Should Netflix Become A Content “Arms Dealer”? How A Show Like ‘Grace And Frankie’ Reveals Netflix’s Strategy

If we are in the midst of the “streaming wars“—the coming battle for viewers between Netflix, Amazon, Disney, Comcast, AT&T and the old cable/satellite companies—then someone needs to supply each side with the weapons. And these weapons are content. That means, as I believe Rich Greenfield coined on Twitter, we need…

That’s right, content arms dealers for the streaming wars.

The content arms dealer has some slight distinctions from an actual arms dealer. First, the content—say sitcoms and feature films—replaces the weapons—say AK-47s and Stinger missiles. But like the arms dealer, the content arms dealer lives in the shadows, usually selling shows without telling you about them. Plus, they do their deals in secret. Did you know Lionsgate owns the rights to Orange is The New Black?

Currently ViacomCBS is the exception, not the rule. To take this analogy too far, the big entertainment conglomerates going up against Netflix have decided that they can’t afford to arm their rival anymore. The challenge is that they’re going to lose a lot of potential revenue in the meantime, as this Hollywood Reporter headline (accurately) suggests:

However, for all the time we spend asking if traditional conglomerates will sell to Netflix, as they have for the last decade, we rarely flip that question on its head. Netflix is currently outspending most of Hollywood to make content…and it’s losing money doing so. So why shouldn’t Netflix take some of its popular shows that are getting up there in years and become a content arms dealer itself?

Fortunately, we have the perfect test case to test to see how much money is potentially out there for Netflix. Grace and Frankie—a series which first premiered in 2015 and is ending in 2021—will end its time on Netflix with seven seasons and 94 episodes. That’s a funny number because in the olden times (of the 2000s) 100 episodes used to be the hurdle to sell a series into syndication.

Could Netflix sell Grace and Frankie to traditional linear channels? Or even another streamer? Would it even want to? Answering these questions will tell us a lot about how content licensing deals could impact where a lot of our favorite streaming shows will be in 5 to 10 years.

The Owner – Who *can* sell this series?

The biggest factor for whether your favorite Netflix, Amazon or Hulu series—to which we’ll add Disney+, HBO Max and Apple TV by next year—is who owns the series. A lot of series billed as “originals” in America are exclusive to Netflix or Amazon in the United States or Europe, but not “owned” by them. I’ve defined this in three rough areas before:

• Licensed: The streamer only licensed the first run of the series, which is usually for a given time period.
• Co-production: The streamer owns “half” the series, and its partner—usually a big studio like Warner Bros, Sony, Universal or Paramount TV groups—owns the other half. Usually the two partners still split the costs, but the streamer/channel pays close to 100% production costs.
• Wholly-Owned: The streamer created and paid for the whole thing, so they own it in perpetuity.

For a licensed series, as soon as rights are up, the owner can (and will) resell it. Sometimes the streamers extend these deals, but that’s costly. A good example is that Amazon licensed the rights to Catastrophe, so when its exclusive window expired, it ended up on the Lifetime channel. In another case, BoJack Horseman is airing on Comedy Central since its linear holdback expired. For co-productions, the streamer usually has the rights for much longer (anywhere from a 3-7 year hold back), but after that time can resell the series.

I’d add for Netflix there is almost a fourth category of “super licensing” where they never own the series, but pay much, much more (say 120-150% of the production costs) to licensing the first run for anywhere from 3-7 years. Netflix is actually facing down this problem for both Orange is the New Black and House of Cards.

Where does Grace and Frankie fall? According to TV Top Five podcast, it’s a licensed series. (I reached out to Netflix and Skydance TV for clarification, but usually Netflix doesn’t comment on content contracts.) Since Grace and Frankie has NOT aired anywhere else, presumably Netflix either has control over subsequent windows or they paid Skydance TV not to air it elsewhere.

Which always means Netflix could change their minds and decide to let it air somewhere else. Especially for a cut of the revenue. Even if Netflix doesn’t control the rights, whenever Grace and Frankie comes up for renewal, Netflix will face the question of how much to pay to extend the series or risking it going to another streamer or channel.

(Also, I’m going to use “syndication” and “licensing” interchangeably in this article, but to refer to the same thing. That’s the idea that after the initial run on broadcast, cable or streaming, a series with a significant number of episodes is sold to either a cable, broadcast or streamer for a set time period and/or number of runs. Typically, that’s called syndication, but for the streamers, they typically call it licensing. The difference is mainly about naming and paying residuals, which is an issue for a future article.)

The Context – Content Rights Market Are Exploding

The biggest series up for licensing renewals are seeing eye-popping deals every other month. In 2019, Netflix paid $100 million for the rights for Friends for just one year. Then news leaked that HBO Max would pay similar rates for The Big Bang Theory. Friends too! And now South Park! Last decade, FX paid over $1 billion for the rights to every Simpsons episode ever, and now Disney+ is taking over that deal at similar high valuations. NBC paid bushels of cash for The Office for its streaming service ,Peacock, that debuts this spring.

The key question going forward is what happens for the lower tier series, like a Grace and Frankie. No one would confuse G&F for Friends or even Orange is The New Black. To quantify this, executives doing licensing like this take similar shows—or “comps”, short for “comparables”—and extrapolate that if they’re roughly the same level of popularity, then they’ll be worth about the same. This is usually calculated as a price per episode, which is multiplied by episode, for a given time period. 

