On the eve of Netflix 's (NASDAQ:NFLX) second-quarter earnings report, the company got some bad news from a partner. This disaster will serve as an important test for the Netflix model of TV shows over the Internet.
DreamWorks Animation (NASDAQ:DWA) had high hopes for Turbo, an animated comedy about a garden snail competing in the classic Indy 500 race. DreamWorks sees this film as a tentpole, and is already working on a TV series built on the accelerated snail's content shell. Netflix has exclusive rights to broadcast this show in every country where the company offers streaming video services. You'd expect no less, because Netflix also co-produces the show.
So Turbo is kind of a big deal, not only for DreamWorks Animation but also for content partner Netflix. The digital video veteran has already produced five original shows, mostly to good reviews. House of Cards and Arrested Development are up for Emmy consideration in some high-value categories, and Hemlock Grove competes for some less prestigious technical Emmys. Next year, I wouldn't be surprised to see Orange Is the New Black in the running for both drama and comedy awards.
Netflix is investing untold millions ( literally untold -- Netflix never discloses the size of its original content projects) in these original shows and plans to increase these investments next year. But the Turbo series will lean on a shockingly weak tentpole.
Turbo bowed to American audiences this weekend, and the numbers are in. According to Box Office Mojo , the film scraped together $21.5 million for an uninspiring third place on this weekend's chart. Time Warner 's (NYSE:TWX.DL) R-rated, low-budget horror film The Conjuring scared up a $41.5 million pole position, followed by the third week of Universal Studios' Despicable Me 2 at $25 million.
Universal owner Comcast (NASDAQ:CMCSA) and Warner can celebrate their unexpected successes. The Conjuring was made on a minuscule $20 million budget, and R ratings often act as box office speed bumps. Nobody expected a home run. But the largely no-name creative team delivered some serious scares, conjuring up a fantastic 84% "fresh" rating on Rotten Tomatoes. Create something great and the free word-of-mouth marketing will come, and that's what happened to Warner's demonic film.
As for Despicable Me 2, Comcast must have expected a large haircut this week as the racing snails arrived to steal potential viewers from the same target demographic. But it didn't happen. The Steve Carell vehicle with a production budget about half the size of Turbo's stayed strong in its third week. That's as much a testament to Despicable's quality as it is to the Turbo concept not appealing to kids and their parents.
This is very bad news for DreamWorks and Netflix. Turbo is underperforming last year's Rise of the Guardians, which bombed at the domestic box office despite an all-star cast and heavy marketing support. It's starting to look like DreamWorks and Netflix have a non-starter on their hands with the follow-up TV series.
It's a little early to draw any long-term conclusions from this huge miss. After all, Guardians ended up earning its keep with a strong showing overseas plus very good DVD and Blu-ray sales. I don't expect that title to sprout sequels, spin-offs, and TV series, but it's also not the unmitigated disaster that the weak opening weekend seemed to portend.
How to find the big takeaway
In the end, this becomes an important litmus test for the Netflix distribution model. If Turbo: F.A.S.T. catches on with its young Netflix audience, it could light a fire under the core film's video home sales as well. If not, well, there's your first failed Netflix show and another whiff for DreamWorks. Wait until the show premieres on Netflix this fall, and then watch out for announcements of a second season -- or lack thereof.
None of this will change the picture for tonight's second-quarter earnings report, but it's something to keep in mind for us long-term Netflix investors.
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