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The most disruptive force in Hollywood is Netflix

Netflix recently won a bidding war over Hollywood studios, spending US$105m (£82m) on Martin Scorsese's adaptation of the book I Heard You Paint Houses, a story about Frank 'The Irishman' Sheeran, a high-ranking mob hit man.

The film is scheduled for a 2018 release and represents the first streaming giant example, which competes directly with studios in what is usually considered a theatrical type of content acquisition.

In terms of format, it also signals the content spend shift to a more proportional content spend between scripted and unscripted original programming vs feature films.

There are three fundamental underlying aspects of Netflix content strategy:

  1. The content spend format diversification and revenue shift to feature films is likely to hit 50% of total spend in near future.
  2. Operational performance subscribers “collateral” growth to back the first, and
  3. Most recently gained qualitative and creative credits/Cannes 2017 entry on its very first long format line-up produced in 2016.

First, from a revenue planning and programming spend perspective, Netflix’s first win of the super-budget film just shows how competitive the new media giant has become in a remarkably short period of time, acquiring a big budget title in less than two years from its very first film Beasts of No Nation.

As competition in the streaming media space intensifies, Netflix’s move into theatrical titles is a key new disruption for Hollywood studios and one of the fundamental pillars of Netflix growth strategy. This development is likely to be a major game changer in the way films are produced, released and distributed in the near future because the No 1 studio may become the top streaming platform.

On the operational front, Netflix is steadily adding subscribers; making it the biggest global audience aggregator. This operational performance justifies its plans to boost its programming spend to more than US$10 billion over the next three years – threatening the integrity of the traditional major studios business model and film finance in general.

This is especially relevant internationally, where streaming platform giants have more direct route to diverse markets than traditionally complex studios distribution deals. Further, Netflix has much stronger access to younger audiences than Hollywood, because it owns the millennials, a demographic that has been the key box office challenge in recent years, especially in the US and advanced digitally mature markets. In simple words, kids are online and on the move, consuming what is streamed to them rather than going to theatres.

Reversing the process, and perhaps extending the Netflix generation to content reserved for the big screen is becoming a reality, and a horror scenario in the content acquisition race for risk-averse studios. There is a huge threat of “smaller screens” natives taking over the control of how content is consumed, ultimately produced and margins generated.

Netflix and Amazon are organically positioned to capitalize on this fundamental shift in younger audience behaviour. To date, studios have been slow to adjust to this pressure and the number of titles produced indicates its power is on decline.

Finally, the most interesting new media disruption is actually coming on the creative front because, in less than one year, Amazon stormed the Cannes Film Festival in 2016 with five titles across the Official Selection.  In May 2017, Amazon will be back to Cannes with Todd Haynes’ Wonderstruck and Lynne Ramsay’s You Were Never Really Here, and Netflix is also making its Cannes debut with first two movies selected – Noah Baumbach’s The Meyerowitz Stories and Bong Joon-ho’s Tilda Okja.

The bottom line is that in just over two years, Netflix and Amazon have evolved from streamers of content to major content producers, controlling access to mass audiences and evidently, producing good quality content in an incredibly short period of time.

The inevitable question is how far they will grow? Netflix is in a situation where it's spending on programming could become challenging, unless the company maintains the steady growth in subscription levels both in the US and internationally, and access to Russia and China; two markets where Hollywood traditionally struggled to monetize to its full potential.

This is partly because of the lack of investment in original domestically produced content ventures. Netflix started by selling Russia less content, much of it in a culturally adverse format and at a prohibitive price. Studios and majors also did it, based on the idea of one-type-of-content-fits-all.

Unfortunately, a McDonalds-esque strategy does not work in content business and, so far, Netflix has been successful in tailoring its international strategy to specific local conditions. As an example, it recently signed a few deals with iQiyi, a Beijing-based video platform, in order to avoid regulatory restrictions and get its foot into China's huge entertainment market. While Netflix growth has not been cheap, the company marks the history as the No 1 giant tech content industry disruptor.

It will be interesting to follow how quickly it makes returns on billions spent on original programming.

Aleksandra Bosnjak is Strategic Planning Director, Multiplatform Content Distribution, ISLA ANALYTICS LTD.

 

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