service came from “two people with knowledge of the matter” and not Mr. Pedowitz himself.  According to the Wall Street Journal,  “Mr. Pedowitz declined to specify who else CBS and Time Warner might be talking with regarding a new output deal but said he expected the issue to be resolved in the next six to nine months. He also did not rule out coming to terms with Netflix.” 

The WSJ report also mentioned one huge sticking point to the negotiations, international distribution.  Netflix wants to expand their streaming of the CW shows to the new international markets.  And there’s where things come full circle. Remember what I told you earlier about international revenue?  That has been a massive key to Warner Brothers and CBS making money on the CW shows and not tossing out the network entirely.  Almost all CW shows turn a profit for their studios as soon as they go to air, even poorly rated ones like Reign.  Beauty and The Beast gets awful CW ratings, but it’s very popular internationally and makes money for CBS studios.  That’s why it keeps getting renewed.  If Netflix wants to expand the current structure internationally poses a big risk the bottom line for Warner Brothers and CBS in those markets. 

So yes, now The CW is being forced to consider other options.  Whether openly speaking about those options is merely a scare tactic used during negotiation or if they’re serious is not known at this time.  However, The CW is also facing another problem that might send them to an in-house online streaming service…Tribune Media.  

Securing the Affiliates

At ten years old, the original affiliate agreements are up and The CW has managed to easily sign several high profile local station groups, such as Gray television, Media General, and Sinclair.  With Gray television, they pick up 19 existing stations and 4 new ones, all to go with Sinclair’s 24 stations and Media General’s 16.  Things are still up in the air with Tribune though, which holds 13 markets.  They hold the largest markets, New York, Chicago, and Los Angeles.  As expected those negotiations haven’t been going well.  

Tribune has been outspoken about their displeasure in The CW for years, especially as they struggle with their dwindling revenue options after emerging from bankruptcy a few years ago.    Tribune CEO Peter Liquori in 2014 complained openly about their strategy of programming for “people who don’t watch television” and he wanted a seat at the programming table.  Tribune airs news after CW programs air and younger viewers tend not to stick around for the newscasts.  They also constantly pre-empt CW programming for local sports events, something that does hurt the live ratings of The CW but boosts the local broadcasts.  There are a few reports that Tribune wants the digital rights to CW shows, allowing them to stream CW shows online in their markets.  That’s a piece of the pie that The CW is very reluctant to give up since it’s been critical to its bottom line and survival the last few years. 

Tribune’s options if they lose The CW aren’t ideal.  In order to earn more revenue and make them more competitive with cable channels who get subscriptions fees, the US broadcast networks started charging local stations “transmission fees.”  All of the CW affiliates pay a transmission fee, and sources say that they are asking for increases in those fees, although the big four networks charge much heftier fees given their higher ratings.  If the Tribune stations are dropped The CW, they would have to go independent.  For a company with a shaky financial picture and the numerous original programming options already out there, the risk is high.  Buying second run shows is expensive as well, especially if it’s a popular one like CSI.  

The CW has been exploring alternate options for a while now should Tribune not renew their agreements.  The most obvious one is to air on CBS digital sub-channels, but those aren’t highly watched channels.  The other is to offer an online service.  While neither are ideal options, with other affiliates easily on board, The CW can at least carry on in a good amount of smaller markets.  Their traditional broadcast model isn’t going away any time soon.  

So what have we learned from all this?  It’s business and it’s all about negotiation.  Warner Brothers and CBS are both very shrewd negotiators and aren’t easily going to give away their content without a price.  The one question is, how deep would The CW go with their catalog in an online service?  The network is only ten years old.   Unless Warner Brothers allows them to dip into the old WB network’s catalog, the service does lose a bit of its luster.  CBS is already airing old UPN shows like Everybody Hates Chris, The Game, and Star Trek: Enterprise on their All Access service.  

Given that the mere idea was only mentioned this past week, we do have to wonder what sort of thought has been put into the new service.  It’s still way too soon to tell.  One thing is for sure, given that The CW has found huge success streaming online, they’re not going to do something that will prevent that sort of easy access to their shows in the future.  With CBS launching their own All Access service and Warner Brothers’ Time Warner sibling HBO starting their own HBO To GO service, they do have other implemented models to follow.  

