The latest data leaked from Sony Pictures Entertainment by hackers reveals that Sony executives had accused Netflix of breaching its licensing contract for Sony Pictures Television (SPT) shows by allowing customers in foreign markets to use virtual private networks to stream them, calling it piracy that is “semi-sanctioned by Netflix.”

Sony pressed Netflix for increased “geofiltering” control over its customers to prevent the practice, including restricting payment methods for the service to ways that would allow screening for customers living outside countries where Netflix had contractual rights. The move came as Sony was positioning to merge its own streaming offerings and other digital products into a “One Sony” digital operation to better compete with other services.

In November of 2013, as Sony Pictures Television was negotiating with Netflix over licensing of content—specifically, rights for Breaking Bad—the company’s president of international distribution Keith LeGoy e-mailed Sony Pictures Television President Steve Mosko to update him on the proceedings. The deal was important to Sony—SPT execs believed it would bring in $41 million in the 2014 fiscal year. In another e-mail to Mosko, SPT Executive Vice President and Chief Financial Officer Drew Shearer had emphasized, “We need to deliver the Netflix BB deal in FY14 like we thought or $41mm goes bye-bye from FY14.”

However, SPT executives felt Netflix was doing too little to control who could use its service—and in the process was damaging its licensing revenue overseas. LeGoy laid out the issues in his e-mail to Mosko in November of 2013:

Netflix do not closely monitor where some of their subscribers are registering from and don’t take steps to counter circumvention websites that allow people in, for example, Australia, to sign up to the US or the UK Netflix service and subscribe illegally (Netflix don’t as of now have a service in Australia, nor do they have Australian rights for our content). We have asked Netflix to take steps to more closely monitor circumvention websites, and to restrict methods of payment to more clearly weed out subscribers signing up for the service illegally. This is in effect another form of piracy—one semi-sanctioned by Netflix, since they are getting paid by subscribers in territories where Netflix does not have the rights to sell our content. Netflix are heavily resistant to enforcing stricter financial geofiltering controls, as they claim this would present a too high bar to entry from legitimate subscribers. For example, they want people to be able to use various methods of payment (e.g. PayPal) where it is harder to determine where the subscriber is based. They recognize that this may cause illegal subscribers but they (of course) would rather err that way than create barriers to legitimate subscribers to sign up. We have expressed our deep dissatisfaction with their approach and attitude. I’m sure other studios feel the same way, especially as we are now hearing from clients in Australia, South Africa and Iceland (to name a few) where significant numbers of people are able to subscribe to Netflix. Netflix of course get to collect sub revenues and inflate their sub count which in turn boosts their stock on Wall St., so they have every motivation to continue, even if it is illegal. This issue is almost certainly going to get more heated, since our goal and Netflix’s are in direct opposition.

Another issue LeGoy raised was that Netflix was “bundling” content from SPT, making multiple shows from the company available in the United Kingdom and other countries where Netflix was overtly serving customers. “They maintain, incorrectly, that they do have the rights which is absolutely wrong,” LeGoy said in his e-mail, adding that “we are prepared to grant them these rights as we have done in Holland, but in return would want to gain extra value (as we did by giving the greater flexibility in our Dutch deal).”

But Netflix, LeGoy said, had “stated that they intend to continue doing more bundles without negotiating any new agreement, so we will need to send them a letter from our lawyers stating that this will put them in breach of their agreement with us. I am attaching a copy of the proposed letter.”

Netflix also wanted to tie any new agreement on Breaking Bad to licensing of the spinoff, Better Call Saul, for overseas viewing. "As in the US, they have asked to tie the Breaking Bad deal to the delivery of Saul—or in the event we don’t make Saul, to reduce their license period on Breaking Bad and the license fee," LeGoy said. "We have told them that we are prepared to make a separate deal for Breaking Bad which is not tied to Saul, or to keep to the deal we have agreed, but that we are not prepared to attach any conditionality around the terms for Breaking Bad."