Netflix Inc. (NFLX -0.48%) recently expanded its office space in the Southern California area by leasing 320,000 square feet of a new 14-story office building on Sunset Boulevard in Hollywood. This is in addition to the 80,000 square feet of office space the company already occupies in nearby Beverly Hills. The company has set up a base of operations 300 miles south of its Los Gatos headquarters to have a presence near the center of its original content productions.
Hollywood has been the epicenter of film production for decades so it is only natural that the dominant leader in internet television would gravitate toward that area. Having offices close to where the action is helps the company hire people with the right type of experience and skills to make it successful.
Company management is now taking issue with the practice of going out of state to film movies and TV shows in order to receive higher state tax credits.
Image source: Pixabay.
State tax credits and the film industry
States have been attempting to woo movie and television production companies to move a project’s filming from Hollywood to their state. The idea is simple. The state wants to stimulate the local economy by bringing in revenue from the production company whose employees will stay at local hotels, eat in local restaurants, and hire temporary help from the local community. In exchange the state issues tax credits that can be used by the company producing the film or can be sold to companies who can take advantage of the tax credits.
Although the incentives may be great for production companies there is a downside to all this. Employees who live in the Los Angeles area are forced to spend months away from their families as their employers move production projects to far away states chasing tax credits. Great if you’re a movie mogul not so good if you are an employee working for a movie mogul.
Netflix charts a different course
Now that Netflix is playing a role in creating exclusive original content it is weighing in on this concept of going out of state in return for financial incentives such as state tax credits. To the delight of the local creative community in Hollywood it is saying employees do their best work when they do it at home. Specifically, Netflix has already announced that its offbeat hit “The OA” will be moving production from New York to Hollywood for its second season and the company plans on keeping most of its U.S. projects local.
Here is how Chief Content Officer Ted Sarandos answered an analyst's question about state tax credits on Netflix’s Q1 earning’s webcast.
Look, think about it as an extension of our talent-friendly commitments, but also in terms of our commitment to quality. And what we have found in our own business is that if we create a great working environment for an employee, they do the best work of their life. And I think, in the case of production, a lot of that comes off in the performance, which comes off in the screen. So we want to invest in our talent the way we invest in our talent inside of Netflix and create the best shows on television. One way of doing that is not having people travel all around to chase the tax credit. …
Netflix can still get California tax credits
Keep in mind that although the company is spinning a very good story for local production companies Netflix is not turning down any money that may be coming its way from the state of California. In 2015 California bolstered its own offering called, the Film & Television Tax Credit Program 2.0, by raising its cap to $330 million per year for a period of five years. It may not have the most lucrative program being offered in the country but it isn’t too bad.
Below is a table showing tax credits for a few of the states in comparison to California.
| State | Tax Credit |
|---|---|
| Alabama | 25% |
| California | 20% |
| Illinois | 30% |
| New York | 30% |
| Washington | 30% |
Data source: The Hollywood Reporter. Chart by author.
Netflix’s message is loud and clear
The message Netflix is giving to the content production industry is simply work with us and we will treat you like valued employees and in return we expect you to give us your best work. In a competition for content typically the high bidder will get the deal. There is something to say, however, for the phrase that people like doing business with people they like doing business with and Netflix is giving Hollywood another reason to like Netflix.
Netflix subscribers along with the cast and crew of Netflix productions are the real winners. Subscribers will be treated with higher quality productions and who knows maybe an extra content deal or two will swing in Netflix's favor based on the enticement of working close to home.
