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Netflix fights to keep its most watched shows: 'Friends' and 'The Office'

The Wall Street Journal. logo The Wall Street Journal. 4/25/2019 Joe Flint and Amol Sharma
Jason Bateman, Nick Offerman, Steve Carell, Jennifer Aniston posing for the camera © Photo Illustration Dave Cole/WSJ; Photos: Netflix(3), ABC, NBC(3)

Netflix Inc. may soon have to contemplate life without its No. 1 show. It’s “The Office.”

NBCUniversal, which owns the show, licensed reruns of the comedy to the streaming-video giant years ago. Now NBCUniversal is launching its own streaming service, and has begun internal discussions about removing “The Office” from Netflix when the contract expires in 2021, according to people familiar with the situation.

This is about to become a recurring headache for Netflix.

Three of its biggest programming suppliers—AT&T Inc.’s WarnerMedia and Walt Disney Co. in addition to Comcast Corp.’s NBCUniversal—are entering the streaming-video arena. After licensing content to Netflix for years, happy to cash its checks, they are looking to take their hit content back to feed their own platforms.

Netflix has an air of invincibility in the entertainment world, with a huge audience, a hefty war chest and a sizzling stock. But the moves by its Hollywood rivals are a gathering threat, raising the prospect the service could lose some of its most-watched programming or have to pay a steep price to keep it.

The three companies launching new streaming services have created TV shows and movies that make up nearly 40% of the viewing minutes on Netflix, according to data compiled and analyzed for The Wall Street Journal by Nielsen.

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Although Netflix has burnished its brand with a flood of original programs such as “Stranger Things” and “The Crown”—and spends most of its time on quarterly earnings calls discussing that content—nonoriginal “library programming” made up 72% of the minutes people spent watching Netflix as of October, according to the Nielsen data. That means reruns, and most of them are made by Netflix’s rivals.

Eight of the 10 shows people spent the most time watching on Netflix in the U.S. last year were reruns, including old hits such as NBCUniversal’s “Parks and Recreation,” WarnerMedia’s “Friends” and Disney’s “Grey’s Anatomy,” the data show.

Netflix discloses little information about its viewership. A Netflix spokesman said the company doesn’t comment on third-party data.

In an earnings call last week, Chief Executive Reed Hastings said the company has long expected to lose some of its library content and is “ready for it, anticipating it, and in fact we are eager to have more and more of our money to be able to do spectacular new titles.”

Chief Content Officer Ted Sarandos said on the same call that Netflix originals are “the shows that our members most value us for, and the things that we really pay a lot of attention to.” He added that the amount of time subscribers spend watching original programming continues to grow.

Still, the next phase of growth for Netflix will likely be more challenging, producing more pressure to develop original hits. In some cases, Netflix might have to relax its traditional insistence on acquiring exclusive streaming rights for classic shows, say industry executives.

“There are a select number of properties that are so meaningful that they will cause someone to revisit that position,” WarnerMedia Chief Executive John Stankey said in an interview earlier this year.

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It cost Netflix $100 million to keep reruns of “Friends” in 2019, roughly three times the fee it had been paying, people familiar with the terms of the deal said. After WarnerMedia launches its streaming service, it can take the sitcom back if it chooses, or offer to share it with Netflix.

Netflix will decide on a case-by-case basis whether to share shows, Mr. Sarandos said in a recent interview.

The company, with nearly 149 million customers, is expected to spend about $12 billion this year on entertainment content, excluding commitments for future outlays. For years it has been pouring resources into originals to be ready for when big studios would stop licensing their wares.

Netflix believes original programming propels sign-ups. It doesn’t drive viewership, however. Of the 10 shows Netflix subscribers spent the most time watching in the U.S. last year, only two were original: the sci-fi horror drama “Stranger Things” and the crime drama “Ozark,” the Nielsen data show.

Top originals provide a burst of viewing right after new episodes, but blue-chip reruns are more consistent, according to the data Nielsen compiled for the Journal. Viewing of “Stranger Things” zoomed in autumn 2017 when its second season was released, but fell back steeply afterward.

Over a 12-month span ended last July, it was watched for 27.6 billion minutes, the Nielsen data show. Viewers watched “The Office” for 45.8 billion minutes.

The Netflix spokesman said looking only at time spent watching overstates the importance of older shows that have many years of episodes—because most Netflix originals have three or fewer seasons—and it discounts films even further.

“Focusing on the individual shows and films members choose and watch is more valuable than how much time they spend on one series vs. another,” the spokesman said.

Brian Fuhrer, senior vice president of product leadership at Nielsen, said sometimes viewers are overwhelmed by a sea of options. “When you open a drawer and you have all these shirts to wear, but you have this one broken-in comfortable sweatshirt, you tend to grab that,” he said. “That’s what people are doing with programming.”

Meanwhile, younger viewers who never saw old shows such as “The Office” on regular television treat them like new programming.

Marta Kauffman, co-creator of “Friends,” the sitcom about six young Manhattanites that went off the air 15 years ago, said it was a “glorious surprise to me that the show has lasted and has this whole new other life.” She attributed its endurance to its heart-warming tone: “It’s not dark, it’s not twisted, it’s not about corrupt people. It’s comfort food.”

