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Netflix and the Myth of Innovation: Simultaneous Release Is a House of Cards on November 18, 2014

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by Patrick Corcoran, Vice President & Chief Communications Officer, NATO

Netflix got some attention for itself just before its Q3 2014 earnings call by announcing a deal with Imax and The Weinstein Company to release Crouching Tiger Hidden Dragon: The Green Legend--a sequel to the $128 million-grossing 2000 hit--simultaneously on Imax screens and streaming on Netflix. Unsurprisingly, theater owners responded less than enthusiastically, with major domestic and international circuits announcing they had no intention of booking a title simultaneously released to the home.

Netflix's chief content officer, Ted Sarandos, continued to tout the plan, assailing theater owners for standing in the way of "innovation."

"Movie distribution is pretty stuck in old models. A lot of models that the theater owners have kept in place are outdated," he said at the fifth annual U.S. / China Film Summit on November 5. "We need to stop distinguishing the experience by access. Many movies are just as good if not better at home."

This is an old refrain from Sarandos, who a year earlier said at the Film Independent Forum, "Theater owners stifle this kind of innovation at every turn. The reason why we may enter the space and release some big movies ourselves this way is because I'm concerned that as theater owners try to strangle innovation and distribution, not only are they going to kill theaters, they might kill movies."

NATO president John Fithian quickly fired back. "Subscription movie services and cheap rentals killed the DVD business, and now Sarandos wants to kill the cinema as well," he said. "The only business that would be helped by day-and-day release to Netflix is Netflix. If Hollywood did what Sarandos suggests, there wouldn't be many movies left for Netflix's customers or for anyone else. It makes absolutely no business sense to accelerate the release of the lowest value in the chain."

Sarandos quickly backpedaled, saying at the Bloomberg Tribeca Film Festival Business of Entertainment Breakfast a few days later, "I wasn't calling for day-and-date with Netflix. I was just calling to move all the windows up to get closer to what the consumer wants. I think there's a better business in giving people what they want than creating artificial distance between the product and the consumer."

Sorry, not sorry.

We have covered numerous times the various fallacies inherent in the simultaneous-release business model. Movies like Margin Call, Arbitrage, and Bachelorette, touted as successful examples of the model domestically, far underperform theatrically in the United States compared to their performance internationally. Arbitrage's distributor claims there was no cannibalization of theatrical revenues because the moviegoing audience is different from the home audience, citing surveys that show 90 percent of moviegoers were unaware it was also available on VOD. A business model predicated on consumer ignorance does not inspire confidence.

More recently Snowpiercer, released to VOD in its third week in theatrical release, fell off 37 percent, despite expanding its screen count by more than 42 percent. Conversely, Boyhood, with a traditional platform release (it opened on five screens, then 34, then 107 in its third week) expanded from 107 screens to 310 screens in its fourth weekend (189 percent increase) and revenues rose 36 percent. Further, Boyhood outgrossed Snowpiercer (in its third-week expansion) on slightly fewer screens ($1.76 million to $.63 million). Through seven weeks of release, Boyhood had quadrupled Snowpiercer's theatrical gross over nine weeks.

Yet strangely enough, one of Boyhood's producers, John Sloss, slammed exhibitors at the Produced By: New York conference, saying, "The real criminals here are the exhibitors. We're creating bad habits. I don't think people steal content because they want content for free. They just want it when and where they want it."

This, too, is a myth. The leading indicator for piracy is, in fact, availability. Illegal downloads of movies spike on the Internet almost as soon as a movie hits theaters and then trail off, mirroring the weekly declines in admissions in theatrical release until they are a barely perceptible background hum. They spike back up again the week before the home release when a DVD or two falls off the truck between the warehouse and retailers, which again mirrors legal availability and popularity.

The entire argument for simultaneous release is founded on bad faith, shoddy data, and mysterious bookkeeping. John Sloss made waves in the industry with his call for transparency in the reporting of VOD revenues. It's long past time for that call to be heeded. Netflix doesn't even provide viewership data per title to its own shareholders.

And, frankly, I don't think that Ted Sarandos believes his own arguments. If he truly believed that exclusivity is a curse, "creating artificial distance between the product and the consumer," he would make House of Cards and Orange is the New Black available on Hulu, Vudu, Redbox, Amazon Prime, cable VOD, and next to the checkout counter at Walmart. But he doesn't.

And why not? Because exclusivity matters. Exclusivity works. Because Netflix needs to offer its subscribers something its competitors don't to retain them as subscribers and for those subscribers to believe they are getting something of value that they can't get from a growing number of competitors.

