Algorithm and Blues: How Netflix Is Conquering Hollywood

In the battle for the future of film, Netflix is coming out on top.

In February of this year, Netflix (NASDAQ: NFLX) once again flaunted its talent for doing the unexpected by winning not one but three Academy Awards. The gongs, which all went to Alfonso Cuaron’s critically-acclaimed ‘Roma’, represented a major moment in the relationship between Silicon Valley and Hollywood — California’s two great symbols of brilliance, wealth, and glamor.

A new kid, it seemed, was in town, and his name was Netflix.

The streaming service has been locking horns with the traditional movie industry ever since it began financing original films about five years ago. At the heart of the conflict was Netflix’s so-called “day-and-date” strategy by which it simultaneously released movies in theatres and on its platform. One of the first films to be distributed in this fashion was 2015’s ‘Beasts of No Nation’, prompting four of the largest theatre chains in the U.S. to effectively boycott it over a supposed violation of “windowing” schedules, which traditionally gave cinemas a 90-day period of exclusive screening rights.

Interestingly, as Netflix becomes a growing force in the industry, it appears that the company is beginning to see the value in separating theatrical and home releases after all, albeit by shorter distances. ‘Roma’ itself had been in theatres for more than three weeks before it was added to Netflix’s platform, while last year’s smash-hit horror film ‘Bird Box’ was in multiplexes for all of a week before it flew from the big screen to the little one. It should be stressed, however, that this unusual distribution method was essentially a formality on the part of Netflix in order to make its films eligible for major awards.

As it demonstrates its capacity for producing commercial and critical hits, it might seem that Netflix is doing to Tinseltown what it did to video rental chains such as the once-mighty Blockbuster. But it’s not quite so simple.

As unstoppable it might look, Netflix’s rise has been complicated by at least two factors. First, the huge amount of cash it spends on maintaining its dominance. Film production and distribution is a notoriously low-margin business, with theatres famously making most of their money through popcorn and soda sales rather than at the box office (most cinemas will get to keep 40% of ticket revenues if they’re lucky).

What is less well-known is that streaming is similarly challenging. Despite its status as the reigning king of the space, Netflix actually burns through money at a fairly alarming rate. Indeed, the company expects its operations and investments to burn through $3.5 billion by the end of 2019. Ever since the poor performance of Uber’s IPO earlier this year, investors have been sensitive about the “spend money to make money” excuse for a giant burn rate.

Netflix’s second major problem comes from the fact that many of the established Hollywood studios are now looking for their own piece of the streaming pie. Fans were disappointed recently to hear that NBCUniversal would be buying back its hit sitcom ‘The Office’ from Netflix for $100 million per year, but that move was just the latest in a multi-front campaign by old Hollywood against the feisty upstart. One of the biggest threats in this department undoubtedly comes from The Walt Disney Company (NYSE: DIS), whose upcoming subscription-based video-on-demand service, Disney+, is set to shake things up for Netflix. For instance, this week, reports emerged that the studio behind Mickey Mouse had poached a top Netflix executive, suggesting that the currents might be changing, however slightly.

Culturally, too, Netflix’s influence has divided the industry. Many of its most beloved filmmakers, from Guillermo del Toro to the Coen Brothers, have jumped on board, while even the venerable Martin Scorsese has agreed to release his next two movies through the service. Steven Spielberg, on the other hand, is a notable voice of dissent. “I don’t believe that films that are just given token qualifications in a couple of theatres for less than a week should qualify for the Academy Award nomination,” the billionaire director said after the ‘Roma’ nominations made headlines. “I’m a firm believer that movie theatres need to be around forever.”

It seems that Spielberg is swimming against the tide of history here though. Ratings for the Oscars — the ultimate Hollywood spectacle for many — hit an all-time low last year, while established studios are struggling to compete with streaming services on both the production and distribution fronts.

As old Hollywood prepares to go high-tech, and tech, in turn, embraces traditional releases, the real question is no longer whether Steven Spielberg believes that movie theatres should always be around, but whether Netflix does.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Netflix and The Walt Disney Company. Read our full disclosure policy here.