This Could Be Netflix's Biggest Mistake Since Qwikster

There are two interesting nuggets out of the Netflix (NASDAQ: NFLX  ) camp this week.

First, it was a deal with CBS (NYSE: CBS  ) to bring Dexter back to Netflix's streaming catalog. CBS is the parent of Showtime, the premium cable network that took a chance on the serial killer serialized drama and was rewarded with eight seasons of the critically acclaimed show.

The second morsel was Netflix content chief Ted Sarandos speaking at an industry conference over the weekend, throwing a potential new wrinkle in the leading video service's playbook.

"Why not premiere movies on Netflix, the same day that they're opening in theaters?" he rhetorically asked attendees as the keynote speaker of the 2013 Film Independent Forum. "And not little movies. There's a lot of people and a lot of ways to do that. Why not big movies?"

Yes, you heard that right. Netflix is dreaming about the day when it can offer a big-budget theatrical release on the same day that it hits a multiplex near you. We've seen this before with small indie releases, hoping to cash in on digital revenue and piggyback a digital marketing strategy on top of a theatrical one.

One of these strategies is brilliant. The other lacks a purpose-driven serial killer. 

It's hard to fault the Dexter plan. The first four seasons will begin streaming on Thursday -- Halloween, folks -- and the the final four seasons will follow come January. The show is still fresh enough in the minds of consumers where it will be a binge-viewing magnet for the vast majority of the country that doesn't subscribe to Showtime so they never caught it. Cable networks and service providers used to derisively tag Netflix as "rerun TV," but it's a badge that has served the platform well. Serialized dramas keep viewers engaged and unlikely to hit the unsubscribe link on their accounts.

The notion that Netflix will premiere a potential blockbuster seems far-fetched. For starters, it's a self-fulfilling prophecy. If folks know that they can stream a movie as part of a $7.99 monthly subscription, why would they pay more than that for a ticket -- or several tickets -- to screen it at a movie theater? Availability will doom its chances of being a box office winner, and that alone makes this a bad bet. How many millions or tens of millions will Netflix have to shell out for these rights? That money would be far better spent on TV shows that have hundreds of hours of content instead of on a two-hour movie. The novelty of having a flick available on the day it's released ends quickly. Consumers will then want more. These are caviar tapas. They're small expensive bites. The strategy won't work. There's a reason Netflix and rival Amazon.com have invested in original programming of television shows. Yes, Amazon has thrown some money at actual movies, but these have been low-budget flicks that would likely never receive wide theatrical releases anyway.

Netflix makes a sound argument for disruption in Hollywood. Sarandos went on to point out that there was a 50% increase in movies with production budgets of at least $75 million this summer, but all of that money only resulted in a 6% increase in attendance. Movie studios could use new revenue streams to take the risk out of movies, and getting a chunky up-front payment from Netflix would naturally help. However, the dynamics just will never be the same as TV shows where exposure on Netflix of earlier episodes increases awareness and anticipation for current shows. There is no evidence that a movie's availability in Netflix's streaming catalog results in an uptick in DVD or video download purchases. Logic would dictate that the exact opposite happens. 

There is definitely a market for Netflix in low-budget original releases, likely documentaries that it can then license to networks or perhaps low-key movie revivals of shows that gain cult status on the site. However, first-run movies won't be worth the hassle or the money for results that will likely fall short of expectations. 

Leave the serial killing to professionals, Netflix.

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Read/Post Comments (18) | Recommend This Article (20)

Comments from our Foolish Readers

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  • Report this Comment On October 29, 2013, at 10:20 AM, takersrevenge wrote:

    They can if they want i'll still go to my local theater. I HAD netflix when they debuted there tv shows and thought they sucked. Netflix in my opinion needs to stick with just playing movies not making them!

  • Report this Comment On October 29, 2013, at 10:52 AM, scarter25 wrote:

    Ok the author is not making any sense. Why would Netflix keep the same model for movie production? The idea is to charge the price of a movie ticket and view said movie in the comfort of your home. Something I wouldn't mind doing! There is a market for it. There are millions of people who rather watch that big budget film from the comfort of their homes and spend so much money for poor service at the movie theaters. But then again most people are idiots! Most people think netflix is supposed to offer the latest and greatest when it's clear through advertising that they don't.

  • Report this Comment On October 29, 2013, at 11:11 AM, 12OnAHunch wrote:

    If anyone would air a big movie the same day as it hit theaters it would be the movie company itself as a pay per view. Netflix is just throwing out any idea it can think of to keep its name in the news. They're burning through cash like no tomorrow and paying their top people with stock option who than turn around and sell it the same day. Even the CEO sold all his shares. If it wasn't for over 80% of outstanding shares being owned by mutual funds and big investors it would be selling below $100 a share.

  • Report this Comment On October 29, 2013, at 11:29 AM, CatchTwentyTwo wrote:

    Hello Scarter,

    You are absolutely correct. A pay-per-view structure for viewing movies would be the best course of action for Netflix. Why not offer a premium service for a premium product? Well, there are some downsides but overall I think it is a good idea.