There are really only two things that matter to Netflix's bottom line: the cost of acquiring and delivering content and subscription revenue. The importance of keeping costs down led to Netflix's biggest misstep with its customers when it tried to separate out the DVD-by-mail business from its streaming business. It costs Netflix far more to ship DVDs back and forth per transaction than it costs to stream over the Internet, but subscribers revolted at what they saw as an attempt to impose a nearly 100 percent price increase on those who wished to receive their content both ways. The company backed down, not only failing to contain costs, but also losing them enormous goodwill and quite a large number of subscribers.

And costs continue to rise. Netflix is no longer the only streaming player, studios have started to pay close attention to the potential revenues in the space, and Netflix is no longer content to wait at the back of the line of home windows. This means to compete with more competitors for prime content, which will keep their subscribers growing and satisfied, their content costs will only go up. At the same time, Internet service providers are squeezing Netflix for more money to guarantee fast connections to their systems. Additionally, Netflix is spending large sums to break into international markets.

Simultaneously, the company is seeing a slowdown in subscriber growth in the United States. Some analysts cite a price increase for new subscribers as a reason for that slowdown. Current subscriber rates will rise later. With 36 million U.S. subscribers, the domestic market is running out of grow room, and consumer acceptance of price increases will become critical to revenue growth.

Netflix truly broke ground with home delivery of DVDs and later with on-demand streaming (of whatever Netflix had streaming rights to). But their first-mover advantage has an expiration date. Premium cable channels are starting to wade into the streaming space and they, like Netflix, will have a mix of exclusive self-generated content as well as exclusive licensed content, and they are going to have to compete for it.

Consumers have a finite amount of money to spend on home entertainment, which is why low-cost subscription services like Netflix and cheap rentals like Redbox took off in the first place. Consumers also have access to an enormous variety of free entertainment thanks to the broadband connection they already pay for to access Netflix. Maybe that connection is also bundled with cable services, and that costs money, too. There's a ceiling on what various services can extract from in-home customers, and Netflix is starting to get a pretty close-up view of it.

Which may be why Ted Sarandos keeps talking so loudly about movie theaters. It keeps the industry from looking too closely at the cards Netflix is actually holding.

Or maybe he just envies our business model.

 

NORTH AMERICA: 'Interstellar' Moves Into First Place on Monday with $2.15M; 'Dumb and Dumber To' #2 with $2.07M; 'Big Hero 6' Takes Third with $1.31M on November 18, 2014

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By Daniel Garris

Paramount's Interstellar moved into first place on Monday with $2.15 million. The high-profile Christopher Nolan directed sci-fi film was down 71 percent from Sunday and down 59 percent from last Monday. It should be reminded that last Monday's grosses were inflated by the eve of the Veterans Day holiday. Interstellar is set to surpass the $100 million domestic mark today after grossing $99.08 million through eleven days of wide release (and two additional days of limited release). The film is currently running 23 percent behind the $128.54 million eleven-day take of last year's Gravity.

Universal's Dumb and Dumber To placed in a close second for the day with $2.07 million. The long awaited comedy sequel starring Jim Carrey and Jeff Daniels trailed Interstellar by just $83,880 for the day. Dumb and Dumber To was down 74 percent from Sunday. The film's daily percentage decline was a bit concerning, especially given that comedies aimed at older audiences tend to have strong first Monday holds. With that said, Dumb and Dumber To continues to slightly outpace expectations with $38.18 million in its first four days. That places the film 9.5 percent ahead of the $34.86 million four-day start of last year's Jackass Presents: Bad Grandpa.

Disney's Big Hero 6 claimed third place with $1.31 million. The 3D computer animated film from Walt Disney Animation Studios fell 87 percent from Sunday and a sharp 75 percent from last Monday's inflated performance. Big Hero 6 has grossed a healthy $111.62 million in eleven days. The film continues to run in line with its lofty pre-release expectations and is currently running 12 percent ahead of the $99.56 million eleven-day take of 2012's Wreck-It Ralph.

Beyond the Lights took fourth place with $0.342 million. The low-budget drama from Relativity declined 73 percent from Sunday and finished just ahead of both Fox's Gone Girl and Sony's Fury for the day.  Beyond the Lights continues to run below expectations with a modest four-day start of $6.54 million. That places the film 20 percent behind the recent $8.16 million four-day start of Addicted.

