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Why AMC Reversed Its Ban on Netflix Movies

By Adam Levy – Mar 9, 2016 at 8:30AM

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AMC is showing Netflix's "Crouching Tiger, Hidden Dragon" sequel on a few screens.

Source: Netflix.

When Netflix (NFLX -1.21%) announced that it was producing a sequel to Crouching Tiger, Hidden Dragon, it said it wanted to release the film in theaters at the same time it launches the movie on Netflix. Theater owners such as AMC Theaters (AMC 11.84%) didn't like that idea, but IMAX (IMAX -1.17%) was on board with its large presence in China.

AMC wasn't opposed to showing movies from other streaming services, such as (AMZN -1.17%). But Amazon provides an exclusive window to theaters for its film productions, whereas Netflix wants to release films on its service the same day they hit theaters. AMC management believes that destroys a lot of value for the theaters.

But AMC recently announced that it will show Crouching Tiger, Hidden Dragon: Sword of Destiny on a few screens "as a favor to IMAX."

Easing up on Netflix
Of the 153 IMAX screens in AMC theaters, AMC is only showing Crouching Tiger on four to six of them. CEO Adam Aron said the language of choice for those screenings is Mandarin, indicating the audience is predominantly Chinese. AMC has 86 locations in China. Considering China is about the only country without access to Netflix, it's not a big surprise that Chinese viewers are most interested in seeing the film in theaters -- they can't watch it at home.

But Aron added another comment after his admission that it's showing the film on a few screens. "AMC will cross future bridges of competition if ... and when they arise," he said, referring to Netflix's push for same-day movie releases. Aron's predecessor, Gerry Lopez, was more adamant that the theater wouldn't show movies without an exclusive theatrical release window.

As Netflix and Amazon start producing their own films, theater owners such as AMC may be more willing to reduce the window for theatrical releases. Amazon Studios' films come with a 90-day exclusive window for theaters before Amazon makes them available to Prime subscribers. In return, Amazon gets free marketing from theaters that play its trailers and promote the films in its lobbies. Netflix didn't get any such support for Crouching Tiger.

Does Netflix need the theaters?
The question for Netflix investors is whether the company even needs support from theater chains. Being able to monetize its releases in China is a major benefit of partnering with theaters, but Netflix may be better served by directing its efforts toward making its service available to Chinese consumers.

But Netflix's movies seem to be doing just fine without theaters. In the company's fourth-quarter letter to shareholders, CEO Reed Hastings noted, "Adam Sandler's first Netflix original film, The Ridiculous Six, which debuted globally on Dec. 11, was the most viewed movie on Netflix in every territory the week of its debut and the most‐viewed movie ever on Netflix in the first 30 days on service."

Additionally, Netflix has received four Oscar nominations for its original documentaries over the past three years. Amazon CEO Jeff Bezos has said he has his eye on winning an Oscar as well but believes the best chance to win one -- and draw attention to Amazon's original programming -- is to show films in theaters. Netflix doesn't necessarily disagree, but it's showing that it's possible to win without being in theaters.

While partnering with theater chains for distribution could bring in more revenue for Netflix, its biggest moneymaker and focus is still its subscribers. Creating entertaining and critically acclaimed content will help bring on new subscribers and keep old ones sticking around. It even opens up the opportunity for Netflix to continue raising its prices, generating much more revenue than a few weeks in theaters ever could.

Adam Levy owns shares of The Motley Fool owns shares of and recommends, Imax, and Netflix. 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.

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