Digital streaming service Netflix (NASDAQ:NFLX) has already disrupted the television industry by undercutting the established pricing model for pay television, changing how people consume TV shows, and proving that top-quality programs need not go through the traditional development cycle.
Now Netflix is looking to change the film industry through a deal that should have theater owners concerned. The partnership with IMAX (NYSE:IMAX) will fund a sequel to the move Crouching Tiger, Hidden Dragon that will premiere jointly on Netflix and on select IMAX screens. The deal takes a potential hit film -- the first one made $128 million in United States on a $15 million budget in 2000 -- away from theaters.
This has upset theater owners, and the top two, Regal and AMC, have said they won't show the film on any of their screens that use the IMAX technology, Deadline reported. A number of other theater operators have pledged to not show the film if it is released on the same day in theaters and on Netflix.
"We license just the technology from IMAX," AMC told Deadline. "Only AMC and [its parent company] Wanda decide what programming plays in our respective theatres. No one has approached us to license this made-for-video sequel in the U.S. or China, so one must assume the screens IMAX committed are in science centers and aquariums."
If IMAX licensees refuse to show the movie -- and most of the major ones in the United States, Canada, and Europe have already said they will not screen Crouching Tiger, Hidden Dragon: The Green Legend -- then they can effectively block part of the Netflix strategy. That might cause problems for IMAX, but it would give Netflix near-exclusivity on the film.
Why is this bad for theaters?
Consumers' desire to see a movie on the big screen has always been a useful lure for theater owners and movie studios. Under the current system, most movies are released to theaters well before they come out on any other format. That model has been slowly changing, however, as the theatrical window has gotten smaller and more films have been released direct to video or to on-demand services. At the same time, the home viewing experience has improved. Large flat screens are now a common feature in American households, and watching a film at home is no longer a vastly inferior experience to going to the movies.
The biggest chip movie companies have left is exclusivity. People will pay more to see a big film on opening weekend in theaters because that's their only way to see it. But a large number of people would likely watch it at home if that were an option.
Though what percentage of box office revenue a theater chain makes varies by company, by release, and in some cases by how long a movie has been out, the late Roger Ebert in 2012 broke down the numbers on his website, using Regal as an example.
For the year ending Dec. 29, they took in $1,842.6M at the box office. They paid out 953.7M as film rentals. Dividing, that means they paid about 51.8% of ticket revenue as film rental.
Fewer people going out to the movies means less ticket revenue, lower concession sales, and perhaps the collapse of the entire theatrical model.
Is this bad for studios?
Studios not only give up a large percentage of the box office take to theaters, they also assume a huge risk. If a studio spends $300 million adapting the game Boggle for the big screen (starring Nicolas Cage as a man who must solve word puzzles) and it fails to lure in moviegoers, it loses money.
Making a deal with Netflix offers a level of cost certainty. Netflix has not released the particulars of its deal with the Weinstein Co., which will produce the Crouching Tiger sequel, but since there is at best only a limited IMAX box office take to share, it's logical to assume a flat fee will be paid for Netflix's rights to the movie (as Netflix pays for its original TV programs).
Ultimately, dealing with Netflix takes away upside for a movie studio, as its not possible to have a blockbuster, but it also greatly reduces risk. If a movie maker knows it will be paid a certain fee from Netflix, it can budget accordingly. That makes the business of making movies a whole lot more attractive in the same way that knowing what they will be paid for producing X amount of episodes with no risk of cancellation has been good for TV studios.
Will Netflix succeed?
Netflix should have some impact on the movie business, though it's not likely to be a big enough spender to be in play for the top blockbusters. Enhancing its content with some midpriced films should be good for Netflix and its customers. Where things could get bad for movie theaters is if Netlfix's deal succeeds and causes other content providers to enter the fray.
The world of television has changed because major projects are no longer just shopped to broadcast and cable networks. Now, Yahoo! (NASDAQ:YHOO), Amazon.com (NASDAQ:AMZN), Hulu, and others are creating broadcast-quality original TV. This has been great for content producers, but no so good for TV networks that now face more competition.
Theaters are likely to follow the same path. Netflix won't own the movie business any more than it owns TV, but it should be able to produce quality films that will steal audience from theaters. If other nontheater content providers follow suit, that could cause a snowball effect that convinces people that a top-tier movie experience can take place in their living room for far less than the cost of a movie ticket. That would be very bad news for theaters.
Daniel Kline has no position in any stocks mentioned. He is a Netflix subscriber who has never seen Crouching Tiger, Hidden Dragon. The Motley Fool recommends Amazon.com, Imax, Netflix, and Yahoo. The Motley Fool owns shares of Amazon.com, Imax, Netflix, and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.