Only time will tell as all these new services are launched, but it can be assumed that eventually streaming services can be offered in bundles, much like cable television.  That’s still far out in the future though.  As a viewer myself, it is a pain to subscribe to so many monthly services, but having choices is nice and if the studios and networks don’t make money the choices diminish.   It does make it hard when shows are not in one central location for a casual viewer to check something out on a whim, but I suppose if a fan of Arrow subscribes and decides to check out Supernatural that’s not a bad thing.  One thing for sure is an online service will not be a replacement to The CW live airings and will be just another supplemental income stream.  As long as I get my fix of Supernatural every week, we’re good.  


Sources:


http://chicagoradioandmedia.com/news/7900-could-wgn-tv-lose-its-cw-affiliation-in-2016

http://www.bloomberg.com/news/articles/2016-01-11/cbs-warner-bros-said-to-consider-online-version-of-cw-network

http://deadline.com/2014/05/tribune-ceo-says-hes-not-pleased-with-cws-performance-731112/

http://www.wsj.com/articles/as-netflix-talks-stall-cw-considers-other-partners-1452456472

http://variety.com/2016/digital/news/netflix-ted-sarandos-blasts-ratings-nbc-1201681727/

http://www.adweek.com/news/television/cw-s-chief-doesn-t-care-when-or-where-audiences-watch-his-shows-168937

Comments  

eilf
# eilf 2016-01-18 21:51
This is really interesting Alice, it is amazing how complicated all this gets. Have the companies managed to get a handle on what size their TV audiences really are or is it all based on the Neilsens? I understand that Netflix has a way of determining viewing levels (just a straightforward count?) and that they keep those numbers pretty close to the chest, it seems unlikely that they would share that with the TV companies? Or would it be in their interest to do so? Wouldn't it more be in the tv industries interest to have a sort of central clearinghouse where shows can be accessed by viewers for a fee and have the companies paid by number of views? Oh yeah, they call that "Television" don't they? :D

I have to say I was unhappy to see that idea being put forward by the CW during the week. I have never been a snob about watching TV, I watched a LOT of it in my life - much of it American :) - but over the years I have often had people around me say that 'they don't watch tv' or they 'don't own a TV set' as if that were some sort of achievement, like quitting smoking. For me TV was something I could pick and choose. Flash forward a few years and I am living here in the US and, while the TV is in many respects better than when I was a teen the difficulty was the commercials! ... oh man the commercials ... so many, so long (I will withhold judgement on the entertainment value (but I am absolutely certain I have never had ED, thanks anyway, nor do I need a local lawyer, car or native american casino)) ... I stopped watching TV after one legendary occasion where it took the channel I was watching 4 hours to show a single James Bond movie (I don't even like James Bond ...) it had been altered from original format! In parts they basically seemed to leave it running in the background while the ads played because there were chunks missing - and it still took 4 hours!

So I cut the cord and moved on to the internet and discovered Hulu (when it was free) and Netflix. I haven't been near Hulu for a long time but I do love Netflix (even though my viewing goes West Wing, Supernatural, WW, Eureka, WW, Warehouse 13 oooh Jessica Jones is v good!) and the thing is I don't want to have to sign up for multiple accounts, and multiple passwords and multiple companies messing around with my identity and my credit card information. It's bad enough with just Netflix and Amazon. The more little teeny payments of a few dollars a month to more different companies means more chance that I end up funding someone's World of Warcraft habit (yeah that happened).

Are they really expecting us to go traipsing all over the internet dealing with different companies different streaming layouts, different formats, different messing about? Netflix is really pretty well designed! Though it isn't perfect. Many companies don't even get that you might like to know what the synopsys IS for the show or movie you are about to watch. "Yeah this show is called "Limitless", you guess what it is about. Is it : a) a sci-fi series with pretty people b) A documentary about the Australian outback c) A cooking show for hipsters".

