Netflix Doesn’t Want to “Play Studio”, Not Even Close
The Hollywood Reporter published an article a couple days ago titled: Hollywood’s Movie Dilemma: Gamble at Box Office or Sell to Netflix? The article details a rising trend of major studios making deals to sell the international and or domestic rights of some of their films to Netflix. Often times these are mid-budget projects ($30–60 million) that the studio has diagnosed, pre-release, as a potential financial under performer. The deal is pretty straightforward, instead of risking a fiscal loss by trying drum up buzz for the film with expensive advertisement in a congested market the studio can get a guaranteed break even or return by selling at a flat rate to their internet “frenemies” Netflix. This seems like pretty savvy business but more than anything it reinforces a notion that only continues to grow ever more apparent. The major studio’s have never respected Netflix as a true competitor but Netflix doesn’t care. Instead of trying to play a rigged game Netflix is consistently one step ahead and redefining the rules as it goes. The studio system created their biggest competitor, whether they know it or not, and only continue to bolster their challenger’s growth.
Most are familiar with Netflix’s humble roots as a DVD rental by mail business. They were founded in 1997 by Marc Randolph and Reed Hastings with backgrounds in marketing and computer science respectively. During this time their biggest competitors were not the major studios but the other rental services, most notably Blockbuster. Netflix’s beginnings were notably scrappy at best. There was a lot to figure out in terms of the company’s ultimate direction but the core has never changed; they intended to use their technology to think differently and get ahead. This mission almost came to an end in 2000 when Netflix offered to be acquired by Blockbuster for just $50 million, a deal Blockbuster turned down. For perspective Netflix is now valued at over $100 billion. Blockbuster is now infamous for being the first major power to disrespect Netflix and the potential of their internet technology. Blockbuster figured they had control of the movie rental industry, if the business started transitioning to the internet they could respond and follow the trend. The industry did change, bolstered by Netflix’s innovations in streaming content. “Within a few months Netflix had shifted from the fastest-growing customer of the United States Postal Service’s first class service to the largest source of evening Internet streaming traffic in North America.” Blockbuster had no chance to respond and eventually filed for bankruptcy protection in 2010. Instantaneous, frictionless, hassle-free, streaming was the face of dramatic changes, not just in the movie rental space, but in the entertainment industry as a whole.
Netflix had a platform, now they needed content. Enter the studios, who saw the fledgling internet company as an easy buck. The studios had built up massive libraries of content over their many decades of existence. These libraries sat literally and figuratively collecting dust in storage. Netflix came to the studios seeking exclusive streaming right deals for their old film and television projects and the studios gleefully negotiated. It seemed like a no-brainier, they make money off the deal for projects long dormant while tapping a new stream to grow their brand. These distributors included Warner Bros., Universal Pictures, Sony Pictures Entertainment, 20th Century Fox, and The Walt Disney Studios. They had no idea how big of a fire they were fueling. All of a sudden Netflix had an audience, Netflix had near boundless content, and Netflix grew rapidly into a powerhouse destination for viewers. It is important to understand how the Netflix model works. In the traditional distribution model an exhibitor’s (i.e. theater’s) number one priority is to fill their seats. Netflix, on the other hand, already has full theaters, they have 118 million subscribers who are hungry for entertainment. Netflix’s biggest priority is acquiring content for their customers as well as identifying content that might be attractive to potential new subscribers outside of their service. By the time the studios realized they were arming a real threat the damage had already been done. Even as they withdrew their content Netflix was, once again, a step ahead.
Their answer was original content. When Netflix started to emphasize their movement towards original content, the studios laughed. It was one thing to coast off of other people’s content, playing an innovative middle man in a distribution scheme that was new and cutting edge. Production was a different thing altogether. Netflix burned the studios once, but now it seemed their success had gone to their head. Production requires capital, expertise, relationships, and a whole host of other challenges that could not so easily be “adopted” by a glorified rental service. Netflix paying for buildings, scripts, and executive salaries was seen as a misstep brought on by a healthy dose of ego and misguided aspirations of grandeur. Major studios saw this internet company trying to “play studio” and figured they would face the demise suffered by every other upstart challenging the Hollywood institutional status quo. The major studios are old money conglomerates who have run the show for years. They were the sharks and Netflix was getting in way over it’s head.
So why would Netflix do something so rash? Because they knew they couldn’t rely on other people’s content indefinitely. They had known this for a while and planned to protect themselves from being shut out of content. Without content their subscribers would leave. When the studios realized how big this method of distribution was going to be they would immediately withhold their projects and start working on building their own streaming platforms. That’s exactly what happened and Netflix was prepared. When Netflix blew up they didn’t become complacent with their success, they parlayed it into a sustainable and powerful new direction once again.
It needs to be understood that Netflix does not want to “play” studio, at least not in the traditional sense. This is an idea that still isn’t clear to much of Hollywood. The company uses a data driven approach to all their creative and financial decisions. They spend a lot of their resources trying to identify their audience’s preferences and then build formulas to make much of the artistic decisions closer to sure things than gambles. Using this information, they can identify strong trends to guide all of their production processes in film and television. House of Cards is an example of how powerful the subscriber information is. In 2011, the program was a simple remake of a BBC miniseries. Attached were David Fincher to direct and Kevin Spacey to star. Netflix was able to use their data to recognize their customers who watched the original series also liked to watch movies directed by Fincher as well as movies starring Kevin Spacey. It was as close to a sure thing as can exist in the entertainment industry.
As mentioned previously, the traditional method of distribution is the notoriously finicky theatrical release process. If often involves long term relationships with exhibitors, excessive bureaucracy, and extreme competition for limited screens. Studios who have used this method for decades have many built-in advantages. They have a ton of money to saturate the marketing landscape as well as ensure they are on theaters across the world. Their relationships with the exhibitors are often the exhibitors most important business connections. Theaters rely on future studio releases to continue generating income in the form of sweet, sweet, concession revenues. Netflix see’s this system and the players in it as archaic. They believe the notion that a movie needs a traditional theatrical release is antiquated. They see the old way as filled with price discrimination, delayed release schedules, and logistical headaches. Not only did they identify the unfair advantages long held by studios, they identified the fundamental flaws in a model that has remained relatively untouched since it’s early days. Why should their customers have to ever wait for their content? Why should they ever lack access to it?
In 2017 Netflix announced their goal of having half of its library consist of original content by 2019. Part of this plan is an investment of $8 billion on original content this year. There are plans to produce 80 original films and 30 anime series. This is significantly more than most major studios. Netflix original content is either produced, co-produced, or distributed by Netflix exclusively on their services. As mentioned in the beginning of this article, Netflix is spending hundreds of millions of dollars on acquisitions from major studio cast-offs preemptively deemed unprofitable in a traditional distribution format. Netflix, however, believes they will work perfectly for their streaming model. Based on their acquisitions it is clear Netflix wants to move into the realm of blockbuster content, flashy affairs built for the big screen. Many people question if viewers will have any interest watching these kind of films on smaller, Netflix friendly devices. Personally, I am not going to start to doubt their decision making. It is almost poetic that much of the original content making up their upcoming slate is, once again, coming straight from the major studios themselves. And the biggest, most expensive, most challenging to produce and ultimately most profitable purchases for Netflix are those cast-off blockbusters. The major studios are doing most of the legwork and Netflix just waits to write the check. Eventually the studios may appreciate the systems of old are changing for good but until then Netflix is happy to play “over it’s head” as the entertainment industry’s vanguard.