    One thing to consider though is this: If they charge $10 to stream an "In Theaters Movie" that is the price of only one movie ticket, but many people could cram into the room all for the price of that one movie ticket. So even the pay-per-view method does not quite solve all revenue issues.

  • Report this Comment On October 29, 2013, at 12:25 PM, mcampbell8 wrote:

    Yeah this is very interesting and would depend on the right price point and not harming the first run movie market, but somehow expanding it into the streaming market as well. Maybe $15.00 for the convenience to see it at home, slightly more than in the theater, but less than 2 full tickets. How many times would you get to watch the movie? What percentage would Netflix get?

    Once more details are forthcoming we will have a better picture. But they caught my attention.

  • Report this Comment On October 29, 2013, at 12:35 PM, IronyTag wrote:

    Netflix's competitors are offering same-day-as-theaters PPV. It would be foolish to ignore a potential revenue stream that competitors are using.

  • Report this Comment On October 29, 2013, at 12:45 PM, RMengineer wrote:

    I don't see that it is as absurd an idea as Mr. Munarriz seems to think.

    Firstly, there were no details about how such a movie would be delivered. Mr. Munarriz seems to assume that it would be included as part of one's monthly streaming fee. Who is to say they couldn't take a Pat-Per-View approach. That is, if you want to watch a first run, you have to pay for that movie.

    As a consumer, it gives me an option for seeing first runs. For Many people, going to a theater is an expense and a hassle. Things like baby-sitters, transportation, food, etc. Sure, for many people, going out to see a movie is an event, but for others, it's simply a hassle.

    And for various reasons, some are simply not going to go to a theater just to see a first run. That consumer base is a potentially untapped revenue source for first run revenue. That is to say, giving that audience the opportunity to watch first runs is a potential source of revenue that might not otherwise be realized by theater receipts alone.

    And sure, there is a question of cannibalism - how many who might have gone to the theater would opt for streaming given the option? And there is the issue of risk - a "sure thing" payment from Netflix might help to mitigate first run risk.

    There are a lot of unspecified parameters that if crafted correctly to produce a mutually beneficial business model fro all parties. But I don't see how it is such an obvious conclusion that no such terms could be crafted. I could see a lot of ways how all parties could be beneficiaries. But as they say, the devil's in the details. But to assume no such beneficial details could be found is simplistic and assumptive.

  • Report this Comment On October 29, 2013, at 12:50 PM, moonflower wrote:

    I would rather see a blockbuster movie in a movie theater - how many people have 40 foot screens in their home with surround sound? I enjoy the movie theater experience - and I enjoy that business owners and their respective employees are employed. Does anyone else ever think about the people who work these jobs, or is it only your interest that matters? I would also like it if Netflix actually provided blockbuster movies once they're available (i.e. out of the theater), rather than the cheap knock-offs they've been offering (still waiting for Barry Plotter, you know it's coming). Adding back Dexter is good - I might actually reinstate my subscription now.

  • Report this Comment On October 29, 2013, at 1:24 PM, IrvThal wrote:

    Boy, you are engaging in some mighty small thinking there, Rick.

    This disruption model IS going to happen. It's going to happen the same way it happened more than a century ago for opera, which was once entertainment for all three classes of society, then became obsolete for poor people. It's going to happen the same way it happened decades ago for live theater, which brought both plays and vaudeville to mass audiences until radio and TV made it only for the rich. It's going to happen the same way it happened in the past 30 years for books -- there's no such thing as a dime novel anymore, but if you have money you can buy your expensive digital copy or go one step further and buy an "obsolete" hard copy.

    Movies cannot follow the trajectory they've been on, not when the vast majority of Americans DON'T EVEN GO TO THE MOVIES. A very successful film ($200 million) will attract perhaps 25 million Americans into theaters, meaning that 275 million people are NOT movie consumers.

    Would they watch "Avatar 2" or "X Men 23" if they could skip the expensive, complicated process of getting to the movie theater and instead watch it at home? Would they be willing to pay more for that privilege?

    Netflix won't include a same-day blockbuster in its $7.99 monthly cost; that's just silly. But can Netflix offer the same concept as pay-per-view sports, where one-night-only events command a high premium? If people will spend $50 to watch a boxing match, will they pay $50 or $75 to see a same-day premiere of a big blockbuster, splitting the cost with several friends who can watch with them?

    You ar forgetting, Rick, that the majority of people in America can't or won't see movies in a theater. They may have small children or elderly parents, they may have illness or injury or simply be immobile, or they may not want to deal with the poor service and rude audiences. In any case, this is about OPENING UP movies to more people, not preventing those who are already inclined to go to the movie theater from doing so.

    It may still be a while before this happens, and I'm not sure that Netflix is HOW it will happen ... but it will happen soon.

  • Report this Comment On October 29, 2013, at 1:36 PM, wvowell wrote:

    Rick,

    Your article has no information on why you say this want work.

    This sounds like your opinion or maybe your hope.

