Netflix, the leading Internet TV channel, wants you to watch movies… in a movie theater.
The company, led by CEO Reed Hastings, announced in September that it would start producing its own movies to be shown both in movie theaters and on its streaming service.
By next year it will show the sequel of Oscar-winning movie “Crouching Tiger, Hidden Dragon” on IMAX theaters and on the streaming service simultaneously. Netflix also inked a deal with the comedian and box office draw Adam Sandler to release four of his movies.
The movie deals are intended to expand its stable of original content, bring in more revenue and perhaps even attract more subscribers. Netflix of course started out renting out DVDs by mail and licensing movies and TV shows from Hollywood studios.
The company said it needs to keep churning out original content in order to compete. Very recently HBO, CBS and Showtime announced that it would be entering the streaming industry with their own subscription-based services. Netflix’s original programming is the edge it says will keep them in the game because they offer shows no one else has.
At the same time, Netflix is trying to expand its already plateauing customer count.
Netflix has grown steadily over the past few years. It currently has 53 million subscribers as of the third quarter compared to 40 million last year. This number however was 20 percent lower than expected.
The company has also achieved strong expansion in the US that it has to look outside of the country to get more customers. In fact it launched in France and Germany at the start of the third quarter.
Netflix is a highly valued company that even though it reported strong revenues for the third quarter, its stock still plunged because its growth was not as strong as expected.
The company posted revenues of $1.409 billion compared $1.105 million the year before. Its stock on October 16, the day after it announced its earnings plunged to $361.70 from $448.59.
This is where the movies come in, raising some eyebrows in the process because of the content.
There were mixed reaction on the Street on the possible success of these movies especially since these are more expensive than developing a new TV show.
“These are much more expensive than we had anticipated. They also have more risk of being write-offs because it is unclear whether any or all will be hits until after the money is spent,” said Dan Medina, analyst for Needham and Co.
In the movie deals, Netflix will be backing the production. Netflix agreed to release “Crouching Tiger, Hidden Dragon” in its service the same time it comes out on IMAX. Sandler ironed out a similar deal.
Netflix—always on the hunt for more original content—is already known as the place to watch Emmy nominated TV programming like “Orange is the New Black” and “House of Cards.”
Recent Adam Sandler movies have bombed in the box office with his latest movie “The Cobbler” getting horrible reviews when it premiered in the festival circuit.
The first “Crouching Tiger, Hidden Dragon” won the Oscar for Best Foreign Language Film. But this sequel will not have its Oscar-nominated director Ang Lee, none of its Oscar-nominated screenwriters and only one of its original stars will return. One also questions if audiences even demand a sequel.
Netflix Chief Content Officer Ted Sarandos said during the company’s third quarter earnings call that its movie deals are designed to do well internationally where it hopes to attract more subscribers.
“The Adam Sandler decision was driven by following market after market, seeing Adam’s films from his deepest catalog to his newest releases…performing wonderfully in every territory,” Sarandos said.
Sandler’s movies do better in international territories yes. The critically panned “Blended”, released in May this year, grossed only $46 million in North America but made $77.2 million in other countries. Critically panned 2011 movie “Jack and Jill” made only $74 million in the US and Canada but grossed $77 million abroad.
But Netflix cannot expect a hit every time it mounts a new production.
When the company airs a show exclusively on its service, audiences are enticed to sign up for a Netflix account. This is mostly how the streaming site gains new subscribers.
Potential customers now have a choice to watch the new original movies in physical theaters and they may choose to watch the film once on IMAX and not sign up for a Netflix subscription.
Netflix officials did not respond to queries for this story.
Analysts suspect Netflix is once again trying to be ahead of the curve and changing the way we watch movies the same way it changed our TV viewing habits.
“This is the natural progression of Netflix’s business model and its competitors like Amazon will now assess if doing original movies will be good for them too,” said Robert Thompson, director of the Bleier Center for Television and Popular Culture at Syracuse University.
After all Netflix is the company that introduced binge watching to general audiences. It already changed people’s viewing habits by dumping whole seasons of shows into the service so people can binge watch, something that Hulu and Amazon have done as well.
The move is a risk but a risk they should take now before HBO, one of Netflix’s biggest rivals, launches its own service. HBO’s popular HBO GO service—only available to cable subscribers or their friends with their passwords—is estimated to have at least 28 million customers. But HBO has a number of critically acclaimed and pop culture zeitgeist shows like “Game of Thrones” and “Girls” which will be available for more people once its stand-alone service is up and running.
Netflix may be making a smart decision to be innovative when it is still the undisputed leader of the streaming industry.
Licensing—one of the highest costs for the company—is at an all time high and will grow. It spent $1.2 billion to add to its streaming content in the third quarter compared to $878.3 million in 2013.
Experimenting on a grander scale now when they are in a strong position allows Netflix some leeway without utterly destroying the company. It is a way for the company to figure out what kinds of avenues are open to them.
Thompson said the two movies may not be a hit but will make way for another potential revenue stream for Netflix. This could allow the company to continue making adjustments to its future films until it finds the right formula like it did for TV shows.
Making a movie is a really big risk for the firm. But there is no time like the present for Netflix to be doing this grand experiment.
Who knows, we might be binge watching its original movies soon like we already do their TV shows.
Like Twitter user Glenville Morris, one of the many that commented on social media when Netflix first announced its movie plans, said:
THIS is how I want my movies in the future! Cinema and streaming on the same day. This is ace news! http://t.co/5jBXcOJBj6
— Glenville Morris (@glenvillemorris) October 5, 2014