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Netflix Embracing Theaters It Once Spurned

By Rich Duprey – Nov 11, 2018 at 11:19AM

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As the streaming landscape becomes more competitive, Netflix looks for an edge.

Netflix (NFLX 0.71%) apparently isn't satisfied with dominating just the Emmys, now it wants to own the Oscars, too. The video-streaming leader will be releasing three new movies into theaters before allowing them to be streamed on its own platform, a change from past practice, where it refused to give theaters exclusivity.

By prioritizing theaters over streaming, Netflix has a better shot of winning some Academy Awards for its content, as well as attracting more talent to its studios. As streaming and original content become more competitive, this new policy could give Netflix an edge.

Theatergoers expressing surprise

Image source: Getty Images.

A ticket to fame and fortune

The three new movies Netflix is planning to release all are seen as Oscar-worthy: an autobiographical drama called Roma on Nov. 21; a Coen Brothers western, The Ballad of Buster Scruggs, on Nov. 8; and Bird Box, a post-apocalyptic thriller starring Sandra Bullock, on Dec. 12. They will play in theaters for a few weeks before migrating over to the streaming platform.

Although that window is much shorter than what most films get, it's a markedly different process for Netflix, which had released a few films into theaters in the past -- Beasts of No Nation and Okja are two -- but they were simultaneously available the same day on Netflix. More recently, it released 22 July, a film about Norway's worst terror attack that killed 77 teens at a youth camp, to 100 screens last month, but it also began streaming it on Netflix. That means fewer people see the productions, and it also keeps them out of Oscar contention.

No doubt it rubbed Netflix and CEO Reed Hastings the wrong way that (AMZN 4.50%) released a handful of movies exclusively to theaters last year and won Academy accolades and nominations for The Salesman and Manchester by the Sea, which was nominated for best picture and won Oscars for best actor and best original screenplay.

Amazon has stepped up its own original programming efforts and is estimated to have spent as much as $5 billion on developing content. Apple (NASDAQ: AAPL) and Disney (NYSE: DIS) are also entering the streaming market, and though their content budgets might not yet approach what Netflix and Amazon are spending, it is going to make the landscape for talent a lot more competitive.

Content doesn't come cheap

Netflix's ambitions are expensive. In its recent third-quarter earnings report, the streaming service surprised analysts by adding 7 million new subscribers worldwide, hitting 137 million, but also burning through cash. Free cash flow was negative $859 million, almost double the negative $465 million it reported a year ago.

The service expects cash flow burn to come in around $3 billion or $4 billion this year, with a similar amount next year, before the situation begins to improve in 2020. Netflix intends to offer $2 billion in senior unsecured notes to use, at least in part, on content acquisition, production, and development, which comes after it's already spending an estimated $13 billion on content this year. It also reported that it has some $18.6 billion in streaming content obligations.

Hastings says the investments it's making have been very successful, and CFO David Wells noted that Netflix is approaching a point where operating profits are going to grow faster than content cash spend, which will eventually drive free cash flow toward break-even. That seems to be far in the future, though.

A break from the past

The theater engagement schedule Netflix has isn't exactly wide release. The films play in select cities for a time before hitting a few more cities and then moving over to streaming. But it should be enough to help attract talent for which receiving industry recognition is part of their creative process.

Netflix has already lined up some major talent as it is. For example, 22 July was a Paul Greengrass effort, the Coen Brothers have produced Ballad, and Martin Scorsese will be offering up The Irishman, a gangster movie about Jimmy Hoffa. Netflix will still be judicious in the films it exclusively releases to theaters. Having previously rejected the need for theaters, it's a big change that Netflix is now embracing them. The move suggests that the company needs more and bigger results to feed its growth ambitions.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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