Netflix’s Aggressive Move Into Movies to Shake Up the Business

Netflix Gets Into Movie Business With
Kelsey Dake

In just 48 hours, Netflix sent the movie biz spinning — and where it stops is anyone’s guess.

The streaming giant made it clear last week that after challenging the TV industry, it now has designs on the bigscreen.

Netflix announced two groundbreaking pacts in short order: the first with Imax and the Weinstein Co. to fund and simultaneously release a sequel to martial arts classic “Crouching Tiger, Hidden Dragon” online and in select theaters in August 2015; followed by a four-picture deal with Adam Sandler.

The surprise moves by the Los Gatos, Calif.-based company could have repercussions for cinema operators and traditional business practices among Hollywood’s major studios, exhibitors and top creative talent.

“They’re very important, game-changing announcements,” says Cinedigm CEO Chris McGurk. “Audiences today don’t care about the old rules of the studio and entertainment business. They want to see films when they want, how they want and on whatever device they want.”

For decades, Hollywood has thrived on a model with clear delineations between a film’s release in theaters, on homevideo, television, and now, digital platforms. But windows are collapsing — perhaps more quickly than anyone thought, if Netflix’s brazen deals are any indication.

“The glory days of DVDs and Blu-rays are gone,” says producer Ashok Amritraj, Hyde Park Entertainment topper. “We had a very happy time for quite a while with those separate windows, each one having its own revenue stream.”

So-called day-and-date movie releases aren’t new — “Margin Call” and “Arbitrage” are two of the more successful titles that premiered simultaneously in theaters and via on-demand platforms. But because of exhibitor backlash and the fear of leaving money on the table, such releases have been primarily the domain of smaller films from indies like IFC, Magnolia and Radius-TWC.

What’s different about the pictures under Netflix’s new deals is that they are mainstream vehicles — particularly the Sandler movies — which have essentially opted to forgo a theatrical release to tap into the streamer’s burgeoning 50 million worldwide audience of subscribers.

But in doing so, Hollywood players like the Weinstein Co. and Sandler may be sacrificing more than ticket sales: They could also be disrupting the economic ecosystem of film, since library content devalues more rapidly when it is made available on Netflix, where it can be streamed endlessly.

“The reordering of windows is what will produce a different economic outcome,” says Josh Grode, partner and co-chair of the transactions group of law firm Irell & Manella. “You are able to take a lot of costs out of the first cycle; the unknown is the revenues that will be generated.”

With the publicity garnered by original series “House of Cards” and “Orange Is the New Black,” Netflix already has disrupted the TV business. It has spurred networks to order shows straight-to-series, while altering the way that viewers consume programs by offering them in one binge-inducing full-season package.

Netflix’s incursion into movies could be just as disruptive, predicts BTIG Research media analyst Rich Greenfield: “This is a meaningful change in Hollywood’s structure. It’s changing the process.”

Netflix can be expected to set aside budgets of more than $50 million for “Crouching Tiger 2” and each of the Sandler movies in the pipeline, Greenfield estimates: “These are significant bets. These are not made-for-TV movies. They didn’t chintz going into the TV business.”

Theater owners  have circled the wagons, with the four biggest U.S. chains — AMC, Cinemark, Regal and Carmike — saying they will refuse to show “Crouching Tiger” on their Imax screens.

But in a sense, Netflix also is responding from a defensive posture in tapping Sandler to be the public face of its experiment in filmmaking. Like rival HBO, Netflix must give its users a reason to shell out $7.99 (or $8.99) for a subscription on a monthly basis. Sandler’s recent films may have struggled at the box office, but his older efforts are among the most-viewed by Netflix users around the world, and they cater to a very different demo than its other original programs.

Netflix is “chasing a world where it’s hard to get premium and exclusive content,” according to a talent agency exec. “They see an opportunity with a star who may not be as bankable as he once was, but who does have a demographic of tens of millions of people who want to watch him.”