NORTH AMERICA: Weekend Actuals: 'Dumb and Dumber To' Leads the Way with Strong $36.1M; 'Big Hero 6' and 'Interstellar' Both Hold Up Well with Respective Takes of $34.7M and $28.3M on November 17, 2014

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By Daniel Garris

Universal's Dumb and Dumber To took in $36.11 million this weekend to claim first place. The long awaited comedy sequel starring Jim Carrey and Jeff Daniels outpaced Big Hero 6 by $1.45 million for the frame, in what turned out to be a close race for first place. Dumb and Dumber To slightly exceeded expectations this weekend, as the film proved to be critic-proof. Pre-release online buzz for the film had been relatively soft as well, but fans of the original 1994 film clearly showed up in a big way on opening weekend. Dumb and Dumber To represented the largest live-action debut for Carrey since the $67.95 million debut of Bruce Almighty back in 2003. For a number of reasons, box office comparisons are tough to make to Carrey's more recent films. Dumb and Dumber To did open 13 percent ahead of the $32.06 million start of last year's Jackass Presents: Bad Grandpa.

Dumb and Dumber To opened in first place on Friday with $14.23 million (which included $1.6 million from Thursday night shows), decreased a slim 2 percent on Saturday to fall to second with $13.92 million and fell 43 percent on Sunday to gross $7.96 million. That placed the film's opening weekend to Friday ratio at a respectable 2.54 to 1. The film did receive a lackluster B- rating on CinemaScore, which along with a fan-driven opening weekend, could signal front-loading going forward, though that remains to be seen. The audience breakdown for the film skewed towards male moviegoers (55 percent) and towards moviegoers 25 years and older (57 percent).

Disney's Big Hero 6 placed in a close second with $34.66 million. The 3D computer animated film from Walt Disney Animation Studios held up well this weekend, as it declined a healthy 38 percent from last weekend's strong start. Big Hero 6 surpassed the $100 million mark this weekend and has now grossed $110.31 million through ten days of release. That is in line with the film's lofty pre-release expectations and places Big Hero 6 18 percent ahead of the $93.65 million ten-day take of 2012's Wreck-It Ralph (which fell 33 percent in its second weekend to gross $33.01 million). Big Hero 6 represents another strong recent performer for Walt Disney Animation Studios, joining the likes of Wreck-It Ralph, 2010's Tangled and last year's Frozen. The film will likely continue to hold up well throughout the holiday season.

Also holding up well this weekend was Paramount's Interstellar. The high-profile Christopher Nolan directed sci-fi film was down an encouraging 40 percent from last weekend's lower than expected debut to place in third with $28.31 million. This weekend's hold was especially encouraging given the new competition the film faced for older moviegoers from Dumber and Dumber To. Interstellar is being helped out by its continued strong IMAX grosses, from good word of mouth and from its long running time and older-skewing audience leading to some natural back-loading. Interstellar is on the verge of reaching the $100 million mark with $96.93 million after ten days of wide release. It should be noted that Interstellar has fallen further behind the pace of last year's Gravity. Interstellar is now running 21 percent behind the $122.32 million ten-day take of Gravity (which fell just 23 percent in its second weekend to gross $43.19 million).

Beyond the Lights opened in fourth place this weekend with $6.20 million. Despite strong reviews and strong pre-release online buzz levels, the low-budget drama from Relativity opened below expectations. Beyond the Lights debuted 17 percent below the recent $7.49 million start of Addicted (which opened in significantly fewer locations). Beyond the Lights started out with $2.30 million on Friday, increased 15 percent on Saturday to gross $2.64 million and declined a sharp 53 percent on Sunday to gross $1.25 million. That placed the film's opening weekend to Friday ratio at 2.69 to 1. The film did receive a strong A rating on CinemaScore.

Fox's Gone Girl rounded out the weekend's top five with $4.56 million. In the process, the critically acclaimed David Fincher directed film surpassed the $150 million domestic mark this weekend. Gone Girl continues to display terrific holding power, as it was down just 27 percent from last weekend. The 45-day total for the film stands at $152.64 million.

Upon expanding into wider release, Fox Searchlight's Birdman claimed tenth place with $2.47 million. That was up a slim 7 percent from last weekend and gave the Alejandro González Iñárritu directed awards season hopeful starring Michael Keaton a modest per-location average of $2,884 from 857 locations. After a very strong platform start, Birdman has been unable to maintain momentum as it has expanded into wider release. With that said, the film has still grossed a very respectable $11.597 million to date and will hope to stick around throughout the awards season.

In limited release, neither Open Road's Rosewater nor Samuel Goldwyn's Kirk Cameron's Saving Christmas lit the box office on fire this weekend. The Jon Stewart directed Rosewater opened with $1.15 million from 371 locations, while the Kirk Cameron led Saving Christmas was slightly softer with $0.99 million from 410 locations. Respective per-location averages were $3,111 for Rosewater and $2,420 for Saving Christmas.

Sony Pictures Classics' Foxcatcher was off to a more encouraging start in platform release with $270,877 from 6 locations. That gave the Bennett Miller directed awards season hopeful starring Steve Carell and Channing Tatum a healthy per-location average of $45,146 for the frame.