This idea of everyone doing their own thing is not going to last long I would think, because watching tv is supposed to be reasonably effortless. And finding an audience for a new show is already difficult. If the networks want their new shows to be found I think they will come to realise that they need to be near other, similar shows by their competitors so that viewers become aware of them - people going channel-surfing internet style. Personally if they do fragment it like this I will go back to my DVDs (which I was just about to trade in for Funkos - those things are addictive - at the local gameshop :D) because DVDs at least lack ads...
Been thinking about this a little apparently :P
Alice
# Alice 2016-01-18 23:40
The entertainment companies don't mind you going to DVDs either, because you have to buy them from them! So that's another win for them in controlling content. Of course they can't count how many times you watch.

Getting a full count on who's watching and where has been a very frustrating thing for networks like The CW. Nielsen is just useless. They haven't had much success measuring alternate sources other than live and DVR viewing. They don't know who watches on DVR past 7 days, they don't count online and the Twitter engagement counting they do is still in it's experimental stage. The value of that is still unknown. Mark Pedowitz did say at the TCAs that he was told by Netflix that viewing numbers for The 100 were very good. He didn't elaborate what they were though. One reason why they held the show to midseason was so that people could discover and catch up with the show on Netflix and that seems to be working. We won't know until the show comes back next week if that translates into live viewers, but The CW seems to be okay with audiences finding it elsewhere.

Entertainment companies have always been stingy with sharing their content, but they are especially not good with finding alternate ways to distribute that content other than the traditional, money making channels. You should read that article about the Netflix CEO at the TCA's (it's in the sources section). He's a visionary and said he has no idea how many 18-49 viewers watch shows on Netflix. He just cares about total viewers. According to the article, "He sees ratings as putting ” a lot of creative pressure on talent” that turns into a “weekly arms race.” I've also read other articles where he's overheard complaining about these stodgy old behemoth companies that are reluctant to work with him and embrace the future.

I think Pedowitz is a visionary too but he's limited by his bosses at Warner Brothers and CBS who are very establishment. He has to please them. In the end I hope The CW comes to terms with Netflix. I think it's a win/win for both because it draws younger viewers to Netflix and audiences to The CW. But we'll see. I'm hoping it's all tough talk for negotiations.
cheryl42
# cheryl42 2016-01-18 22:14
Wow that was a really complicated analysis of the current kerfuffle that the CW finds itself in. No wonder Mark Pedowitz has very gray hair. Bottom line it looks like the future of television is going to change for all of us at some point. Honestly the only network television I watch regularly is the CW. I hope our favorite shows (Supernatural being on the top of that list) remain accessible for us fans.

Thanks for the explanation Alice. I knew the CW was a struggling network, I didn't know how much of a hurdle it was facing.
Alice
# Alice 2016-01-19 00:01
I'm not sure if you were watching live back in season 4, but behind the scenes everyone thought The CW would fold after that TV season. The numbers were that bad. The writer's strike really crippled them. Kripke was so worried that he thought season four would be the last season. He decided to go out very strong and had a huge season planned. He backed off a bit in the middle of the season when Supernatural started getting record ratings (for the CW anyway) and it was obvious S5 was happening. Luckily things rebounded for The CW from that strike year (the viewers came back). Warner Brothers also started taking back control of programming decisions after they literally handed control of the new network in 2006 over to Dawn Ostroff and her co-horts at CBS and saw it crash into the ground. Then the next season The Vampire Diaries was a huge hit, thus saving the network. Warner Brothers was instrumental in bringing Pedowitz in as soon as Ostroff's contract was up. What do you know, all the top shows are Warner Brothers shows. Male viewers have come back.