Part of the advantage of older shows is their sheer tonnage. There are 235 episodes of “Friends” to choose from.

“Even if you were a passionate fan, you probably have one hundred episodes you missed,” said David Poltrack, chief research officer of CBS Corp., which also licenses shows to Netflix.

Media executives have been threatening for several years to remove programming from Netflix or otherwise restrict how they license it. The money was too good, so they were slow to act. Some shifted licensing deals to Netflix’s chief rivals, Amazon.com Inc. and Hulu, to avoid relying on a single player for rerun sales.

Now the landscape has changed. The traditional TV business is declining as consumers cut the pay-television cord in ever-greater numbers. The biggest companies are betting their futures on selling online subscriptions to consumers just like Netflix. To do that they can’t keep licensing their content elsewhere, although contracts mean they also can’t remove it in one fell swoop.

Meanwhile, the media companies will face Netflix-like dilemmas of their own, to some degree, since they all source outside programming as well. AT&T’s HBO relies heavily on movies from Comcast’s Universal Studios and Disney’s 20th Century Fox, for example.

Media companies face risks in pulling content from Netflix. If they pass up the licensing revenue and their own streaming services don’t gain traction, they could both hurt themselves and alienate the talent who have financial stakes in shows and get a cut of the cash from Netflix.

NBCUniversal has said little about its planned streaming service. Reruns of many shows the company produces are on Netflix, including the afterlife sitcom “The Good Place.”

As it decides which to bring in-house, the major flashpoint will be “The Office,” a comedy about a Pennsylvania company’s hapless employees and bumbling boss, which ran on NBC until 2013. It accounted for nearly 3% of Netflix’s U.S. viewing last year, or some 52 billion minutes.

The show wasn’t an immediate hit on NBC—in fact, it was in danger of being canceled—making its success on Netflix sweeter for the creators.

"Some shows are watched for nostalgia. ‘The Office’ is being watched by their parents and kids. It is resonating so much with the next generation,” said Ben Silverman, a former NBC executive who was an executive producer of the show.

Greg Daniels, who was its lead executive producer or “show runner,” compared it to other eventual hits, such as “Seinfeld” and “Cheers,” that had slow starts. “It’s a character comedy. It only gets better and better the more you learn about the characters,” Mr. Daniels said.

NBCUniversal executives are still debating whether pulling “The Office” from Netflix and forgoing the licensing revenue makes sense, said a person close to the company.

Netflix paid around $100 million for exclusive streaming rights to “The Office” over several years, according to people familiar with the terms. To keep the rights, Netflix would probably have to offer a substantial premium. Some at NBCUniversal have argued the studio should offer to share the show with Netflix and accept slightly discounted payments.

Also up for debate is programming from the CW Network, a joint venture between WarnerMedia and CBS Corp. Netflix pays between $150 million and $200 million annually for the rights to stream reruns of shows including “Riverdale,” “The Flash” and “Black Lightning” soon after they air on the network, according to people familiar with the terms. That deal expires at the end of April.

Kevin Reilly, one of the WarnerMedia executives overseeing that company’s streaming effort, wants new CW shows to air exclusively on the WarnerMedia service, according to a person familiar with his thinking.

Any deal to place CW content on WarnerMedia’s service would affect only new shows that begin this fall. Netflix would retain the rights to shows it already has for a few years.

Disney’s Marvel Entertainment, which made six shows for Netflix including“Jessica Jones” and “Daredevil,” has shut off its fountain, suggesting it’s not only reruns that are at stake. Marvel now is focused on making shows for Disney’s coming streaming service, Disney+.

Disney has been the most aggressive so far in pulling back content. It expects to lose about $150 million a year in operating income as it takes programming off Netflix. Disney will charge $6.99 a month for Disney+, a little under half of what a typical Netflix subscriber pays.

When deciding whether to remove content from Netflix, media companies will have to balance the interests of show creators. If these “profit participants” don’t get a fair deal, they might have grounds for legal action against studios, entertainment industry executives say.

For WarnerMedia, that became a powerful dynamic last summer when it was preparing for its “Friends” deal with Netflix to expire at year’s end. WarnerMedia executives wanted the show to be available on the new subscription streaming service it plans to launch late in 2019 with content from its Warner Bros. studio and HBO. But they also knew they had to consider the financial implications for the “Friends” creators, people familiar with the discussions said.

WarnerMedia shopped the “Friends” reruns, drawing bids from Hulu and Netflix. Ultimately the company found a middle ground. The deal it cut gave Netflix the “Friends” rights for another year while WarnerMedia works to get its streaming service started up. After that, WarnerMedia can take full control of the show or offer to let Netflix share it and pay 25% less, according to people familiar with the terms of the agreement.

Using the values drawn up in the negotiations, WarnerMedia promised the “Friends” creators they wouldn’t lose any financial ground, the people said. WarnerMedia will likely use other approaches to determine the fair value of shows in the future, one of the people said.

Said WarnerMedia’s Mr. Stankey: “We want them to feel they can come here and get upside, that we treat them fairly.”

The creators of “The Office” say they will be looking for NBCUniversal to be fair to them, as well, should it bring the show in-house.

“They still have to treat it like an open-market negotiation. That is incredibly important,” said Mr. Silverman, the former executive producer.

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