Under Netflix’s arrangement with Sandler, his Happy Madison Prods. will work with the SVOD provider to develop the movies, the first of which could arrive in 2015. It’s clearly a deal that may spark interest from other industry players. With a roughly $27 billion market cap, Netflix appears ready to offer stars big paydays — the kinds of checks many are no longer receiving from studios. Moreover, Netflix has an incentive to pay top dollar for recognizable franchises, given its eagerness to plant a flag in original movies.

“It’s a shot across the bow, but out of Netflix’s $3 billion in (annual) content spending, it’s not that giant a bite,” says Larry Tanz, CEO of Vuguru, the digital entertainment studio backed by Michael Eisner’s Tornante Co. “It makes sense they would not take a TV-only strategy.”

As a data-driven company, Netflix can plot how many people will watch its original movies, and it wants a mix of critic-friendly titles as well as popular fodder along the lines of Sandler’s oeuvre. And, as a global distributor, Netflix needs content that “can play in Cannes and Kansas and Canada and Cologne,” Tanz says.

It’s not clear how great a long-term threat Netflix’s moves pose. But the furious reaction from exhibitors to “Crouching Tiger” indicates the sector thinks it’s necessary to pull out the heavy artillery.

“Exhibition has taken a position, and the question is, how long can they hold on,” says a high-level studio executive. “Any time we’ve tried to be innovative, they’ve taken a consistently hard line. There’s a generation of kids who are used to seeing whatever they want to see on whichever screen. There’s no question there will be evolution.”

Studios, which still show their costly tentpole movies through exhibitors, will have to proceed carefully. That limits their ability to experiment with alternative release strategies via specialty labels they own, such as Focus Features and Fox Searchlight; the blow-back from theater owners could have ramifications for the next “Fast & Furious” or “X-Men” film.

In the short term, any experimentation on the studio side may be postponed because of the glut of big releases scheduled to hit theaters in 2015 and 2016 — years that will see new installments in the “Star Wars,” James Bond, “Batman” and “Jurassic Park” franchises.

That may let Hollywood incumbents kick the can down the road for now. But as Netflix challenges the industry’s long-held practices, theater chains and studios alike must decide if they’re onboard with the new approach. “If talent wants to be on Netflix, and the theaters don’t want to show it — too bad for the theaters,” Greenfield says.

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  1. And to think that I was deemed insane when I proposed, on 1991, a worldwide, all media, release to the mini-major (Vestron) I was working on… my rationale then was to combat the number one competidor of ours, pirates… time changes, time changes.

  2. turnkit says:

    Theatre owners ought focus on keeping the theatre experience special.

    But instead the whole theatre industry has dropped the ball having never implemented automated quality assurance technologies in the theatres.

    Instead it’s unregulated sound, too hot or too quiet, unregulated surround sound sent out as LRC channels only, weak projector bulb lighting, humming air conditioning, stained screens, improperly framed side curtains, walking preview lights left on during feature times, etc. etc. But almost 50% of the time I bother to see a theatre presentation the sound is not 100%.

    (For goodness sake’s, home theatre amps have pink noise mics, why don’t all movie theatres have calibrated feedback mic systems? Each movie should go out with mix level settings that can be updated from the studio on the fly if they discover something is in error.)

  3. steve says:

    the only thing i would say is that Netflix cant rock the boat too much because studios still supply them with the majority of the product to stream. There is a lot of avenues that can be taken to get your product streamed so the studios do not need Netflix but Netflix needs them..

  4. Rick Katz says:

    I don’t necessarily see this as good for the consumer if the theater experience deteriorates. I still miss drive-ins.

    • Jack quevedo says:

      I’m not worried about movies on DVD and blue ray. And hiring sandler to make movies for netflix is kind of like hiring a stapler to improve your cars performance. His movies usually are for retarded potheads that that wouldn’t know a real movie from a soda commercial. Sanders made two movies I could sit through. Punch drunk love and Spanglish…Netflix is not a threat to Hollywood….yet.