One challenge with syndicated and licensed content is that it is a secret world. There isn’t some database with all the past deals out there to browse and analyze. (Like traditional arms dealers!) Except in the cases of huge series sales—like the ones mentioned above—we don’t find out specific prices and even the big deals are usually vague leaks. Still, those six huge TV series—arguably the five biggest comedies of the last few decades—we know a lot about. I’m calling them the F-BOSSS (Friends, The Big Bang Theory, Office, Seinfeld, South Park and The Simpsons). And here’s what we know about their price tags:

(Most of the data above came from the various articles linked to above, but also this very informative Hollywood Reporter article.)

The Data – How Popular is Grace and Frankie?

To make comps, then, we need to know how G&F compares to the F-BOSSS series. Since Netflix doesn’t release viewership data, we’ll have to make some assumptions. I do that by leveraging Google Trends data. It isn’t perfect—it can be noisy if a series or film has a marketing campaign go viral on social, for example—but it roughly correlates. (All US data to follow, unless noted.)

The good news for Grace and Frankie is that it’s getting more popular over time. That’s probably why it’s escaped the fate of many, many other series that never made it past season 3. However, take note that the series peaks quite sharply at launch, then declines pretty steadily.

Of course, this performance tells us nothing about how popular it is compared to other series. Here’s a look compared to some other recent buzzy series and syndicated series.

Grace and Frankie is roughly more popular than Bojack Horseman—which Comedy Central licenses—and Transparent, which had a brief run on Sundance TV. It’s also much more popular than Catastrophe and was more popular than Fleabag…before Fleabag won an Emmy and the internet. Also, according to Google Trends, it is also way less popular than Orange is the New Black.

The bad news is that it doesn’t compare to the F-BOSSS big syndicated/licensed series. To show this, here is last August—a month with no news for any of these series—and you can see the “baseline” interest in the various series:

In other words, Grace and Frankie is best case worth 25% of Seinfeld or worst case about 4% of Friends in the United States. Globally, it’s even worse. To quantify this, I took the average over the month from the tables and made these ratios:

That’s pretty bad news for the price of Grace and Frankie all said. However, if I were SkydanceTV or Netflix, I’d show buyers this Google Map…

Of the comedy streamers I compared Grace and Frankie to above, it’s the show that appeals most to the non-coasts. Meaning the older audience in the center of the country more likely to still watch traditional TV. And potentially still available for cord cutting.

The Tradeoff – Potential Licensing Revenue vs Subscribers

Knowing all this, what would a potential licensee pay for Grace and Frankie, for their platform? Given that the percentage of interest for Grace and Frankie and the F-BOSSS series is between 4-9%, that’s probably the likely range for Grace and Frankie on the open market in the United States, especially if Netflix refuses to share viewership data to potential licensees and syndicators. I took that percentage, and just multiplied it by the price per episode of our comps:

Looking at that data, I’d say the licensing value for this series, using comps is roughly $20-$25,000 per episode per year at the low end. Multiplied by the number of episodes, that means that Netflix or Skydance TV—depending who owns the rights—could make a pretty nice $2.2 million per year selling the rights to this series. At the high end, if a network really wanted Grace and Frankie, I could see this getting up to $100,000 per episode. By the way, in a bidding environment where some executive may really, really want this show, that $100,000 (or even higher) isn’t crazy.

What value does G&F have if it stays on Netflix? This is much harder to quantify, but I have two ways to think about it. Preferably, you could use my method from my Game of Thrones valuation where I “attributed subscribers” that keep their subscription because of a series. I explained my method for that here. (For this calculation, I’m assuming a customer lifetime value of $260. Why? Well, it’s long and I’ll explain it in future articles.) It is slightly complicated, so in addition to that, an easy way to think about it is also the number of customer months people would need to pay for to justify the subscription. Here are those two numbers:

If 9,000 seems small, well it is. But it’s also relatively big, when you think about it in context. In four years, if less than 9,000 folks are watching Grace and Frankie—and again look at that decay, so that’s not crazy—than 9,000 doesn’t seem ridiculous. Further, even if 100,000 customers are watching G&F, you wouldn’t attribute all those folks to Grace and Frankie. To use a Game of Thrones comparison, the most popular series on the planet, I attributed “only” 1 million retained subscribers to it. Is Grace and Frankie—in the future—only 1% as valuable as Game of Thrones? Probably. Maybe less.

The Conclusion – Netflix Probably Could Make Some Money as a Content Arms Dealer, but Won’t.

If Netflix cared about maximizing the revenue and hence profit for all its content production, then it probably would sell a lot more in other windows. Even if Netflix could sell Grace & Frankie for $10 million per year—and other series it may eventually own the rights to—it won’t. It would rather keep each 9,000 fans then make some extra cash. Until something changes—either subscriber decay, stock price crash or continued cash losses—Netflix probably won’t join the content arms dealer club.

The Entertainment Strategy Guy writes under this pseudonym at his eponymous website. A former exec at a streaming company, he prefers writing to sending emails/attending meetings, so he launched his own website. Sign up for his newsletter at Substack for regular thoughts and analysis on the business, strategy and economics of the media and entertainment industry.

Where to stream Grace And Frankie