Netflix (NASDAQ:NFLX), The Weinstein Company, IMAX (NYSE:IMAX), and major movie theaters are locked in a four-way battle regarding a controversial plan to simultaneously release Crouching Tiger, Hidden Dragon: The Green Legend simultaneously on Netflix and IMAX theaters.
The film, which is the sequel to Ang Lee's Oscar-winning 2000 martial arts movie, won't share much in common with its predecessor -- most of the original cast and crew won't return, and it will be shot in English rather than Chinese. The first film was a huge hit, grossing nearly $214 million on a tiny budget of $17 million, so it'll be interesting to see if the sequel can replicate that success when it arrives Aug. 28, 2015.
Netflix secured the film for a same-day release thanks to its close relationship with The Weinstein Company, with which it holds a pay-TV exclusivity agreement. Netflix's chief content officer, Ted Sarandos, told The New York Times that the proposed release, which will reach over 50 million subscribers and select IMAX theaters simultaneously, could encourage other studios to challenge the traditional 90-day delay which shields theaters from DVD sales, rentals, and digital distribution channels.
Theaters are, naturally, opposed that plan. The two largest theater chains in the U.S. -- Regal Entertainment (NYSE:RGC) and Dalian Wanda's AMC Entertainment -- have announced that they won't show the film. IMAX has a contractual right to override theater-chain decisions for certain venues, but it waived that right in the Crouching Tiger negotiations, since it didn't want to force theaters to show the film.
Now that the battle lines have been clearly drawn, can The Weinstein Company, Netflix, and IMAX still redefine same-day releases, or will the theaters crush the oddball sequel and turn it into a straight-to-video release?
The business of same-day movie releases
The concept of same-day home and theatrical releases is relatively new to the film industry.
In 2011, Comcast's (NASDAQ:CMCSA) Universal charged viewers $60 to watch Tower Heist a few weeks after its theatrical release via a fast-tracked VOD, but most customers scoffed at the price. Later that year, Time Warner (NYSE:TWX) released same-day VOD versions of Melancholia, Trespass, and Margin Call, at more reasonable prices between $7 to $10. That business model, which was used for lower profile films, remained the status quo over the past three years.
With the crowdfunded Veronica Mars, which hit theaters in March, Warner convinced AMC to agree to the same-day release by renting out its theaters. Warner retained the box office sales, in hopes that it could produce a profit after AMC's rental fees ($5,000 to $20,000 per week) were deducted. Regal and Cinemark (NYSE:CNK), however, do not rent out their theaters for same-day releases.
The big problem with IMAX's involvement in The Green Legend is that it breaks the status quo in two ways.
First, same-day VOD releases weren't IMAX blockbusters. Second, Netflix isn't using the a la carte VOD model for The Green Legend -- it is offering the film to subscribers for free.
To theaters, this is the top of a slippery slope. If distributors can launch a film simultaneously on Netflix and theaters, they might generate more revenue from the former than the latter. Theaters retain 20% to 80% of ticket sales, depending on the week of release, while Netflix pays distributors consistent royalties to stream their content. Moreover, other high-profile distributors could start releasing its big summer hits simultaneously on Netflix, causing theater revenues to plummet as audiences stay home and watch the films on their 4K TVs instead.
Why theaters have the upper hand
Despite those challenges, theaters still have the upper hand when it comes to negotiating with distributors.
Although digital distribution is getting more advanced and TVs are getting much bigger, the global box office for all films still rose 4% year over year in 2013, according to the Motion Picture Association of America. More than two-thirds of the population in the U.S. and Canada (nearly five times larger than Netflix's user base) went to the theaters at least once in 2013, which was consistent with growth from previous years. This means that theaters, not Netflix or VOD, are still the best place to debut a film for widespread distribution.
More importantly, if the theater chains all band together in refusing to show same-day films, they effectively cripple distributors by turning their films into straight-to-video releases.
Looking ahead, things don't look good for The Green Legend if AMC, Regal, Cinemark, and other theater chains maintain a united front.
IMAX was clearly the weak link in Netflix and Weinstein's plans, since it wasn't willing to force theaters to show the film when it could have done so. This was a smart move for IMAX, since it relies on positive relationships with theaters to thrive, but it will also likely prevent big screen blockbusters from hitting Netflix and theaters at the same time in the near future.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Imax and Netflix. The Motley Fool owns shares of Imax and Netflix. 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.