  5. Tom Combs says:

    The movie industry will learn a hard truth. 90% of films released today can just as easily be seen on our home theater without loss of any quality. The Rom-Com, the chick-flick, and yes, the Adam Sandler comedy all work perfectly well on your home theater or even your iPad.

    If it isn’t a blockbuster SFX filled movie, you don’t need to see it on that big of a screen. It adds nothing.

    That, and when you factor in the growing number of savages texting/talking/acting-like-assholes that make movie fans cringe, it actually has to be a film that warrants the hassle and cost to go see it in a theater.

    The industry needs to not make the mistake the music industry and TV did. The consumer wants to see the content where they want to, how they want to and when they want to. The reason piracy thrives ISN’T the price point, it is the availability to watch in the form we want to consume the content in.

    Just look at the list of top pirated shows. They’re mostly titles that aren’t available on a streaming option. Game of Thrones is the most pirated, and if HBO decoupled HBO Go from a cable subscription those numbers would plummet.

    I would pay 30 bucks to see a just-released movie in my home without all the hassle and savages. Or happily pay Netflix to save me the trouble.

  6. Martin A. says:

    Last night I sat in a packed, sold-out movie theater watching WHIPLASH. If studios make (or distribute) good movies, and learn to cater to niche audiences, you will *always* have a crowd who shows up for a collective film-going experience.

  7. Craig Inzana says:

    Netflix has the distinct advantage that they have all the statistics about what people are watching that Hollywood and the TV Industry have been trying to pin-point through various methods for years. It takes this formulaic movie making to a whole new level and takes nearly all of the guess work out of it.

    Bad or good? Neither, just the new thing. Change will spur interesting content in the era of most-repeatable programing. I’m good with that for now.

  8. keyrok says:

    I don’t get it. They made a 4 picture deal with Adam Sandler? But I thought they wanted to make movies.

  9. Matt says:

    More power to ’em, because movies pretty much suck.

  10. What blow-back from theaters? The major studios OWN the theaters, you think AMC has leverage over Warner? The theaters barely get anything after the nut, they need traditional film exhibitions to exist. Studios can afford to change formats, theaters cannot.

    What will happen is the major cinemas will prolong the complete arrival of SVOD film releases by turning on each other and accepting even worse gross box percentages in exchange for exclusive engagements, increasing vending prices, cutting employees in favor of automated systems, and offering more gimmick services like dine-in/lounge. It’s the same slow death we saw with video rental stores who fought for outdated systems.

    The only way the studios could possibly SAVE their limited access cash cows is to drop ticket prices back down. But c’mon, when has that ever happened? The only movie theaters left in 10 years will be those local small-time operations willing to screen indie/art/foreign flicks, just like record shops outlived sam goody.

  11. Eduardo Jencarelli says:

    It’s called Happy Madison Productions. Happy Gilmore is the name of the movie.

  12. curtlyon19 says:

    ok, great but Adam Sandler? geesh, no thanks

  13. Netflix is not the real problem. It is the studious and their booking practices with films.
    As a small exhibitor who has converted to digital, to be told no you can not open a film does not make any sense.
    Especially when so much of the money any film makes is in the first week or two of its run, why would you NOT want it on as many screens as possible?
    Buy not getting it on screens they ARE making people look else were. Hello Netflix.

  14. Nick Turner says:

    Hmnn…Netflix big data says this deal works best if Sandler delivers comedies like his early stuff which subscribers evidently replay endlessly. No wonder; they are funny as hell. But can a 48 year old play the feckless adolescent into his 50’s? And more to the point isnt AS, a very talented thesp with susprising range, determined to make his mark as an actor by performing more serious roles at this stage? Re giving Sandler creative control…in the past his sensibility if left unchecked seemed to skew to the sophmoric and gross. (Sandler actually told the press this week he did this deal mainly because “Netflix rhymes with wet chicks”. Who do you think came up with that line?) Granted Netflix hit the jackpot by letting genius David Fincher redo a killer 80s UK mini w/out interference with fellow genius Kevin Spacey. But this Sandler experiment is way different. AS, while gifted, is no Fincher, and here will have to create original fare. We’ll see.

