First DVD rentals, then TV production, and now film—Netflix is upending the entertainment business as we speak
Why it’s a big deal. And why we should cheer them on (hint: it’s better for consumers and content creators).
Netflix could be breaking Uber’s record for the number of entrenched businesses it can piss off at a time. Last week, Netflix and the Weinstein Company signed a deal to finance Crouching Tiger, Hidden Dragon: The Green Legend, and premier the film simultaneously on Netflix and in IMAX theaters. A few days later, the company announced a deal with Adam Sandler on 4 films which will be made available directly to subscribers in 50 countries. These are game-changing, disruptive deals—which of course means that someone isn’t happy. In this case, it’s the US theater consortium, which is already fuming and threatening boycott. However, like most disruptions in the name of efficiency, these deals will benefit consumers and content creators.
Why is this such a big deal, and why are theater chains so livid? In essence, just as it did with the TV business and House of Cards, Netflix is challenging the “the way things have always been done”. A typical film is distributed along a sequence of revenue channels, or windows. The windows often don’t overlap so that the maximum amount of revenue can be soaked up at each step, and typically go in order of exclusivity: theaters, VOD sales (sales on iTunes, Amazon Instant Video, and Google Play), VOD rentals, DVD sales (yes, people still buy DVDs), and TV broadcast. People on all sides of the business are ambivalent about content windowing, but most agree that it’s a last ditch attempt to squeeze all out of a slowly dying value chain.
Netflix’s two recent announcements upend the windowing system by cutting out all the “middle men”—in this case, theaters, TV broadcasters, and DVD sellers, et al. With the Adam Sandler movies, Netflix will own all the rights and will make it exclusive on the streaming platform. This means that you won’t be able to watch it anywhere else.
…Which is exactly why Netflix wants. The company surely paid a ton of money and will take on an inordinate amount of risk for these contracts. As an aside, pre-production financing is perhaps the riskiest part of an already risky business, and is a role that typically is played by deep-pocketed executive producers who know there’s an extremely small chance of getting any return. However, Netflix can play this game better than anyone before because it has a secret weapon: it knows what its customers want. Better than any other entertainment company ever, Netflix knows what we want to watch and why. By this point, we’ve all heard that the reason they green-lit House of Cards was that they knew there were passionate audiences for David Fincher, Kevin Spacey, and a drama series. By playing the role of the film financier, Netflix brings terabytes of data about consumer preference to a role that has been, and still largely is, a guessing game. (“I’ve got hunch that audiences will go crazy for Cowboys & Aliens” is usually how these decisions are made.)
Whether the investment pays off or not, Netflix will be rewarded by customers and the media for fighting for customers amid a stodgy industry that prioritizes risk minimization over all else. Which leads to the next point: how is this good for consumers? In short, speed and choice. Netflix knows the way we consume content is becoming more and more on demand. We don’t want to wait until a movie comes to a theater—we want to watch it now. Currently, film studios spend millions on marketing films…months before we can see them (unbelievably, for most films, marketing costs are the highest cost driver). But, once the film premieres, if you’re not in LA or NYC, you’ll have to wait even longer. And even if you are in those cities, you have to go wait in line. Add it all up, and it’s horrible customer experience. Luckily, Netflix wants to change all of that and let consumers decide how, when, and where they want to view the film. This is, of course, something that’s anathema to theater operators.
Finally, how can this possibly be good for content creators? First, some qualifiers. This arrangement isn’t sustainable for all or even most movies, at least not anytime soon, and it’s not for certain film genres. For example, mega-budget blockbusters like Transformers and Guardians of the Galaxy are movies made for the big screen and thus generate most of the revenue from the theater (this partially explains why Hollywood makes so many of these movies. For more on that see my previous post, “Why does Hollywood make so many superhero movies?”). However, there are plenty more films that are perfectly fine for the home viewing experience, and for those in that category, Netflix can be a source of funding and stability. By financing films in pre-production, Netflix is providing a funding source in an otherwise extremely difficult and uncertain time.
The broader point here is that the theater business has shown little to no appetite to adjust to technology and changing consumer patterns. Like the cable TV industry, the theater business is dominated by a handful of nameless conglomerates that rely on old-school tactics. Their enemy is consumer choice, and they’re clinging to the antiquated way of doing things as long as they possibly can.
Which takes us back to where we started. Netflix will keep listening to customers and will grow without regard to industry norms. Just like Uber. Whether its inefficient movie theaters or the taxi cartel, both companies prove that when you break the rules in order to give consumers what they want, you will usually win.