Elsewhere in platform release, Focus' The Theory of Everything expanded nicely with $735,398 from 41 locations. That gave the James Marsh directed awards season hopeful a strong per-location average of $17,937 for the frame. The Theory of Everything has grossed $1.03 million through ten days of platform release.

Hispanics and Film: A Love Story on November 17, 2014

UNIVISION_Hispanic_Moviegoer_Infographic_4_1_2014_Toolkit-2.pngBy Pete Filiaci

What do Guardians of the Galaxy, 22 Jump Street, and Noah have in common?

Not genre, not studio, not talent-and while all three films have earned more than $120 million at the box office, that's not it either.

What these three movies share is they belong to genres for which Hispanic audiences are growing at a significantly faster rate than non-Hispanic audiences. According to research by the Simmons National Hispanic Consumer Study, from 2009 to 2013, Hispanic attendees for action-adventure pictures such as Guardians of the Galaxy grew at a rate of 12 percent-far surpassing the 2 percent growth among non-Hispanics. While attendees for comedies (like 22 Jump Street) are actually off by 15 percent among non-Hispanics, the number of Hispanic attendees for the genre has increased by 5 percent.

Movies in the action-adventure and comedy genres have long been most popular among Hispanics, but new trends appear to be taking shape. The drama category (featuring films like Noah) is down 9 percent among non-Hispanic attendees but up dramatically-15 percent-among Hispanic moviegoers. Let's even consider romantic comedies, a struggling category that hasn't seen a film cross the $100 million threshold in domestic box office in three years. Non-Hispanic audiences are down 19 percent since 2009, while Hispanic audiences are up a healthy 12 percent. In fact, Hispanic audiences have grown in the sci-fi, family, and horror categories, too-every genre tracked by Hollywood.

This phenomenon is due in large part to the fact that Hispanics are much more likely than non-Hispanics to see movies as a family or group. Anecdotally, Hispanics tell us that going to the movie theater is a pastime in itself-a social experience to be shared by friends and family. Part of the fun is debating movie choices and deciding what to see after they have arrived at the theater.

Hispanics not only buy more tickets per movie than the average non-Hispanic family, they also see more movies every year than the average moviegoer. According to Nielsen, Hispanics are the most frequent moviegoers of any demographic group, taking in 8.7 movies per year as compared to 7.7 per year for non-Hispanics.

Hispanics are more likely to go to the movies than the general population (83 percent vs. 77 percent). In fact, Hispanics make up 15 percent of the U.S. population aged 12 and older but buy 19 percent of the movie tickets among this demographic. Do the math and it's clear: appealing to Hispanic audiences is key to increasing box office revenues.

Opening weekend buzz can often set word-of-mouth in action to either make or break a film and its box office fortunes. Hispanics make an enormous impact in that measure as well, with 47 percent of Hispanic moviegoers usually going to see a film on its opening weekend, something only 37 percent of non-Hispanics do.

Hispanics also demand a more integrated entertainment experience than the general population. While only 72 percent of all adults use social media, 80 percent of Hispanics do. Additionally, the number of Hispanics who use social media has increased from 18.9 million in 2010 to 28.7 million in 2014, a 52 percent increase. Put simply: Hispanics are more likely to share their opinions about movies, another factor that will drive box office revenues.

Hispanics' importance at the box office will continue to grow over the coming years. While the U.S. Hispanic population has grown sixfold since Patton and Love Story (1970) were box office hits, and Hispanics represent more than half of the overall growth in the U.S. population since Gladiator (2000) ruled the screen, the current population of Hispanics (approximately 56 million) will more than double to 128.8 million by 2060.

At Univision's panel in June at the "Produced By" Conference, National Association of Theatre Owners President John Fithian said, "Hispanics love the same movies as others ... just a little more."

That statement is very true, but Hollywood must honor this fact. According to a study last year by the University of Southern California's Annenberg School for Communication and Journalism, Hispanics filled just 4.9 percent of the 3,942 speaking roles in the top 100 films from 2013-the same percentage they held five years earlier. The study concluded, "Hispanics clearly are the most underserved racial/ethnic group" in the film industry.

For the love story between Hispanics and movies to continue along its current happy path, Hollywood needs to change that plot.

 

 

Pete Filiaci is a vice president in Univision's Strategy and Insights Group, a dedicated consulting team of veterans from media, marketing, and agency backgrounds who help marketers develop and execute their strategies to drive sales with Hispanics. A cornerstone of their approach is helping companies evolve from treating Hispanic as a niche to deploying a "total market strategy," where Hispanic is integrated into all phases of the business planning process. Filiaci has 20 years of experience in the media industry. He has been with Univision since 1998.

 


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