Netflix rarely releases data about its content but recently broke cover to claim that 45m accounts – nearly a third of its total – had streamed the Sandra Bullock thriller Bird Box in its first week on the platform, a record for a Netflix film, apparently.

At face value the statistic is extraordinary. All things being equal, were the Susanne Bier-directed film released in cinemas, it would have racked up nearly half a billion pounds in just one week based on an average ticket price of £10.

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Susanne Bier: On the set of Bird Box

By contrast, in the week of Bird Box’ release Mary Poppins Returns topped the UK box office for the second week in a row with £7.4m followed by Transformers prequel Bumblebee (released the same day as Bird Box) at just over £5m from an approximate audience of 700,000 and 500,000 respectively.

There are several reasons why this is not a fair comparison, but there are many other reasons why this lifts a veil not only on Netflix’s SVOD strategy but on the way Hollywood is being forced to change its business model to compete.

After all, this is the year when box office revenues for movies are predicted to be overtaken by OTT revenues for the first time.

Bird Box blindfold

Bird Box received lukewarm reviews but propelled by Bullock’s star power, the gimmick of having to perform tasks blindfolded and a marketing campaign on par with that of a major theatrical release, became a social media sensation with thousands of people and celebs posting videos mimicking the set-up. Netflix deftly inflamed the craze by calling for greater care while doing it - but not to desist entirely.

While Netflix’ data secrecy calls for caution there can be no doubt of the soaring demand to stream movies at home, nor of the importance to streamers of securing original must-see content.

“While SVoD subscribers are more avid cinema goers, this may not always be the case” - Toby Holleran, Ampere Analysis  

It’s not just any old content that subscribers want either but premium shows and quality movies that they can’t get anywhere else. This holds as true for Netflix as it does for Hulu, Amazon, Sky or the forthcoming Disney+ and is the reason why content budgets are rocketing while the risk of not returning investment is increasingly high.

Better-tasting popcorn

Netflix itself has an evolving love-hate relationship with cinema. The company famously began as a mail order service for DVDs and continued to adopt an aggressive attitude to disrupting what it sees as outmoded distribution models.

Last year, chief executive Reed Hastings remarked that the only innovation cinemas had to offer was better-tasting popcorn, and content chief Ted Sarandos declared that Netflix is “choosing to be about the future of cinema.”

With the studios ringfencing the traditional cinema-first release window, Netflix opted to copy the success of its TV originals by investing in feature-length content exclusive to its platform.

Some of these might be critically derided – such as the multi-picture deal with Adam Sandler (which nonetheless proved such a hit that Netflix signed another four-film pact with the comic in 2017) – and Brad Pitt’s War Machine, which cost $60m and was widely considered a dud.

But with the combination of astutely weighed subscriber data and shrewd marketing Netflix seems to have hit on a number of successful formulae.

These include rom-coms, such as When We First Met, Naked and #realityhigh, a genre which Hollywood has all but given up on in recent years to concentrate on massive-budget tentpoles; local or foreign language films like Ramón Salazar’s Sunday’s Illness, Alice Rohrwacher’s Happy as Lazzaro greenlit or acquired in part to plug regulator and country-specific quotas; and prestige projects which have the dual function of enticing A-list directors to the platform and of generating awards-buzz respectability.

This strategy, initiated less than two years ago, can also be read as a deliberate strike at Cannes, the most prestigious film festival and arguably the most righteous. Its organisers have banned films from competition that (in compliance with French law) do not have a theatrical release before streaming online. In 2017 that included Netflix original Okja but not much else. This year Cannes’ stance backfired when festivals like Toronto, New York and Venice embraced Netflix financed Awards-baiting films like Coen brothers’ The Ballad of Buster Scruggs, making the festival seem on the wrong side of history.

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Buster Scruggs: Grainger Hines as Mr Arthur

Over the past year Netflix has seemingly undergone a Damascene conversion by granting a limited cinema release to those of its films with most chance of winning an Oscar. For example, Paul Greengrass’ docudrama of Norway’s horrific massacre 22 July was given a simultaneous cinema and online debut, and Netflix minted a 70mm version of Roma for a handily-timed theatrical outing this month when Oscar voting ends. Such a move is also designed to woo directors of the calibre of Greengrass and the Coens.

The streamer not only finances films (in the case of Roma) but picks up rights either from festival premieres (such as Come Sunday starring Chiwetel Ejiofor which aired at Sundance) or those discarded by studios. In the latter camp fall, The Cloverfield Paradox, Alex Garland’s Annihilation and Andy Serkis’ Mowgli: Legend of the Jungle (the latter two given a brief theatrical run) none of which were deemed likely to set the box office alight and may or may not have made a return for Netflix.