  15. In recent years admissions haven’t been growing this summer it was more noticeable because box office has dropped. But in recent years the additional charges exhibitors add for 3D has hidden the fact that box office hasn’t been increasing in years. Exhibitors and studio executives are saying that this year is a blip and everything will be back next year. There might been some massive films but away from the hype most will be like the Emperors New Clothes nothing new or exciting. Which is also why Event Cinema has become so popular as its giving audiences something different to what the studios are releasing.

    Going to the cinema used to be a cheap night out but it has become expensive in recent years and with home entertainment technology getting cheaper with the likes of 4k some homes have better quality technology in their homes than cinemas so its no wonder people are opting to stay at home and stream films via Netflix or Amazon. Exhibitors were concerned last week with Chris Nolan getting his wish to get Interstellar released in 200 cinemas in either 70mm and 35mm as when people see it in that format they might ask them why they are screening films in digital in a poorer quality than they used to get with film. Cinemas are screening films in 2k & 4k while 35mmwas up to 6k and 70mm IMAX is up to 18k compared with digital IMAX being 4k which is the same quality that you can now buy as a domestic TV.

    The Hollywood Studios need take the threat from Netflix and Amazon seriously Blockbuster didn’t when they rejected the chance to but Netflix of $50m they are now worth $30 billion and Blockbuster are bankrupt. The same can be said for companies like Kodak and HMV. The studios had a laugh when Netflix announced signing Adam Sandler for a 4 picture deal but that will be the first of many as they go from distributing studios content to distributing their own content through their worldwide distribution network. . .

  16. This story like it or not is progress. Netflix will take a bite out of both studio and indie films, but will not do huge market share damage – at least at first. High ticket and concession prices combined with obnoxious cell phone users and crying babies mid-show seems to be doing a good job of that without Netflix.

    And, it’s “Happy Madison Productions” not “Happy Gilmore Productions” as stated in the above article.


    • Aru says:

      Progress, or at least the effort of creating it, that’s what I thought too. It seems odd to have an at-home version of a movie at full theatrical release, but it’s not entirely new either. I have to assume also, that this doesn’t mean EVERY studio will get on board, no matter how popular. There will likely still be films that will release only in theatres, or perhaps a shorter showing in theatres before going to video/streaming avenues.

      I see this as a positive move, since movies have been largely stagnant, in my opinion, for longer than I care to remember. Every movie I hear of now, seems to be a remake of something, and with little reason to revisit the story other than adding some twist ending, or more realistic CG. Theatres have also been able to raise prices exponentially without adding any value to what they offer (yes, I know they aren’t the only ones though).

      The final say will be in the hands of the consumer, if no one watches these movies on Netflix they will have to adapt a different strategy. As long as they don’t ask for more money for the same thing I already get. Also, I think it’s odd for a theatre to say they will refuse to show a movie that could give them an edge in this fight. If someone actually prefers to come to the theatre to see Crouching Tiger 2, instead of watching it on Netflix at home, seems like you’re fighting for the other side there even if they did produce the film.

  17. Joe Polk says:

    Cable has been shit for years.Reality programing sucks big time it’s about choice with me.I can watch what I like on netflix not what some programmer thinks I should like.It’s the new democracy in entertainment.

