Market Insight

Netflix bids to adapt traditional film value chain

October 03, 2014

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Major first-run feature film Crouching Tiger, Hidden Dragon: The Green Dragon will premiere simultaneously on Netflix and select theatres of global premium large format theatrical platform, Imax, in August 2015, marking an industry first to debut a major feature film side by side on Imax screens and an online streaming service.

Netflix’s first foray into original feature film is the sequel to the original Ang Lee title released in 2000 and which grossed over $213m in global box office revenues, of which 60% derived directly from US cinemas. The title, produced by The Weinstein Company, will be the first in a series of original feature films to be released day and date on both Netflix and Imax screens.

To date, experiments with day and date releasing have been fairly limited including one of the first simultaneous release titles Steven Soderbergh's Bubble in 2006, as well as Piranha 3DD in 2012. Back in 2011, a similar move to release a major Universal title day and date was effectively blocked by cinema operators. Other more recent day and date releases have been in Europe including a near simultaneous release of Swedish title  The Zero Theorem and Spanish title Carmina y Amen, the latter reportedly generating higher revenues overall through the release strategy.

The move follows a series of recent exclusive streaming deals for Netflix including a pact with Happy Madison, the company owned by actor Adam Sandler to produce four feature length titles and a deal with 41 Entertainment, owner of Kong – King of the Apes property, to produce a feature length film followed by a TV series.

Our analysis

While, there has been some flexibility in film windows over the past couple of years for the right type of film, the move by Netflix is unlikely to be the catalyst that ultimately breaks the traditional windows system, but one that will further challenge acceptable limits on both sides of the industry. Major exhibitors Regal, Cinemark and AMC as well as major pan-European circuit Cineworld have been very quick to reject terms of the new release.  While the release has targeted premium high-end screens through the Imax platform, the experiment will likely impact the regular cinema business by default. Indeed, the experiment is about segmentation (aiming for the premium market theatrically) and such a strategy will hit some exhibition segments harder than others. The move also serves to create a new premiere viewing window for first-run titles in the home environment.

For the content creator, the strategy is to maximise revenues in the context of a declining physical home entertainment sector. While Netflix is as a new entrant to the first-run feature film business and in doing so looking to provide unique content for its growing subscriber base, the subscription based model also raises questions about the long term value (whether real or perceived) for the first-run feature film industry which has long been based on transactional value through theatrical admissions, physical disc, VoD or EST. However, Netflix has already stated that it intends to heavily increase its investment in original content following release of existing new shows House of Cards and Orange is the New Black in a subscription window already worth a significant amount in aggregate.

The strategy directly pits the premium and experiential side of the theatrical business against the multi-screen home. In doing so, the deal is unlikely to materially impact Imax since it includes theatrical distribution in China, where Imax is building a prominent base on track to exceed 200 screens by next year and one where Netflix is not present.  For certain feature films, China accounts for an increasingly large share of box office returns. Imax itself has also participated in other novel release strategies including limited premier engagements ahead of mainstream theatrical release as well as re-releasing of significant catalogue titles such as Top Gun.

For Netflix, the push also comes amid a period of rapid expansion into Europe, having launched in France and five other new European territories in 2014 alone, and fits the company’s semi-promotional strategy of engaging in highly selective, prominent high-value content acquisitions. In Europe, cinema continues to represent over half of all film consumption revenue and is increasingly the value creator. It represents a stable medium in a world of flux about consumption models. There is an understanding that new models will and need to evolve but the industry also needs to move cautiously so as not to destroy the main value creator for film producers and distributors. This doesn't mean resisting change altogether but it does mean 'considered change'. Ultimately selecting the right type of film will likely minimise risk and wider industry disruption and could ultimately provide supplementary revenue for smaller to medium budget films.


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