A button to launch the Netflix app is seen on a remote control in this photo illustration in Warsaw, Poland on April 25, 2019.
Jaap Arriens | NurPhoto | fake images
There’s a big money question haunting Netflix.
In recent years, the streamer has spent heavily on flashy, blockbuster action movies like “The Gray Man” and “Red Notice,” which netted the company $200 million each. Movies are the first steps in event-level franchise deals. But they’re expensive, and it’s unclear how impactful they’ve been for Netflix’s bottom line.
Meanwhile, the platform’s smash hit “Stranger Things,” a horror-tinged supernatural thriller, has become a distinct cultural reference. The series, which just launched its fourth season, has inspired Halloween costumes and video game versions of the monster-filled alternate universe.
While the show has a budget similar to those of these high-octane action movies (about $30 million per episode, or more than $200 million per season), its success has led some in the industry to question whether the high-octane features budget are worth the investment of Netflix.
Netflix’s streaming rivals have begun changing their own content strategies to spend less on direct-to-stream movie content. Warner Bros. Discovery CEO David Zaslav said Thursday that his company has been unable to find “economic value” in producing big-budget movies for its streaming services.
“Fortunately, by having access to all the data now, we’ve seen how direct-to-broadcast movies perform,” Zaslav said during the company’s second-quarter earnings call. “And our conclusion is that expensive direct-to-broadcast movies … don’t compare to what happens when you release a movie in theaters, in theaters.”
Netflix doesn’t typically release movies in theaters unless it’s seeking Academy Award eligibility, so it budgets movies knowing that its only option to break even is through subscription growth.
This is why analysts have pointed to the horror genre as a potential avenue for Netflix.
The horror genre, in particular, generally comes with lower production costs, making these types of films ideal for the box office, as they often gross significantly more in ticket sales than they cost to make.
Blumhouse and Universal’s “Get Out” cost just $4.5 million to produce and generated more than $250 million at the worldwide box office.
And while “The Gray Man” will become a franchise, Peter Csathy, founder and chairman of advisory firm Creative Media, suggested that Netflix is glossing over franchise opportunities that could save the company hundreds of millions per movie. .
“Scream”, “Insidious”, “Halloween” and other horror movie series have won over fans of the genre, as low-budget alternatives to more expensive franchises like Fast and Furious, Star Wars, Marvel or Lord of the Rings. the Rings.
“The production costs are a sliver, a fraction, a tiny fraction of what it is for these huge bets that are being made,” he said. “And why not go for something inexpensive and sure to hit your target demo? Why not put your money there, instead of making these high-profile plays?”
Plus, Csathy added, the horror genre’s target audience is also young: the demographic advertisers and streamers want to take advantage of.
Netflix has found success in previous horror releases, including its “Fear Street” trilogy, and has a number of Netflix Original releases in the genre, including “No One Gets Out Alive” and “Someone’s Inside Your House.”
Wedbush analyst Michael Pachter suggested Netflix could get more bang for its buck by sticking with a lineup of horror and rom-com projects, both of which tend to be relatively low-budget. With more modest budgets, the errors are not so important.
“The good thing about low budget is that you can make mistakes,” he said. “Big budget, you just can’t do anything. If you screw up, you’re screwed. So what’s riskier, one $150 million movie or three $50 million movies?”
Some of the scrutiny on Netflix’s content spending stems from a lack of clear metrics on the financial performance of early streaming shows and movies.
Box office counts for movie releases and TV ad revenue are tried and true metrics. With streaming-only platforms, viewership data varies from service to service and paints an incomplete picture for analysts trying to determine how a movie or TV show has actually performed.
A bill of more than $200 million for a movie like “The Gray Man” is harder to explain when there’s no visible financial gain at the end of production, as studios see in box office ticket sales. Streaming subscribers pay flat monthly or annual fees to access all available content. Netflix argues that its content keeps users on the platform and delivers subscriber fees.
For Netflix, the push toward big-budget movies is a way to burnish its image and silence criticism that it produces mediocre content. The company has beefed up its balance sheet, is cash flow positive and has a three-year window before a significant chunk of its debt comes due, giving it some leeway to spend.
It’s unclear how much Netflix spent per movie for its “Fear Street” trilogy, and there’s limited data on its performance on the platform. But Nielsen ratings estimated that “Fear Street 1994” generated 284 million minutes of viewing during its first week on the service and “Fear Street 1978” clocked in at 229 million minutes. It’s unclear how the third film, “Fear Street 1666,” fared.
In addition, the fourth season of “Stranger Things” has become the second Netflix series to exceed one billion hours viewed in the first 28 days of availability. Of course, comparing Netflix’s movies to its TV series is a bit like comparing apples to oranges, but it’s the best information analysts have access to, as long as the company keeps quiet about content spending and success. .
Many entertainment experts have tried to calculate how streaming hours translate to revenue, retention, and ultimately the strength of Netflix’s business. But much of how Netflix decides what to greenlight and what to cancel remains a mystery to analysts.
According to Netflix’s own data, “The Gray Man” racked up more than 88 million hours of viewing worldwide during its first weekend on the service, 60 million hours less than “Red Notice” during the same period on Netflix. last November. “Red Notice” held the top spot on Netflix’s top 10 list for 12 days, while “The Gray Man” was usurped after just eight days.
As of Friday, the film is fourth on the list behind “Purple Hearts,” “Tower Heist” and “Age of Adaline.”
So was “The Gray Man” worth its $200 million price tag? It seems to have hit some behind-the-scenes metric for Netflix, which is moving forward with a sequel and a spinoff.
“Netflix obviously has the data and the methodology that they think is accurate, to determine what’s this hit on Netflix and what’s not,” said Dan Rayburn, broadcast and media analyst. “Yes [‘The Gray Man’] If they had bombed according to their definition of bombing, whatever that is, we don’t know, they wouldn’t have announced an expanded agreement.”
As for how Netflix makes its content choices, Rayburn says that while the data isn’t currently widely available, that could change once the streamer enters the ad market.
“Whether they want to give us data or not, we will get more data as the years go by, on the advertising side,” he said. “That will help us better understand the content.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC. Universal is the distributor of the Halloween and “Get Out” franchise.