April 28, 2021

Winner Takes Most

In a rather ironic move, Netflix has been quietly debuting some of its movies in U.S. theaters with a 7-day window (i.e., Netflix streams the films seven days after their theater run ends).

Could the original “black hat” of the theatrical window be cinema’s savior? And why would the company that once accused movie theaters of “strangling the movie business” now be their “white hat” salvation?

In 2012, TDG observed that Netflix’s primary competitors were no longer brick-and-mortar retailers like Blockbuster, which it had left in the dust, but premium cable channels such as HBO that both aggregated third-party content and produced their own shows.

In 2013, Netflix premiered its first original production, House of Cards, an American version of the popular BBC mini-series. Why invest in originals? According to Ted Sarandos, CCO of Netflix, the company wanted “to become HBO faster than HBO can become us,” which required offering subscribers the best of all content, including its own.

This was a shot across the bow of the traditional film industry, which had for decades lived by a theater-first mantra, with cinema enjoying an 80-90-day window over secondary distributors. Other streamers followed in short order, among them Amazon and Hulu.

TDG was among only a handful that understood the long-term implications of this move. Today, most industry players tout this strategy as “the only future.”

Kilar Shoots First
Jason Kilar, CEO of WarnerMedia, recently fired his own shot, announcing the simultaneous release of its 2021 films in theatres and on its SVOD service, HBO Max. Though he later backtracked on a similar strategy for 2022 releases, Kilar’s original move revealed just how far the value of films had shifted away from moviegoing in favor of home streaming in the eight years since Netflix first launched House of Cards.

But just as WarnerMedia appears to be moving closer to day-and-date releases, Netflix seems to be moving away from them, releasing two films, Christmas Chronicles 2 and The Prom on Cinemark screens with a 7-day window. Terms of the deal are not public, but one can speculate that Cinemark did not have the upper hand in negotiations, a position theater chains have long enjoyed.

But why is Netflix now supporting a 7-day wait for subscribers to see the studio’s movies on its service? Why are subscribers having to wait at all?

Netflix’s New Reality
Netflix subscriptions in the U.S. cannot grow forever, as evidenced by the first-quarter 2021 addition of 488,000 UCAN (U.S. and Canadian) subscribers, a mere 20% of Q1.20 additions. Put simply, Netflix is nearing its demand asymptote—that is, the point at which tactics shift from adding subscribers to retaining them and growing viewing time.

And with a flood of new SVOD entrants, subscriber growth will be more difficult and expensive for Netflix. Little wonder the company is looking for incremental dollars in other channels. Capturing some of the theatrical dollars will allow Netflix to capture a larger piece of the entertainment pie going forward. The success of Godzilla v. Kong, both theatrical and streaming, is an indication that HBO is becoming more like Netflix. As with many businesses, as you mature you become more and more like your competition, Netflix may be no different, although this time as a follower.

There is also a concern that post-pandemic demand will soften, as more viewers return to in-person activities.

Talent Management as a Strategy
Netflix acquired the Egyptian theater in May 2020, officially to “expand programming at the theater in ways that will benefit both cinema lovers and the community.” However, it is more likely meant to benefit the rumored 60+ person award’s team who allegedly spent $30M on their failed Oscar bid for Roma.

Even in Europe, Netflix has struggled with the creative community, pulling out of Cannes due to the French government’s (and Cannes organizer’s) support of the theatrical window. Cannes is a big deal for Hollywood and the larger global film talent community. This is a must be seen at event if the goal is to be a legitimate player in film.

Despite this move, Netflix is quietly taking a different approach to film festivals & award shows, supporting them in ways that seem counter-intuitive to its disruptive nature. As a result, Netflix had its best year ever at the Oscars with seven wins from 36 nominations, far more than anyone else – a sure-fire way to keep their newly-acquired talent happy.

Beyond the Cinerama Dome
As America emerges from the shadows of COVID-19, there are some clear winners and losers from a year of consumers moving their appetite for video online during “safer at home.” Among the latter is one of the storied LA theaters, Arclight’s Cinerama Dome, which has announced closure.

Ironically, the LA community is asking for Netflix to save the Cinerama Dome. This would be a great PR move for Netflix, preserving the unique shared experience that the Cinerama Dome provided Hollywood viewers.

One wonders that if Netflix continues to become more like Hollywood, if Netflix continues to “take most,” will anti-trust scrutiny come its way as it did for Hollywood in 1948 when the Paramount Decree was born. (The Paramount Decree prevented the studios from owning both production and distribution).

We will keep our eyes open for talk of a “Netflix Decree” in the coming weeks, months, and years.

Stick with TDG to Stay in front of the Curve.

Douglas Montgomery is a 15+ year veteran of the Entertainment Business. His time with Warner Bros. was spent analyzing, and living the incredible changes from the VHS era, to DVD and finally Streaming.

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