Roughly three hundred miles north of Hollywood, Netflix chief content officer Ted Sarandos and his team are eagerly flipping through movie scripts ranging from million-dollar indie films to multi-million-dollar mainstream flicks. They’re looking for Netflix’s new competitive edge.
The company that changed the way we rent movies and paved the way for streaming platforms is hitting a ceiling on the number of subscribers it can add using the consumer draw it has relied on for so long. For those who haven’t gotten hooked onto binge-watching licensed series like “Friends” or originals like “Stranger Things,” Netflix is hoping that investing heavily cinema will do the trick. Two years after releasing its very first original film, Beasts of no Nation, Netflix announced plans to make 80 original movies in 2018 using part of the $8 billion it has budgeted for content that year.
“I think people will start seeing the potential for this original movie initiative that it can be done on the big – on the enormous scale that we have on the television side,” said Sarandos.
The Los Gatos-based streaming company doesn’t have the advantage of being first to market here. Plus, industry competitors depend on cinema distribution, which Netflix has made clear it has no intention of doing for mass profit. The box office strategy hasn’t translated well for Netflix’s subscription-based business model.
“We had three different films that released this quarter that, if viewing was buying a movie ticket, would be sizable successes,” said Sarandos during the third quarter earnings call. A one-time movie ticket fee is a different sell than a monthly subscription. To keep customers coming back and convince new customers that the commitment is worth the price, Netflix will need more hits than the average studio, with a more conservative budget.
“The movie is going to have to be really, really, good to have people want to see it and sign up for it,” said Gina Keating, author of the 2012 book, “Netflixed: The Epic Battle for America’s Eyeballs.” “It’s a totally different situation.”
And Netflix has struggled with medium- and large-scale productions like “War Machine” and “Death Note,” while the low-budget original films bought from indie directors like Noah Baumbach and Dee Rees have been well-received. The decision to lean on one or the other will determine whether it’s able to stay financially competitive in the long term.
“Streaming rights are very expensive,” said Keating. “As Netflix has gotten more and more successful and as more players have come on to the scene, it gets more expensive. They have to make very good decisions about what to buy, and now what to make.”
Netflix is currently fueled by billions of dollars of debt, with subscription payments as its sole profit driver, and investors would like to see cash flow turn positive sooner rather than later. If done correctly, growing Netflix’s content library could bring in new subscribers – the main metric that matters for investors. It might also help keep current subscribers.
The announcement that Netflix would produce 30 more films in 2018 than it did last year came soon after movie studio Disney said it would pull its movies from Netflix’s library and add them to its own streaming service, which launches in 2019. It isn’t the first production company to start a streaming service with exclusive rights to its content, and it won’t be the last. Exclusive movies could make up for that loss. The question is whether it’s adding content that’s quality enough to attract new users.
“Movie-wise, no, but series-wise, yes,” said Cameran Yeager, a 17-year-old from Millersburg, OH. Generally, Yeager is unsatisfied with the movie selection. “I think it’s poor, honestly. I feel like it’s always movies with cheesy endings and poor plots.”
The movie-rental company turned production company stands a better chance if it can build a repertoire of well-made low-budget independent films. Yet it continues to search for a tentpole movie – the industry’s term for a large-scale production that brings in the positive return that a studio needs to stay afloat – with little success. “War Machine,” a dramedy that stars Brad Pitt, and screams “tentpole” at $60 million in production costs, hasn’t exactly worked wonders for the platform.
“In the end, there isn’t much to praise about this film, due to the fact that you can’t really recommend it to anyone,” KJ Proulx, a Brad Pitt fan and a regular on the review aggregating website Rotten Tomatoes commented on the movie’s page. “Fans of parodies will be extremely bored as there is not enough comedy and fans of dramas will be conflicted, due to the fact that there is comedy in random areas. As a film, this doesn’t work at all in my opinion.”
Half of the movie critics who evaluated “War Machine” on Rotten Tomatoes gave it a negative review, and about two-thirds of the consumers who reviewed it on the site gave it less than a 3.5 out of 5.
Yeager has yet to see “War Machine.” Her favorite Netflix movie was “Hush,” a million-dollar film that director Mike Flanagan supposedly made in secret. Netflix acquired rights to it in 2016. Similarly, the highest rated Netflix original movie on Rotten Tomatoes, “Tramps,” is a 2016 independent film by second-time director Adam Leon, and had an estimated $1.5 to $2.5 million budget. The movie got positive reviews from 95% of the movie critics who evaluated it, and a 3.5 or higher from 74% of users who did the same.
Netflix could be carried by these smaller, more successful films, but the impact of a star-studded film is hard to ignore. “Tramps” has 20 critic reviews on the site and was reviewed by 395 consumers, while “War Machine” has 77 critic reviews and was reviewed by 5,259 consumers. Well-made high-budget productions could bring new eyes to the platform; Emphasis on the words well-made and multiple.
“War Machine is the latest in [Netflix’s] feature film category, and while it does show promise in getting big stars attached to some of their releases, I still think they have a while to go before they start to shut down movie theatres,” read Proulx’s comment.
But Netflix clearly intends to keep trying, though its financials leave little room for error. Will Smith stars in “Bright” this December, and a promised Scorsese mob movie is set to be released in 2019. Both will be big-budget films financed with debt, since the only other way to pay the bill is by continuing to increase subscription prices.
“There’s a certain tolerance for spending for content, as long as you really feel that you’re getting what you want,” said Keating. Customers’ response to Netflix’s price hike, intended help pay for its 2018 $8 billion budget, reflected that sentiment.
Netflix is really changing their price to 13.99 a month in December 🤔🤔UMM y’all took all the good movies and shows you even had off sooo nah
— sky🌗♏️ (@cloudySkyyyy) November 21, 2017
Since they raised the price for Netflix they better add good movies 😭😤
— drea (@_dreavh) November 26, 2017
Anybody want to explain why @netflix took off all of the good movies/shows and then increased their prices???
Am I missing something?
— кєℓѕєу♛ (@masseykelsey_) November 28, 2017
Pricing will need to stay competitive as goliaths like Disney, Apple, Facebook, and Amazon enter the market. These companies have other forms of revenue, while Netflix’s gross profit and market performance come down to whether or not consumers think its content is worth the monthly payment.
“The problem is that this is the business model now: You underprice, you lose money, you essentially gain market share,” said Michael Churchill of Churchill Research, an independent equity-research firm. “But when the day comes when you have to price normally, what happens to your customers?”
Year-to-date, Netflix’s stock price has increased 47 percent, and 60 percent year-over-year to $186.82. Subscription growth, the stock-driving metric, has done well for Netflix so far, beating analyst expectations last quarter when it added 5.3 million subscribers.
Still, the stock price – which went up to $202.68 in the weeks leading up to earnings – has decreased in the weeks since, signaling that investors are becoming cautious.
“It’s a very difficult business, trying to predict what kind of art form is going to capture people,” said Churchill. “I’m sure they’re smart enough to get some young people who can figure out what people actually want to see, but I’m glad I’m not the one having to do it.”