"We understand that our approach to films - debuting movies on Netflix first - is counter to Hollywood’s century-old windowing tradition," Netflix said in its earnings report Monday. "But just as we changed and reinvented the TV business by putting consumers first and making access to content more convenient, we believe internet TV can similarly reinvigorate the film business."
Netflix produced 16 films in 2016, less than half of what it says it'll make this year. But beyond the increase in movies, it is the company's vision for distribution that threatens to upend the money-making apparatus that Hollywood has relied on for so long.
Traditional film studios have long established a system of showcasing a movie in theaters followed months later by the release of a DVD. Netflix's 2015 film, "Beasts of No Nation," debuted in some theaters as well as living rooms at the same time. The approach angered some theater chains, which refused to screen the film.
Netflix cares far more about its subscribers and whether they can access the best content from their homes or mobile devices. The limited theater releases are partly for "awards consideration," said Jonathan Friedland, a company spokesman. Still, the company said it plans to continue its dual release strategy for some of the 40 films it is releasing this year. That might include "Bright," a sci-fi action film starring Will Smith due later this year.
"There is a war in Hollywood right now and the war is the Netflix model versus the Hollywood model," said Ross Gerber, president and chief executive of Gerber Kawasaki, a wealth and investment management firm based in Santa Monica.
Over the past decade movie attendance has trended downward, just as ticket prices have steadily increased, according to data compiled by Box Office Mojo. And opening night for many movies outside the blockbuster genre has lost some of its luster, analysts say.
"Nobody is going to the movies," Gerber said. "If it's not a tent-pole movie, people don’t care anymore."
Gerber envisions a new model where Netflix customers are granted access to newly released movies, perhaps for a onetime $40 fee, or as part of a monthly premium subscription. Hollywood studios could get their films in front of Netflix's 104 million members around the world, with the chance to convince customers who would have otherwise stayed home and skipped the traditional movie night.
But Patrick Corcoran vice president and chief communications officer of the National Association of Theatre Owners doubted whether Netflix's strategy could work.
Corcoran acknowledged that movie studios have been focusing on big budget movies with broad appeal, shrinking the market for mid-range movies, but he said that moviegoing remains a unique experience, especially as many theaters have upgraded to digital projection, recliner seats and restaurant and alcohol service. "People get excited going out to movies. The crowd is actually energizing." he said. “Netflix is disrupting television, it's not disrupting the movie business.”
Michael Pachter, a research analyst at Wedbush Securities, a Los Angeles-based investment bank, said it may be difficult for Netflix to capitalize on the large investment it takes to make movies, since audiences will simply watch them and move on. "Lets say the Adam Sandler movie was the best movie that was ever made. Then what?" he said. (Earlier this year, Sandler and Netflix agreed to expand a previous deal and release four additional films on the streaming platform.) "What's the value of 'House of Cards' three years from now? Not very high," he added.
Pachter said Netflix may very well pull the movie experience closer to an on-demand model, in the same way that DVD's have shortened the timespan between a theatrical release date and when movies can be viewed at home. "It's fine to say the system will change, but it changes gradually over 20 to 30 years, not overnight," he said.
On Tuesday, Netflix shares soared to $183.60, up more than 13.5 percent from Monday's closing, a record high. But Netflix’s efforts to draw in new customers through an ever-expanding library of original movies and television shows has come at a steep cost. In its earnings report Monday, Netflix said it had a negative free cash flow of over $600 million for the second quarter. And that number could balloon to $2.5 billion for the year 2017, according to the company.
Netflix said it will continue to spend increased capital towards content, especially for its original programming, and that it expects its cash flow to remain negative for "many years."