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Netflix’s ‘Squid Game’ success casts light on international production discounts

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Scene from “Squid Game” by Netflix

Source: Netflix

In the streaming wars, one company’s hit is another company’s failure.

Netflix‘s “Squid Game” is an exception.

Netflix has its biggest hit ever with “Squid Game,” the gory dystopian South Korean series that has taken the world by storm. More than 111 million viewers globally have already watched at least two minutes of the show.

Typically, hit series breed competitive envy and angst. Netflix famously outbid HBO for “House of Cards,” a lament of HBO executives nearly a decade later. But some of Netflix’s competition is cheering the success of “Squid Game” because it further opens the door to non-U.S. production, allowing media companies to save oodles of money if foreign-language television becomes part of a standard American household’s content diet. Amazon, Apple, Disney, WarnerMedia’s HBO Max, NBCUniversal, Lionsgate‘s Starz and ViacomCBS are all looking across the globe for new TV series that will capture the world’s attention.

Hollywood studios save millions of dollars by hiring local talent instead of Hollywood stars, collecting tax credits and rebates from hungry nations looking for bumps in tourism and recognition, and avoiding strict American union regulations, said Ajay Mago, a corporate and technology lawyer and managing partner for EM3.

“Different countries have different incentive packages,” Mago said. “Some countries will give you free marketing through government channels or support at festivals. They may even give you free local co-producers.”

Eastern European countries, such as Hungary, Austria and Malta, and Canada have long offered significant tax credits and incentives for Hollywood, said Domenic Romano, an entertainment attorney and managing partner of Romano Law. But in the past, U.S. productions would often use international locations as stand-ins for American sets.

“They’d come around to Canada or some place that offered tax incentives, and they’d drop in some American mailboxes and street signs, change the license plates on cars, and voila,” said Romano. “What’s happening now is there is local content from these regions. Studios are no longer masquerading.”

American audiences have typically viewed foreign language films as niche content. Very few, if any, non-English speaking TV series have become part of the mainstream zeitgeist prior to “Squid Game.” Keeping local actors and sets saves a lot on production costs, said Romano. Swapping in expensive A-list Hollywood actors to recreate reboots of hit foreign shows, as has been done in the past, can cost tens of millions of dollars per show, Romano said.

Disney said this week it plans to begin production on 27 new TV series and films in the Asia Pacific region for Disney+ and its Asian streaming service Disney+ Hotstar. The total cost of making “Squid Game” was just $21.4 million, Bloomberg reported this week. A top entertainment executive told CNBC the cost of “Squid Game” with a U.S. cast and union production regulations, which prevent the long work days that are allowed in South Korea, would probably have been five-to-10 times more.

Investing in local international productions also saves Hollywood studios on investing in expensive intellectual property. Episodes of Disney+’s Marvel shows, such as “WandaVision” or “The Falcon,” cost Disney $25 million per episode — more than all nine episodes of “Squid Game”and that doesn’t include the $4 billion Disney paid to acquire Marvel back in 2009. Amazon Prime Video’s first season of the upcoming “Lord of the Rings” series will cost $465 million, according to New Zealand’s minister for economic development and tourism. Amazon paid around $250 million for the rights to the Tolkien property in 2017.

The success of “Squid Game” may also be a boon for creators that have felt stuck in an industry that has relied on superhero movies and reboots of old TV shows for reliable revenue. Tapping the world for new stars and ideas allows for new avenues of growth that can mutually benefit artists and studio executives.

“Netflix is one of the first global streamers in South Korea, and they’re trying to win the content race,” Romano said. “It’s like the Cold War arms race is now the content race where streamers are falling over each other to find content to stream exclusively so they can sign up subscribers before the competition muscles in.”

Investors will have a better idea of just how successful “Squid Game” has been for Netflix’s bottom line on Oct. 19 when the global streaming giant announces third-quarter earnings.

Disclosure: Comcast’s NBCUniversal is the parent company of CNBC.

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