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

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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