Whenever we were setting up meetings for my old boss while deployed in the Middle East, he used to ask if the devoted resources to the engagement were worth it - "is the juice worth the squeeze?" It was a simple question, and it often resulted in me setting the phone back into its cradle when we realized the costs would outweigh the benefit.
Looking at the most recent Netflix (NASDAQ:NFLX) $90 million movie deal for Bright with Will Smith, I have to wonder this same question - is the investment in first run movies going to be worth the potential profits from new and recurring subscriptions? Netflix did report that Adam Sandler's The Ridiculous Six did quite well, despite having very low reviews (~2-3 star range, even on NFLX itself). But then again, NFLX can report whatever it wants as management does not put out exact numbers per content offering. Additionally, when one looks at the cast of The Ridiculous Six, it fits right in with most of its comedy offerings and thus likely helped to at least retain old customers and at least get a trial subscription from new users.
IMAGE COURTESY NETFLIX
Just as The Ridiculous Six makes sense in NFLX's library, so does the purchase for The Little Prince as it is something that can be "netflixed," i.e. watched over and over again as children often do, and concurrently provide entertainment for adults. Also, having been abandoned by Paramount, it likely was an inexpensive purchase, similar to NFLX's previous moves to buy cancelled TV shows. It's a frugal way to build a decent library through content that already has an audience.
With that said, NFLX did something different with its $90 million for Bright - first, it spent a lot of money on a bet that this will attract the necessary subscribers to cover the expense. But more importantly, it cut out the back-end costs (residuals/payments that go on for years) normally associated with movies released to theaters, disc and digital download. This is a relatively uncommon tactic and likely a plight to bring in a new paradigm to Hollywood. Basically, NFLX pays the cast/crew/connected parties up front in the hopes the movie brings out subscribers regardless of how the movie does on streaming. They owe nothing to these parties later regardless of how the movie does - a win-win, right? Maybe, as this type of deal makes sense on three fronts:
1. With either no release or a very limited release to theaters, residuals from ticket sales will basically be nil - it fully reaps the benefits of any subscriber gains. It is NFLX's dream model - they have the rights and the only platform for viewing the content, thus gain and retain subscribers, and the enduring profits.
2. By avoiding any type of payment per view to the cast, NFLX will be able to continue its pattern of not divulging these numbers - something NFLX has evaded to date and likely not something it would like to reconsider. If NFLX had to go down this road, it would begin immediate comparisons to competitors, creating an unnecessary distraction in a constantly changing viewership "horse race."
3. In conjunction with No. 1, it cuts out the theaters completely, or at least those not receiving a limited run of the movie if that occurs at all. This promotes spending time at home watching NFLX, which NFLX hopes leads to more time at home watching its shows. Again, NFLX is attempting to set a new standard of movies having a much shorter flash-to-bang time from the big screen to the flat screen in the living room.
Will this squeeze enough juice to please investors?
Even as the back-end costs are eliminated, is the $90 million worth it to grab new subscribers? While this was on NFLX's up-front payment terms and some analysts appeared optimistic with this addition, especially with Will Smith, I'm cautious and feel outcomes will not end in such a win-win narrative.
First, it is a movie, not a series which generally brings in NFLX audiences for the long term. Viewers are able to Netflix an entire show for several seasons, which often leads to long-term subscribers looking for more shows to Netflix. Second, this seems like a lot of bang for a hopeful buck, especially since NFLX outbid the nearest competitor for Bright by almost one-third (from ~$64 million counting the script). NFLX paid extra to seal these terms, but it has, in effect, put itself into a Catch-22 situation. Somebody loses in the long term. Consider a couple basic outcomes:
1. The movie is the equivalent of the original Men in Black or Bad Boys - It rates well with movie reviewers and audiences, and attracts several million additional subscribers - success for NFLX is the headline.
Short-term winner: NFLX. Short-term loser: Parties involved in creating Bright, theaters.
Long-term winner: Hollywood and future casts. Long-term loser: NFLX.
Theaters sit in the middle long term. They could carve out a new niche, but it also makes it more competitive for them to provide NFLX and Hollywood better deals to turn a buck.
But NFLX won't say it was such a huge success in numbers just that it received great reviews and had a lot of views by users. Even so, Hollywood is likely to take note of its quarterly reports, see the numbers grow, and put two and two together. In this light, NFLX wins the initial battle, but has now caused Hollywood and the theaters to increase their resolve in the war. Will Smith will probably be publicly content with Bright's compensation but irritated that he is missing potential gains in the long term, as will the rest of the cast. So what will happen for the next film NFLX buys? The studios and SAG members are going to hold up NFLX and the theaters are going to have a say in whether they gain an opportunity to show the movie. NFLX disrupts the current model, but the new paradigm is an example of the grass not always being greener on the other side. Point being - NFLX probably should have passed on going up to $90 million as they have now anchored this immense price, which in this outcome will only go higher.
2. Another outcome is that the movie is terrible - Ratings in both reviews and from audiences spell out a decisive failure. It does not attract subscribers.
Short-term winner: Parties involved in creating Bright. Short-term loser: NFLX
Long-term, the decisive winner: The theaters, as the old model remains in effect. No decisive loser in the long-term as NFLX and Hollywood will likely use this as a lesson learned and continue status quo.
NFLX loses here as its $90 million is a sunken cost - they can't get it back, and the actors walk away with their money while NFLX tries to redeem a stinker. NFLX will likely spin it as a movie that has done well, but not quite to their expectations. It showed some subscriber interest, but not as much as they would have liked. While it will lower price tags on future movies, it won't change the paradigm. Additionally, NFLX is likely to attract lower quality films just hoping for a paycheck - hence Hollywood can keep its status quo of giving NFLX the scripts like The Ridiculous Six. The lesson learned for NFLX will be to stick with movies that fit their current library - likeThe Ridiculous Six - and look for TV shows and movies that are lower cost but grab cult followings and long-term subscribers - similar to cancelled TV shows. The real winners here are the movie theaters, as they keep the status quo of raking in ticket and concession sales.
I still hold a small position in NFLX, but based upon this expenditure, I'm ready to exit this position at $110. The results of $90 million for one flick are likely to show the juice is not worth the squeeze, and this sudden escalation in purchase price for a hopeful hit is cause for concern. NFLX will unlikely gain the necessary long-term subscribers needed to justify this type of expense and I don't see the movie industry agreeing with this new style of movie creation and distribution. I look forward to how this pans out, but I'm not expecting NFLX to fill its glass on this move.
Disclosure: I am/we are long NFLX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.