The CW is actually doing pretty good right now. It'll never compete with the other networks, but their shows have buzz and recognition. The Flash actually finishes third in it's time slot routinely. It is the highest rated show ever on The CW. So they have a chance to take this momentum into these negotiations and secure their future. Let's hope they do it right!
percysowner
# percysowner 2016-01-18 22:23
Thanks Alice. this really helps me understand some of what is going on with this streaming situation. As a viewer I really don't want to subscribe to NBC, ABC,CBS, FOX, and CW separate streaming sites. I want to go to one or two places to find the majority of my shows. The other issue is price. For me, CBS Access is way overpriced. Netflix currently has me grandfathered in at $8.00 for their service. CBS is asking $6.00 while having you watch commercials and only covers their programming. It seems like a big deal. The suggested price of $2-$4 for a CW streaming site would be in the range of what I'd be willing to pay for a stand alone site. I'm also very aware that in my area, the CW will remain available Over The Air, so I can always get an antenna and an OTA DVR and keep watching all networks, including the CW.

As a note, for anyone who wants to binge Crazy Ex-Girlfriend, all episodes are currently available on Hulu or at least Hulu Plus, I use Hulu plus on my Roku, so I can't vouch for regular Hulu. I agree it's worth binging and people can.
Alice
# Alice 2016-01-19 00:06
I'm a little pissed at CBS right now for the whole Person of Interest thing. So they won't be getting a dime of my money for their All Access service. We have all the Star Treks on DVD anyway.

Tribune - particularly WGN and WPIX, have been acting like independent stations for years. They tossed the CW logo from their station IDs and constantly interrupt CW programming for sports. Looking at the new agreements, only New York, Chicago, and LA aren't covered if Tribune should bail, which I think they should. The CW deserves a better and more loyal affiliate. Tribune needs them more than The CW needs Tribune.
ScifiSpirit
# ScifiSpirit 2016-01-19 09:24
If future shows were smart, they would just bypass these big-wig exec companies and go straight to Netflix for production. Daredevil and Jessica Jones were amazing and they were Netflix-only shows. There are so many others too. I watch the shows I watch and I hardly pay attention to the channel they are on. That's what my DVR is for. I enjoy TV too much to let it go because there have been so many good stories as of late in genre's that I really love. Currently, I'm watching: Supernatural, Vikings, The Flash, Arrow, Gotham, OUAT, Grimm, Big Bang Theory, Legends of Tomorrow (soon), X-Files (soon), SHIELD, Blacklist (because everyone needs that ONE show that's not like the others, lol), Heroes (but that's ending), and Wayward Pines (but that's not until the summer. Yay for it getting a season 2!!). And I couldn't tell you what channel half of those shows are on. I honestly don't care. I don't support the network. I support the writers and the actors. So, I'll watch anything anywhere. Netflix just makes it convenient to get caught up on stuff. I wish these shows were produced more on the basis of quality than ratings, but it is what it is. I just hope it all gets sorted out soon.
paladinteacher
# paladinteacher 2016-01-19 17:06
Very interesting article. Thanks for filtering and interpreting all of that information for us. I had actually been under the impression that CBS and Warner were more co-mingled than they are, just because the news that airs at 10:00 on the CW is the news program from the local CBS affiliate. I had heard about CBS All Access, but it was mostly complaints from people when the service was launched, who said that it was too expensive and did not offer content that they wanted to watch. Person of Interest and Supergirl are the only two programs on CBS that I am interested in right now. It stinks for Person of Interest that the program is being sacrificed for one that has comparable ratings. I am a little worried that I am in Tribune market. I think I have heard or seen that at the end of the newscasts.

I personally do not have Netflix (yet), though I am considering it. I've tried out a few shows at my brother's house. They just moved way out to the boonies in the country - and we grew up rural. Netflix is all that he has at the moment. They have a two-year-old, so most of their programming is Thomas the Tank Engine right now.

On a slightly different tangent, I recently read an article, in Entertainment Weekly, I think, in which one of the studio executives was complaining that the most talented and creative writers were all going to cable and outlets like Netflix. None of them wanted to write for the traditional 22-episode shows.
njspnfan
# njspnfan 2016-01-19 17:49
When I first read about this, I thought it was a negotiating tactic. If anyone ever figured out a reliable way to track viewers nowadays they'd make a fortune. Seems pretty clear that Nielsen doesn't have a clue.
Kris
# Kris 2016-01-24 05:04
This is an interesting article, but it sure could have used a proofreader.