It’s fitting that Netflix’s (NFLX) first foray into moviemaking comes via a martial arts film. In the cagey and brutal game of content distribution, the streaming service has just launched a bold offensive in its deal with the Weinstein Co. to produce a sequel to Crouching Tiger, Hidden Dragon.
The coming film will make its debut in August simultaneously on IMAX (IMAX) screens and on the Netflix streaming service. To play the analogy out: Weinstein is the tiger, Netflix the not-so-hidden dragon, and all the other studios and major theater-owners are waves of masked ninjas that scatter like black-robed bowling pins.
Plotting a carefully crafted series of release windows is a Hollywood tradition, a sound strategy for separating customers by their willingness to pay. Those who can’t wait to see a film pay for a cinema ticket, while patient vieewers can rent the movie a few months later. By tradition, companies such as Netflix (NFLX) and cable networks swoop in for broadcast rights to appease late-night channel surfers. The windows have been shrinking for some time, and Netflix’s announcement on Tuesday morning shatters them entirely—at least for one 14-year-old martial arts franchise.
Netflix cut its content-producing teeth with a string of original series such as House of Cards and Orange Is the New Black. For its first foray into the movie business, however, it is taking a cue from Hollywood by going with a proven property and a lauded production partner. The seminal Crouching Tiger was released in 2000 to garner $128.1 million in U.S. theaters, more than double the returns of Life Is Beautiful, the next-most-lucrative foreign language film, according to IMDb. The film rounded up an additional $85.4 million outside the U.S., as well as four Academy Awards.
“This is a natural extension of Netflix’s original programming strategies, which they’ve done quite well with” said Paul Sweeney, director of research at Bloomberg Industries. “It really does drive subscriber growth.”
Richard Greenfield, an analyst at BTIG, considers the move into movies sensible because Netflix is already spending vast sums for rights to movies that have already been wrung out by cinemas. “An outsider like Netflix can enter the business without the fear of having to protect a legacy business,” he wrote in a blog post earlier this year.
At the end of the day, the new Crouching Tiger represents a greater threat to major theater chains than it does to Hollywood studios. Regal Entertainment (RGC), AMC Entertainment (AMC) and Cinemark (CNK) have fought diligently to keep streaming movies at a distance. The window between a theatrical debut and a streaming or DVD sale has shrunk from an average of 173 days in 1998 to 119 days last year, according to Bloomberg Industries.
Old-fashioned movie studios don’t have much to worry about yet. The big studios have been greenlighting bigger budgets for fewer movies in recent years. A schedule of such so-called tent-pole films needs a big boost at the box office. It would take more than $3 from each Netflix subscriber, for example, to cover the production budget of a blockbuster like Guardians of the Galaxy. ”This is a one-off deal,” Wedbush analyst Michael Pachter wrote in an e-mail. “And if there was a huge demand for theatrical exhibition, it wouldn’t have happened.”
Meanwhile, IMAX Chief Executive Officer Rich Gelfond told Bloomberg News that traditional cinema companies that house his company’s screens will have a choice of whether to show the Netflix film. ”We are not going to war over this,” he said. “We are still committed to the system for Hollywood blockbuster films.’’
