March 23, 2023

In this photo illustration on April 25, 2019 in Warsaw, Poland, a remote control has a button to launch the Netflix app.

Jaap Ariens | Image | Getty Images

Netflix has a big money problem.

The streamer has invested heavily in flashy blockbuster-style action films like “Grey Man” and “Red Notice” in recent years, each of which has brought in $200 million for the company. These films were the first steps in inspiring an event-level franchise. But they’re expensive, and it’s unclear how much they’ll affect Netflix’s bottom line.

Meanwhile, the platform’s hit Stranger Things, a supernatural thriller with a terrifying undertone, has become a clear cultural touchstone. The series just released its fourth season, inspired by Halloween costumes and a video game version of an alternate universe full of monsters.

While the show’s budget is similar to those of high-intensity action movies — around $30 million per episode, or more than $200 million per season — its success has led some in the industry to question whether the high-budget feature is worth Netflix’s investment.

Netflix’s streaming rivals have begun changing their content strategies to spend less on direct-streaming movie content. Warner Bros. Discovery CEO David Zaslav said Thursday that his company has been unable to find “economic value” in making big-budget movies for its streaming service.

“Fortunately, with all the data now accessible, we’ve seen the performance of direct streaming movies,” Zaslav said on the company’s second-quarter earnings call. “Our conclusion is that expensive direct-streaming movies … can’t compare to what happens when you put a movie in a movie theater, a theater.”

Netflix doesn’t release movies in theaters very often unless it’s seeking Oscar eligibility, so it budgets for movies knowing that its only option to recoup spending is through subscription growth.

That’s why analysts point to the horror genre as a potential avenue for Netflix.

Horror genres, in particular, are typically less expensive to produce, making these types of films ideal at the box office, as they often earn far more than they cost to produce.

Blumhouse and Universal’s “Going Out” cost a mere $4.5 million to make and grossed more than $250 million at the worldwide box office.

While “Grey Man” will be developed as a franchise, Peter Csathy, founder and chairman of consultancy Creative Media, said Netflix is ​​appallingly ignoring franchise opportunities that could cost the company every film Save hundreds of millions of dollars.

“Scream,” “Insidious,” “Halloween” and other horror movie franchises have won fans of the genre as low-cost alternatives to more expensive franchise endeavors like Fast & Furious, Star Wars, Marvel or Lord of the Rings.

“The cost of production is a fraction, a fraction, a fraction of these huge bets,” he said. “Why not go get a cheap sure thing to hit your target demo? Why not put your money there instead of doing these big prestige dramas?”

Furthermore, Csathy added, the horror genre also happens to be targeting young people — a demographic that advertisers and streamers want to capitalize on.

Netflix has built on success with horror films of the past (including its “Street of Fear” trilogy) and has a number of Netflix originals in the genre, including “Nobody’s Out Alive” and “Somebody’s in Your House.”

Wedbush analyst Michael Pachter said Netflix could make more money by sticking to a string of horror and rom-com projects, both of which tend to have relatively low budgets. With a more modest budget, mistakes aren’t such a big deal.

“One of the cool things about low budgets is that you can make mistakes,” he said. “Big budget, you just can’t do it. If you screw it up, you screw it up. So which is more risky, a $150 million movie or three $50 million movies?”

missing metrics

Part of the scrutiny of Netflix’s content spending stems from a lack of clear metrics around the financial performance of streaming-first shows and movies.

Box office statistics of theatrical releases and TV ad revenue are tried and true indicators. For pure streaming platforms, viewership figures vary by service and paint an incomplete picture for analysts trying to determine how a movie or TV show is actually doing.

Bills as high as $200 million for a movie like The Grey are harder to explain when production ends with no clear financial gain, as studios have seen at the box office. Streaming subscribers pay a flat monthly or annual fee to access all available content. Netflix argues that its content keeps users on the platform and pays subscription fees.

For Netflix, the foray into big-budget movies is a way to raise its profile and quell content that criticizes its mediocre production. The company has consolidated its balance sheet, is cash flow positive, and has a three-year window before most of its debt comes due, giving it some wiggle room.

It’s unclear how much Netflix spends on each film in its “Streets of Fear” trilogy, and there’s limited data on how it performs on the platform. But Nielsen’s viewership estimates that “Street of Fear 1994” generated 284 million minutes in its first week on the service, while “Street of Fear 1978” reached 229 million. It’s unclear how well the third film, Street of Fear 1666, will fare.

What’s more, Season 4 of Stranger Things has become Netflix’s second series to surpass 1 billion hours watched within 28 days of its launch. Of course, comparing Netflix’s movies to its TV series is a bit like comparing apples to oranges, but as long as the company is mum on content spending and success, it’s the best data analysts have.

Many entertainment experts have tried to figure out how streaming hours translate into revenue, retention, and ultimately data that affects the strength of Netflix’s business. But how Netflix decides what content to approve and what to cancel remains a mystery to analysts.

According to Netflix’s own figures, “Grey Man” was watched more than 88 million hours globally in the service’s opening weekend, 60 million less than “Red Notice” during the same period last November. “Red Notice” topped Netflix’s top 10 for 12 consecutive days, while “Grey Man” was usurped in just eight days.

As of Friday, the film ranked fourth behind “Purple Heart,” “Tower Heist,” and “Adaline Age.”

So, is The Grey Man worth the $200 million price tag? It appears to have hit some behind-the-scenes metrics for Netflix, which is rolling out sequels and spinoffs.

“Netflix obviously has what they think is accurate data and methodologies to determine what is and isn’t Netflix’s success,” said media and streaming analyst Dan Rayburn. “if [‘The Gray Man’] By their definition of bombing, whatever it is, we don’t know, they won’t announce an expanded deal. “

As for how Netflix selects content, Rayburn said that while the data isn’t widely used right now, that could change once it’s streamed Enter the advertising market.

“Whether they want to give us data or not, over time we’ll get more data because of the advertising side,” he said. “This will help us better understand the content.”

Disclosure: Comcast is the parent company of NBCUniversal and CNBC. Universal is a distributor of Halloween franchises and “going out.”

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