Netflix is making a big fuss about a deal it announced this week with Relativity Media under which major theatrically released films owned by Relativity will be licensed directly and exclusively to Netflix for streaming to its subscribers during the “pay TV window.” Traditionally, these films have flowed through Relativity’s studio releasing partners to output deals with premium TV channels.
It’s a very small step and one we predicted more than a few years ago, but the timeframe for change in the content markets is lengthened by the fact that it is an industry trying to retain the status quo, obliterate piracy and get back to the good old days. Studios five years ago hated the internet and could never look seriously at an idea that involved it, which is why this is perhaps a sign of how far we have come, despite it not being all that far compared to where the industry could be if it threw itself behind internet distribution.
Effectively, on this one occasion, Netflix is able to promise enough revenue to Relativity that it will grant it next stab at its content after going out to cinemas, instead of dropping it in the lap of HBO, Showtime and Starz. These are all paid TV channels which aggregate films and charge a premium to cable and satellite TV subscribers. The films will be streamed from Netflix just a few months after their release on DVD.
While it is a historical decision, you have to wonder why only one such company has ever done it, and whether or not, at this stage of the market they will regret it.
The films that will go this route include “The Fighter,” distributed by Paramount Pictures, and “Skyline,” co-directed by the Brothers Strause and released by Rogue Pictures and Universal Studios. Both films will come out this year and to be available at Netflix in early 2011. Other films going this route include Nicolas Cage’s Season of the Witch and Movie 43, written and directed by Peter Farley.
It has taken a company that has amassed 14 million monthly paying customers (at around $8.99 a month each) to take this step and of course it is analogous to HBO in many ways, because this is a bidding process ‘ In HBO’s case you take a chunk of the revenue you get for Pay TV carrying the channel, which includes highly predicable monthly payments per subscriber, and you bid for various exclusivity items. For Netflix it is doing the same but using the pot whereby 14 million homes pay it monthly and using that money to bid.
In each case they are able to guarantee the film’s minimum revenue and make some guess about how much good the exclusivity will do them in terms of new signings. For Netflix it has taken until this quarter, when 55% of its 14 million have developed an online viewing habit. This time last year it was just 36%, and last quarter just 48%.
So all this shows is that the internet needs a focused service provider which has proven captive revenue streams before anyone will take a risk on it for even part of their revenues. These films will still have a theatrical release, which will grab about 40% of their revenues, and still go out on DVD, which will perhaps gain it another 35% to 40%, leaving just a few percentage points of revenue at risk. Under those conditions surely more and more movies will take the leap? But the truth is that while HBO and Pay TV dominate the acquisition of high quality content, there can never be a sudden free flow of deals of this type to the general internet.
The logical end point for this industry is that movie studios distribute their own content using the internet as the primary launchpad, going out almost simultaneously with cinemas, and then staying available on VoD forever. But it has taken 10 years to make digital cinemas become a significant force, and advanced, piracy protected digital distribution from the likes of Technicolor to manage digital distribution to cinemas. It could take another 10 years for established online services to take the Lion’s share of the third phase of a film’s exploitation, after cinema and DVD release and another 10 years for it to supercede the DVD, and perhaps longer before Cinemas lie empty.
The interesting thing here is that consumers WANT this to happen faster. Consumers say they love going to the cinema, but they have to queue on the phone to get tickets at most chains, who have inelegant online ticket purchasing; they have to spend money on petrol, popcorn and pop to satisfy their children’s need for a true cinema experience. And now they have to pay extra for 3D glasses, to watch films which offer a dubious improvement when seen in 3D (unlike Avatar). They then have to pay separately for three or four tickets for the viewing instead of one. The result can be little change out of $70 or $80.
This process also eats at least four hours of a family day, at a time when families are fragmenting, in the sense that they are doing more and more things separately with peers.
Clicking an online view button to stream a movie and satisfy everyone in the room instantaneously, with no planning, and a cost per month way under the price for a single cinema visit, is far preferable, especially on a large, modern, flat screen. It is also preferable for the studio, because all of that money is shared with a single online operator, not with the petrol station and the cinema food franchises. They would get a higher percentage per viewer and in turn that could keep overall prices down and dramatically increase the number of people prepared to watch online.
So this is not about satisfying consumers. It is about ensuring that no revenue stone is left unturned in squeezing the maximum profit out of a major movie. A swift shift to online would make studios more profitable. But they are so terrified of losing a little money on one film, finding out the best way to get online, that they have become totally risk averse.
Which is why Netflix is so critically important in this transformation. It is established, it has loyalty, it has ready cash, is revered by investors and has stood the test of time to build a brand in the online world.
Relativity is a relatively small player and says that it has financed, co-financed or produced more than 200 feature films, generating more than $13 billion in worldwide box office revenue. That, in film terms, is tiny especially when you realize that each of those movies would have averaged $65 million, when a single Lord of the Rings film brought in over $1 billion at the box office.
However it’s not tiny if you take the top Hollywood producers Sony, Disney, MGM, Fox, Universal and Paramount out of the picture and anyway the great bulk of even these top players’ films are not 100% funded by themselves. Each of these studios produce between 20 and 25 films a year and take complete control over maybe 7 or 8. The rest they share with companies like Relativity with varying degrees of expenditure and control. But all these 125 or so Hollywood films go to distribution through the distribution arms of these six studios.
That means that distribution rules are set in advance. So when Relativity says that it has had a part of ‘Robin Hood,’ ‘Get Him to the Greek’ and ‘Grown Ups,’ it doesn’t mean that these films could have gone down the Netflix route. The involvement of major studios would have meant that distribution routes were tied up contractually before the film was made.
That means that we won’t suddenly find that Netflix gets all 20 or 30 pictures that Relativity has an involvement every year, which is what makes this a slow process. First the system has to prove a success, then Netflix will use that to attract yet more customers, and to attach even more device types to the end of its online service and then slowly word gets around and more films try to this route to market.
The rivals to Netflix start to do the same thing, and finally there are three or four online routes to market that are ‘proven,’ which is why it takes ten years to make progress.
Relativity says it has more than 10 films it is financing and producing entirely on its own, scheduled to be released over the next 12 months. So it’s not insignificant in terms of what this might do for Relativity, but in terms of it being an industry landmark it is perhaps less important.
Ted Sarandos, chief content officer for Netflix said, ‘Historically, the rights to distribute these films are pre-sold to pay TV for as long as nine years after their theatrical release. Through our partnership with Relativity, these films will start to become available to our members just months after their DVD release.”
The Netflix online service can work directly with TV sets through the Microsoft Xbox 360, Sony’s PS3, the Nintendo’s Wii console; Blu-ray disc players from Samsung, LG and Insignia; Internet TVs from LG, Sony and Vizio; the Roku digital video player, TiVo digital video recorders, and Apple’s iPad tablet.