  18. i really wouldnt mind if netflix charged a bit more for some new movies and series and such, even if it were a few dollars to see it a few weeks earlier.. it would give them a load more money and wed all be willing to pay it.. id rather netflix get those 5$ rental fees then the other guys.. come on netflix… charge more?…… … destroy cable! we have all been wishing for its death since forever. Tired of 100+ channels i dont want. and 3-4 that i do depending on the show… and those channels i cant get, the unpopular ones… that i have to buy the expensive packs to get.. wtf??? nasa chn should be free as well.. discovery? history.. netflix save me D:

    • Robert says:

      You are complaining about cable companies charging you and you notion netflix to start as well? Sorta ironic since you pay a subscription fee already…

  19. Mur says:

    I welcome this. Not my problem they pay an normal person an ridiculous amount of money to star. I am not paying close to $20 bucks to watch something I can at home. Just like the music business, the old business model is dead due to technology.

  20. Jeff says:

    I never go to the movies anymore, that pleasure was ruined a long time ago by obnoxious people. Cell phones, talking through the movies, babies crying. We watch everything through Netflix, CDs delivered or on the computer. I believe that Netflix or someone will fix the final nails in the coffins of the Theatres. They will go the way of the Video stores and outdoor drive-ins. I do hope they have a better plan than Adam Sandler movies though, he bombs in about 90% of his movies.

  21. John Shutt says:

    If Netflix thinks they are going to succeed in and shake up the movie buisness, they are sorely mistaken. Overstated article thats nothing but pro-Netflix garbage.

    • von moltke says:

      Yeah, it’s totally unrealistic. The movie business is as impervious to change as the music industry. And the television industry.

  22. jdobypr says:

    Reblogged this on The Urban Link and commented:
    Netflix is 10 years ahead…it’s going to be insane. I know so many people who subscribe to Netflix just to watch the brand’s original programming. Lookout cable and satellite

    • Mary Triola says:

      I am thinking of cancelling my account. Your content is becoming more and more disappointing. I have Amazon and Acorn I find myself watching more and more of them. I have been amember for years and now find myself more and more disappointed with your selections. I go thru and there are more blank spots on your roster. You had better start paying more attention to your selections. I have spoken to many people who are just as disapointed as I am.

      • smarts says:

        I personally know a couple people whom have cancelled Netflix in the last 8 months. I remember when they had other movies then the “B” movies to watch. The latest fraud advertisement by Netflix is – they claim to be selling “cards” at retail stores. But the stores contradict that false claim.

  23. Jo says:

    I have no stomach for Blue Ray and I hate DVDs. People like Brad are welcome to enjoy them as usual but I am genuinely excited about Netflix’s recent moves. I love House of Cards and Adam Sandler movies.

    I got tired of paying for hundreds of cable channels I never liked or bothered to watch, just to get 4 channels that I might tune into once in a blue moon. In fact, prior to Netflix, I had NEVER tuned into ANY TV series on a regular basis.

    Thanks to Netflix, things have changed. I have watched episode after episode of Sons of Anarchy, Scandal, Bones, Breaking Bad, Dexter and many many others.. The way the content is delivered is everything I could have desired.

    I just wish Netflix could update these shows sooner, but I understand how it goes. Cable wants their chance first. I am a patient person and I will wait until the whole season is available.

    Anyway.. I look forward to seeing more content and original movies through Netflix….

    Now if only we can get them to throw in live streaming to football for a little more a month…
    And maybe a life news channel … I’d be in heaven.

    • Max Mielecki says:

      I like Netflix just fine, but I still go for DVDs/Blu Rays. I guess i’m old school in the regard that when it comes to movies I like to have a physical product that I can hold in my hands.

  24. “As a data-driven company, Netflix“. Really? Don’t you have anything to say about the lack of transparency of Netflix on the viewers count? This is an immensely overstated story, indeed.

  25. Brad says:

    Anyone that thinks that DVD and BluRay are dead is clueless. Especially since 4k Blu ray is already just shortly ahead. Netflix content is fine, but the presentation quality will never come close to BluRay, or the experience of a cinema. This is an immensely overstated story.

    • LOL at thinking people waiting for the next Adam Sandler movie are worried about video quality, or destined to wax nostalgia for overpriced popcorn, disruptive audiences, and trying to figure out how to get the best seat at a crowded showing.

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