Why "The Interview" on YouTube Could Be Huge for Netflix Inc.

It was only about a year ago that Netflix (NFLX -6.41%) Chief Content Officer Ted Sarandos suggested releasing movies on the video streaming specialist at the same time they are released in theaters. It appears he might get his wish sooner than expected.

The company is already developing a sequel to Crouching Tiger, Hidden Dragon scheduled for a theatrical release next year, along with four Adam Sandler movies. However, The Interview is being released today -- the day before its theatrical release -- via YouTube, Google Play, and Xbox Video. Sony is reportedly in talks with Netflix, too, to stream the movie just days after its theatrical release.

I'm among those who believe Sarandos' idea of releasing films simultaneously in theaters and on Netflix could never work. We're finally getting a pretty good chance to see who's right.

Day and date
The idea of releasing a day and date movie with its theatrical release sounds extremely appealing to consumers, especially those who live far away from theaters or have commitments keeping them at home. But there's one big aspect holding it back -- theaters are not on board.

Naturally, theater owners do not like the idea of alternative distribution outlets, which will theoretically detract from box office sales. As a general rule, most theaters will not show a film unless they are guaranteed a 90-day window of exclusivity in theaters. Studios have tried shortening the window in the past, and the result is always the same: theaters drop the film.

With The Interview, everything was thrown out the window when hackers threatened attacks on movie theaters, prompting most national chains to cancel screenings. This gave Sony the opportunity to experiment with online distribution while it worked with independent theater chains to get a limited theatrical release for its original Christmas release date.

A perfect test run
Most of the promotion and advertising -- which the national theater chains help pay for -- had already been done before the cyberattacks started, so the big theater companies are taking a loss on The Interview. The regular advertising spend from theaters, though, provides a great opportunity for studios and Netflix to determine the impact of day and date streaming on ticket sales.

Typically, theaters would not bother promoting movies with a short exclusivity window, if bothered to screen the films at all. There is no way they would promote a movie if they knew in advance it would end up on Netflix the same day it premiered in their theaters. This is all because they fear losing box office revenue to online distributors. As a result, box office sales from a future release would be distorted by less than typical advertising.

The Interview's box office sales will naturally be distorted due to the now limited release, but it should be relatively easy to see what kind of impact the release on YouTube and other platforms a day before the theatrical release had on ticket sales compared to expectations.

Netflix's big movie aspirations
Netflix is not shy about its desire to premiere new big-budget movies. Producing its own content is often costly, and the average Adam Sandler production costs about $80 million.

Buying the rights to release movies as they open in theaters might be less expensive for Netflix, and it could cherry-pick the most appealing projects in midproduction -- a strategy it has already pulled off successfully with television shows.

If theaters back down from their hard stance against day and date releases, it could open up an entirely new audience to Netflix. The company could even charge a steeper subscription price for access to the movie releases, and convert current subscribers into higher-paying subscribers.

Financial impacts
The company must to do something to improve its cash flow situation. While the streaming service continues to gain subscribers at a rapid pace, Netflix's free cash flow has declined significantly over the last three years. While that is partly affected by international expansion expenses, the largest impact is from rising content costs.

Free cash flow reached $100 million in the first quarter of 2011, but had declined to negative $74 million last quarter. Over the last 12 months, the company has produced $47.6 in negative free cash flow.

Of course, premiering movies at the same time they appear in theaters will cost quite a bit, but the additional cash flow from new subscribers, as well as the potential to upsell current subscribers, could easily offset the costs.

That is, if all goes well with the theatrical run of The Interview.