    This is a great idea, payforview works on concerts, sports, so why not first run movies?

    Great idea Netflix continue to burn the naysayers!!

  • Report this Comment On October 29, 2013, at 1:53 PM, vshope1 wrote:

    A. If it happened it would have to have profit for the movie people.

    B. Many people do prefer going to movies.

    1. Its more exciting.

    2. Its a great place to take dates, at least till you

    get to know them.

    3. Its a great place for people who don't do the bar

    scene and such places.

    4. Its just a great place to go to with or without the

    kids.

  • Report this Comment On October 29, 2013, at 7:30 PM, duuude1 wrote:

    Rick,

    Sounds like you are defending status quo and a dying industry.

    Two Stock Advisor-recommended entertainment names that I've bought into big time are NFLX and ATVI - on the thesis that both are changing HOW we are entertained. Just look at the music industry as an analogy - is it even recognizable today compared to just a five years or a decade ago? Kids used to go to the movies at the mall - now they play video games. And today movies can be seen via AAPL, AMZN, NFLX and others on a huge range of devices.

    Does this mean movie theaters are going to die? No (people still go to plays just like the Greeks did; people still go to the opera, to poetry readings, comedy shows, live concerts, etc). But will movie theaters be a growth industry? Look here:

    http://www.the-numbers.com/market/

    A weekend release of ATVI's Call of Duty absolutely blows away the top movie's opening weekend, and the a single game's total revenues also blow away the top grossing movies.

    Movie theaters will leave frantic claw-marks in the dirt as they are slowly pulled into the abyss where dying industries go - and people will eventually talk about going out to a movie like going out to the opera. It'll be a special event, or a favorite haunt for a few aficionados, old graying retirees looking for sentimental places to hang...

    In the meantime, as studios see revenues from movie theaters stagnate and then slowly deteriorate, they will look at other revenue sources.

    For the immediate future, you may very well be correct that studios (and theaters) will resist releasing movies to NFLX and theaters simultaneously. But over time, NFLX's leverage will increase, and theaters leverage will decrease, and you will see studios change the tune and ask NFLX to dance with them.

    Best,

    Duuude1

  • Report this Comment On October 30, 2013, at 5:15 PM, BioBat wrote:

    Frankly, I thought Netflix should have gone this way already. There's nothing stopping them from being a PPV provider. Yeah, the margins stink on PPV but a lot of small margin transactions can mean big profits.

    I'll also reiterate IrvThal's point - the majority of Americans don't go to movies. I've only seen one big screen release in the last 3 years and no plans to see anything anytime soon. BluRay, a 50 inch HDTV, and a great sound system mean I never have to leave home.

  • Report this Comment On October 30, 2013, at 5:52 PM, dremella100 wrote:

    I agree with a few other comments here that the same day viewing service should be a premium one i.e. on top of the 7.99 per month. If the family can do away with the driving, parking, ridiculously pricey snacks and water and drinks, the family can really reduce the cost of watching the movie by half. On top of it, a real problem is a kid wants to go use the bathroom, the movie is not going to wait, so the kid misses the movie and the accompanying adult misses. Compare to that, pause-go-return-play. I would easily use that service if made available compared to cramming into a movie hall.

  • Report this Comment On October 30, 2013, at 6:26 PM, mythshakr wrote:

    Please Netflix, please make another mistake like Qwikster. Bought first shares at $50, sold shares at $250, bought back at $75 sold again at $275. Love to buy some more at <$100.

    What are the chances I could do that again.

  • Report this Comment On October 30, 2013, at 6:43 PM, kain84 wrote:

    It happens in Motley Fools articles often - an article supposing written by an analyst shows no analysis, critical thinking, nor common sense.

    Premier screening is new revenue to netflix. It make business sense if they can structure the cost properly. How can that be an unwise idea? At least your article didn't give any justification on why this is an unwise idea.

    As a grade 10 essay, you earned an F.

  • Report this Comment On October 31, 2013, at 12:30 AM, Bonmotten wrote:

    I have to agree with kain84 and then some. Some more discriminating levels of subscription would open things right up.

    As it stands, the monthly subscription gives you either cheap - for which you receive mostly obscure (which I like) - or crap movies. Anything vaguely normal is available only via hard copy in the mail?!

    On the face of it, an anachronistic pricing/choice structure even to a baby boomer like me. Get with it Netflix.

    As to the essay/article/analysis, I again agree with kain84. I am an educator and yearn for the grade minus F.

  • Report this Comment On November 03, 2013, at 10:22 PM, framehorse wrote:

    I would watch it on PPV. I'd love to be able to watch it in my own home by myself or with a few friends.

    Some reasons:

    1. Not have to change my clothes or wear shoes.

    2. Not have to get out in crummy weather.

    3. Not have to waste gas or time to drive to theater.

    4. Not have to put up with obnoxious people.

    5. Pay five cents instead of five dollars for a box of popcorn, while enjoying my bottomless soda.

    Aaaaaahhhhhhhhhhhh!

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