THE HOLLYWOOD REPORTER 42 NOVEMBER 13, 2019
AnalysisThe Business
Illustration by John Ueland
FITHIAN
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AGES.As far as Wall Street is concerned, the streaming giant has all the leverage it needs to ignore
tradition when it comes to releasing films theatrically, given how it is trouncing the exhibitors in
the metrics that matter most: a surging stock and consumer growth. — PAUL BONDO
n Nov. 1, John Fithian,
president of the National
Association of Theatre
Owners, called Netflix’s decision
to forgo a traditional theatri-
cal release for Martin Scorsese’s
The Irishman a “disgrace” and a
“missed strategic opportunity.”
Fithian is an effective advocate
for his constituents, but as a
Netflix shareholder, I disagree
with his position. It would be a
major strategic and financial
mistake for the streamer to spend
large sums to give The Irishman
a wide U.S. release, accom-
panied by a 90-day theatrical
exclusivity window.
As film insiders know, the
“P&A” cost to market and distrib-
ute a wide-release studio movie
can equal or exceed the budget
of the film itself. With so many
high-quality home entertainment
options available, theatrical dis-
tributors must spend huge sums
to break through the clutter and
drive the audience to show up on
opening weekend. The cost of live
TV ads, still the most effective
way to reach a national audience,
also has risen due to scarcity
value. Making matters worse,
distributors often must earmark
P&A spending well in advance ofA ‘Disgrace’?! Netflix Should
Avoid Wasting Money in Theaters
The massive cost of putting The Irishman on 3,000 screens is money the streamer
can spend producing more movies for its growing audience, argues a Wall Street analystmore customer engagement and
retention, key drivers of a healthy
subscription business model.
This strategy is creating real
value: From Sept. 3, 2015, the day
that Netflix took perhaps its first
big step into film with the release
of Cary Fukunaga’s Beasts of No
Nation, the company’s market
value has increased from $43 bil-
lion to $130 billion. That gain is
greater than the enterprise value
of Lionsgate, Viacom and all of
the publicly traded movie exhibi-
tor stocks combined.
Fithian also says Netflix “sent
a message to filmmakers that
even if you are Martin Scorsese,
you won’t get the wide theatrical
release you want through Netflix.”
This is true. And the risk to the
Netflix model is that filmmakers
of Scorsese’s caliber simply will
refuse to work there.
But many of the world’s great
and popular storytellers, includ-
ing Dee Rees, Michael Bay,
Fernando Meirelles, Alfonso
Cuarón, Noah Baumbach and
Susanne Bier, are choosing to
make movies with Netflix because
it is willing to take creative risks
the traditional studios will not
take. Netflix’s distribution plat-
form also puts its films in front
of a global audience of 160 mil-
lion subscribers. Assuming two
viewers per account, Netflix can
deliver filmmakers a prospective
audience of 300 million people
(and growing) with each release.
This film distribution strategy
is enabling rich, diverse stories
to reach a massive audience. And
that should be celebrated as a
win for movie lovers — and the
movie business.the theatrical rollout, leaving the
distributor vulnerable to unfore-
seen cultural or commercial
changes in the marketplace.
Independent distributor
Broad Green exited the distribu-
tion business in 2017; STX’s and
Annapurna’s challenges are well
reported; and mini-majors like
Lionsgate and MGM have found
it difficult to consistently grow
theatrical business
profitability.
Still, entertain-
ment companies that
need to monetize
movies via theaters
have little choice but to spend
big on marketing and distribu-
tion. The talent involved often
demands a large marketing push,
and if the studio doesn’t invest
big, the film has little chance of
a large opening weekend at the
box office. Because a low opening
weekend impairs the downstreamvalue of the movie, P&A spend
can have a material impact on
the long-term economic viability
of a film. It’s becoming a tough
business model.
Fithian is right that theatri-
cal moviegoers like Scorsese.
His more recent consumer-
friendly film, The Wolf of Wall
Street, opened to $18.4 million
in 2013 and ultimately grossed
$116.9 million domestic. But how
much did Paramount spend to
push it to those numbers?
Netflix’s business model is
not held hostage by any of these
constraints. It does not need to
drive opening-weekend box office,
nor does it sell DVDs or license its
owned content. The $100 million
in P&A costs that Netflix prob-
ably would need to spend to open
The Irishman on 3,000 screens
is money that cannot be spent
on producing more movies.
More new film content leads toGUEST COLUMN | BEN WEISS
BEN WEISS is chief investment
officer for 8th & Jackson
Capital Management.FithianNetflix Looms Over Theaters
2016$8.8B
*$123.80 $3.2B
*$27.03$2.9B
*$35 $377.M
*$31.40
2017$11.7B
*$191.96
$5.1B
$12.68 $3B
*$32.77 $381M
*$23.15
2018$15.8B
*$267.66$5.5B
*$11.70 $3.2B
*$34.85
$374M
*$18.81Netflix AMC Entertainment Cinemark Holdings Imax Corp. *Stock PriceSource: Yahoo Finance and SEC filings. Stock prices are for end of year, adjusted for splits and dividends.REVENUE: