Netflix: The monster that’s eating Hollywood

Tara Flynn, a rising star at a TV production unit of 21st Century Fox, walked into her boss’s office last August and told him she was quitting and joining streaming-video giant Netflix Inc. The news was not well-received. “Netflix is public enemy No. 1,” said Bert Salke, the head of Fox 21 Television Studios, where Ms. Flynn was a vice president, according to a Netflix legal filing.

When Netflix finalized Ms. Flynn’s hire a few weeks later, Fox sued, accusing it of a “brazen campaign” to poach Fox executives. In response, Netflix argued Fox’s contracts are “unlawful and unenforceable.”

The ongoing legal battle is just one sign of the escalating tensions between Netflix and Hollywood as the streaming-video company moves from being an upstart dabbling in original programming to a big-spending entertainment powerhouse that will produce more than 70 shows this year. It is expanding into new genres such as children’s fare, reality TV and stand-up comedy specials—including a $40 million deal for two shows by Chris Rock. The shift has unnerved some TV networks that had become used to Netflix’s original content being focused on scripted dramas and sitcoms.

Netflix’s spending on original and acquired programming this year is expected to be more than $6 billion, up from $5 billion last year, more than double what Time Warner Inc.’s HBO spends and five times as much as 21st Century Fox’s FX or CBS Corp.’s Showtime. It spent close to $10 million an episode on “The Crown,” a lavish period drama about a young Queen Elizabeth II.

Its shock-and-awe spending—combined with that of Amazon and other new players—is driving up costs industrywide and creating a scarcity of people and equipment.

“You just can’t compete with someone coming in with fresh money, low overhead and a lot less baggage than you,” said Darrell Miller, an entertainment lawyer at Fox Rothschild LLP. One veteran television executive likened Netflix’s onslaught to Genghis Khan’s.

TV stars are demanding “movie star” salaries of some $250,000 per episode when they previously were content with half that, according to studio executives. Competition for “A” team camera crews, sound engineers and postproduction specialists is fierce.

“It’s a feeding frenzy to get the best people,” said Jeff Greenberg, a prominent casting director.

TV networks and studios helped fuel the rise of what is now a competitor. When streaming video led to a plunge in DVD sales about a decade ago, licensing shows to Netflix was seen as a new way to cash in and extend the financial life of expensive programming. With Netflix now seen as a direct rival for original programming, some media companies are cutting back on those licensing deals, including Discovery Communications Inc. and Scripps Networks Interactive.

“We of course have flare-ups because we compete for people, we compete for projects,” said Netflix Chief Content Officer Ted Sarandos. But “we are in this together” with media companies, he said.

About 20 other 21st Century Fox employees not under contract have recently jumped to Netflix, a person familiar with the matter said. Netflix also recently plucked away Stacey Silverman, a senior executive at Comcast Corp.’s NBCUniversal Television, as well as executives from Sony Corp. and Walt Disney Co., among others. (21st Century Fox and Wall Street Journal-owner News Corp share common ownership.)

Faced with spiraling costs, TV chiefs are redoubling efforts to discover new writers, show creators and lessexpensive stars. Scripps created an HGTV show called “Home Town” starring a fix-it couple found on Instagram, and it has several in the works with YouTube stars. NBCUniversal said it would make shows with BuzzFeed based on popular web video and news content.

Producers and agents are beginning to talk about the downsides for talent of being on Netflix shows and movies—for example, by saying they don’t get the promotion they deserve on Netflix’s crowded shelf of content—but many Hollywood stars still relish the chance to be in a Netflix original. Netflix tends to offer more money up front along with a more flexible filming schedule due to fewer episodes, and several of its shows have won critical accolades and industry buzz.

Some TV industry executives and Wall Street skeptics question whether the company can add enough subscribers, especially in international markets, to support its breakneck spending pace and justify a $60 billion market capitalization that values Netflix at more than 300times its 2016 earnings. Netflix’s overall subscriptions grew 25% in 2016 from the previous year to nearly 94 million.

MoffettNathanson analyst Michael Nathanson estimates Netflix this year will have negative free cash flow—a measure of profitability—of about $2 billion due to elevated spending on original shows, which require a higher upfront outlay than library deals.

Netflix has financed the spending by borrowing money, increasing its debt burden more than 17-fold since 2012 from $195.8 million to $3.4 billion.

Investors and Netflix executives are focused on subscriber growth over any other metric and have been encouraged by a surge in international customer additions over the past couple of quarters. Last quarter, it added 5.12 million subscribers abroad, beating expectations. Shares are up 44% in the past year.

Netflix’s desire for domination is on display in its push into comedy. It has gone after big name stand-up comics that used to call HBO home, including Mr. Rock, Louis C.K. and Amy Schumer, with an aggressiveness not seen since CBS’s famed talent raids on NBC in the late 1940s, when it wooed away radio stars such as Jack Benny and Edgar Bergen. Mr. Rock’s $40 million payday is more than double what he was getting at HBO, according to people familiar with the terms.

Mr. Sarandos, the content officer for Netflix, declined to comment on Mr. Rock’s deal.