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We've Seen This Movie Before

Has Netflix really changed the TV business? And will it change the film business?

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Netflix made news this week by announcing “Crouching Tiger 2,” the first scripted studio feature film to be released simultaneously in theaters and on its platform. Better yet, it struck a deal with Adam Sandler to film four movies with Netflix as the sole distribution platform in nearly 50 countries.

In Monday’s story, ReCode’s Peter Kafka mentions that Netflix isn’t the first to offer on-demand movies that are still in theaters. He correctly points out that many smaller films come out “day and date” in theaters and for rental and download on platforms like your cable box and iTunes. Those platforms are transactional, and require a direct payment for the film.

What many people have forgotten is that as early as 2006, Academy Award winner Stephen Soderbergh’s film “Bubble” was released simultaneously in theaters, on demand, and for free to anyone with a cable box and a subscription to Marc Cuban’s HDNet.

Consensus feedback to the Netflix moves, summed up by BTIG’s Rich Greenfield: “Netflix already changed the TV business in a very, very significant way. The movie business is teed up next.” Moreover, as outsiders like Activision Blizzard get into the film-production business, the tech world is starting to speculate that the traditional film business can be significantly disrupted.

Has Netflix really changed the TV business? And will it change the film business? I’d argue that Netflix and other streaming video on demand (SVOD) services have reinforced TV economics and added a significant amount of fuel to foster more content creation. When it comes to film, we are likely to see a reinforcement of the status quo, not meaningful business model innovation.

Taking a step back, here’s how traditional studio films make money via “windows”:

  • 1. Film is released in theaters, domestically and internationally. The studio generally earns between 40 percent and 60 percent of the gross box office revenue.
  • 2. Film is released for transactional VOD (TVOD) and DVD. This generally happens from 60 to 90 days after the theatrical window closes. Studio earns a wholesale price per unit.
  • 3. Film is released to premium subscription services (Pay 1). Historically, the premium cable providers (HBO, Starz) were the major buyers, but starting in 2016, Netflix will release Disney’s movies on SVOD. This generally happens six or more months after the TVOD window starts and lasts four to six years.
  • 4. Film is released on free cable (e.g., USA, FX). There’s also a free TV (broadcast) window, but that has essentially disappeared.
  • 5. Film is released to premium subscription services again (Pay 2).
  • 6. Lots of smaller, more opportunistic, and occasionally nonexclusive windows.

The above is replicated internationally, with slight differences among territories.

Can SVOD services and other innovators collapse windows and meaningfully change viewer experience?

All the major theater chains have reacted negatively to the “Crouching Tiger” Imax/Netflix deal. Similarly, “Bubble” didn’t find much distribution outside the Cuban-owned Landmark Theatres chain.

Why not? Simply put, theaters make money because they are the only place where consumers can see the film for an extended period of time. If that same film is also available for free to tens of millions of consumers with a Netflix, Amazon, or Hulu Plus subscription, the burden of quality required to get butts into seats is significant. Theaters are in the real estate business. They manage high fixed costs, and are motivated by sold-out rooms. If those rooms are harder to sell out, theaters tend to be unhappy.

Make no mistake, lots of experimentation happens on the margin. But the studios are beholden to theaters for their major film releases. And theaters will not tolerate the idea of an alternative that’s more convenient (and effectively free) for the vast majority of the audience.

SVOD services have already and will continue to make the world a better place for film viewers. Moreover, they have and will continue to release world-class first-run feature films exclusively on their platforms. This year, “The Square” was nominated for an Academy Award. “The Great Beauty,” available on Hulu Plus, won the Oscar for best foreign picture. Today, services like Netflix and Amazon can afford to spend millions in license fees on an individual film, and more to market it. In the future, that number will be measured in the tens of millions. Netflix has already committed to paying that for Disney/Marvel/Pixar/Lucas films a full year after they are released.

But none of this is new. Netflix and its competitors are following a well-developed growth strategy, and are increasing the overall filmed entertainment pie, not fundamentally changing the distribution paradigms.

To quote Ted Sarandos, Netflix’s goal is to “become HBO faster than HBO can become us.” HBO’s history is fascinating, and I will not rehash it in great detail here, but it was not always the ultra-premium brand we know today. A full 10 years after its birth, people used to joke that the letters stood for “Hey, ‘Beastmaster’ is On.” Its major early original programming highlights were “Dream On,” “Arliss” and “Tales from the Crypt.” “The Sopranos” and “Sex in the City” weren’t green-lit until the late ’90s.

Netflix became HBO much faster than HBO did. Having had a head start via its DVD business when it dove into digital distribution, Netflix took a bold content bet by making a deal with Starz in 2008. Subscribers could try the streaming service free, and could watch new premium films from Sony and Disney. Once enough users signed up, Netflix could justify licensing more content, at first non-exclusively, and eventually with some small-scale exclusivity. Fast-forward to today, and Netflix is outbidding major cable networks for second-run rights to the most popular television shows. Most recently, it paid a reported $2 million per episode for Sony’s “The Blacklist.”

The original series on Netflix, Amazon and Hulu are as good or better than anything on TV. They also look just like premium TV. My personal two favorite series so far this fall are Amazon’s “Transparent” and Netflix’s “BoJack Horseman.” And don’t forget the major Emmy nominations and wins that Netflix (and Hulu) have received.

Let’s remember how Netflix makes money. It needs to attract new paying subscribers. And it needs to keep those subscribers watching, which creates a high likelihood of not canceling. To attract users, it needs sexy content, and to retain them, it needs to make sure they never run out of something to watch. In other words, lots and lots of programming.

To attract subscribers, sexy titles are a must. Note the HBO playbook once again: Netflix has massive hits like “Orange Is the New Black” and “House of Cards,” and safe(ish)-bet investments like the Marvel series. With the Sandler announcement, there’s no doubt that over time, like HBO, Netflix will invest in original films, but the math of spending $100mil on 26 hours of “House of Cards” versus 90 minutes of a superhero film seems to have a pretty clear bias toward serialized programming.

Don’t forget, HBO doesn’t just make series. Last year it released Stephen Soderbergh’s (yes, the same Soderbergh) “Behind the Candelabra” to great critical acclaim. HBO has made films starring major movie stars including Al Pacino, Michael Douglas, Matt Damon, and Kevin Bacon. Over time, Netflix and Amazon too will likely earn the right to invest in films in the $20 million to $40 million budget range. Even an occasional swing for something sexy that costs more. They will also continue to bid on new output deals with major studios in the Pay 1 window. Even free services, like Crackle, will likely make strategic original film investments. After all, Lifetime has been doing this for decades.

Will all of the above propel Netflix to be even more competitive with HBO, Showtime, FX, and USA? Sure. Will it create more money available to filmmakers? Yes. Will this affect the major studios and their blockbusters? Sure — with new buyers the price will be bid up.

But is this fundamentally new? Absolutely not. The last few years have seen aggressive new buyers for TV, and more and more, these same buyers are opening their wallets for film. But it’s not an unprecedented new development. Rather, it’s another lucrative outfit for high-caliber storytelling.

What we are yet to see in the new digital universe is premium content that fundamentally differs from what preceded it. In that sense, the new content evolution is still in its early infancy. But perhaps that’s fodder for another article …


Alex Kruglov is co-founder and CEO of Smiletime, a video technology company launching in 2014. Prior to that, he was head of content acquisition at Hulu for six years. He lives in Santa Monica, Calif., with his wife and two daughters. Reach him at @akruglov.

This article originally appeared on Recode.net.

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