Cinema takes a hit

Box office revenue is already being hit from a number of quarters. This year, OTT revenues will overtake theatrical revenues for the first time, according to Ampere Analysis. SVoD has already surpassed cinema in the US, and the trend is widening to include European and Chinese markets. All in, OTT is predicted to reach US$46 billion in 2019, beating worldwide box office receipts of US$40 billion.

Among the chief reasons given by Ampere is the high price of tickets.

“There’s clearly an appetite for content among some consumers whether on the big screen, or a smaller one,” noted senior analyst Toby Holleran.

“The key for cinema is to understand that while SVoD subscribers are more avid cinema goers, this may not always be the case. Therefore, the shared experience of watching a film on the big screen must remain an enticing – and realistically priced – one.”

There’s growing evidence that breakout Netflix hits are also denting the prospects of theatrical releases. Analytics firm Vault modelled the potential impact of Netflix sci-fi hit Bright. Reportedly costing $90 million, the effects-heavy blockbuster starring Will Smith landed on 22 December 2017, the same weekend as Star Wars: The Last Jedi and Jumanji. According to Vault, the film would have taken $40m had it been shown in cinemas.

“Whilst a $40 million opening isn’t exactly considered a box office record, it did create headaches for the Jumanji marketing campaign,” suggests author David Stiff.

Vault calculates that Jumanji lost $10m-15m as a result of the clash and further predict that Bright would have gone on to gross $128m – not bad for a film which received poor reviews and further testimony to the data-mining accuracy of Netflix’ machine. It seems able to pinpoint the mix of stars, story and format which will appeal when commissioning projects and generate wider audiences for films that might otherwise suffer at the box office because the films remain on the platform building word of mouth (as happened with Bird Box, Bright and Annihilation).

Studios play the franchise game

The battle for content and the seismic shift to direct-to-consumer video pioneered by Netflix created the hottest M&A last year when Disney beat Comcast to 21st Century Fox. It also electrified the most eagerly anticipated business launch this year.

Disney+ will put the world’s biggest media company in direct competition with Netflix but analysts are unsure of the outcome. On the one hand Disney has to invest billions of dollars in content just to keep pace with the likes of Netflix which set aside $12 billion in 2018. At the same time, it will release much of this content on its new platform, waving goodbye to the licence revenue it would have received from third parties.

This is most notable in the case of Netflix where, according to Variety, Disney stands to lose $300 million a year by pulling all its content from its rival.

On the other hand, that content is among the most valuable in the world. Aside from 7,000 TV episodes and a 500-movie catalogue it includes the sprawling Marvel and Star Wars universes, both of which have new feature instalments due in 2019 and live action TV spin-offs in the works (Star Wars: The Mandalorian is in development).

Jon Favreau’s The Lion King and animated sequels Toy Story 4 and Frozen 2 will also be shown first on Disney+ (outside of cinema).

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Avatar: Four sequels are due to be released

There is the also the potential to spawn abundant content opportunities with Avatar, James Cameron’s sci-fi extravaganza which is prepping a first-of-many feature sequels for 2020.

“The single worst thing Disney could do is launch a DTC product that consumers find underwhelming,” analyst Todd Juenger of Bernstein Research wrote in Variety. “We struggle to see how Disney can simultaneously make this [sustained] investment while also de-leveraging [paying down the debt on Fox]. We fear they will either underinvest in the DTC product, or fail to deliver.”

Disney is not thought likely to rip the floor from under its third-party carriage deals entirely. Its September 2016 deal with Turner for TV rights to air Star Wars movies runs until 2022 – by which time the new OTT service from AT&T-owned WarnerMedia will be long up and running. It will offer content from Turner, HBO and Warner Bros.

Wooing prestige projects

While Hollywood studios are gambling their future on mega-budget ‘universe’ expansion, a host of small to mid-sized features – among them the passion projects of pedigree directors - are being dropped. Netflix is there to pick up the pieces.

The chief pull from a director or star’s point of view is that a streaming platform is more likely to deliver a worldwide audience, particularly if that project is one that studios decide are uncommercial in subject matter or treatment.

Alfonso Cuarón’s black-and-white, Spanish-language art film fits that mould, as does Greengrass’ 22 July. Directors, cinematographers and editors also seem to enjoy a creative freedom at Netflix or Amazon outside the executive confines and stricter schedules of a studio major; an indie mentality with blockbuster budgets, if you like.

This explains why Guillermo del Toro, a classic Hollywood outsider, has chosen to follow his Oscar winning The Shape of Water with an animated feature version of Pinocchio for Netflix.

Martin Scorsese is perhaps the most lauded auteur to sign online to date. His U$100 million gangster movie The Irishman was picked up by Netflix when original studio, Paramount, got cold feet. Perhaps Paramount did not want a repeat box office performance of Scorsese’s previous passion project The Silence, but nonetheless it says a lot when one of the world’s greatest directors together with actors Al Pacino, Harvey Keitel and Robert de Niro can only get their movie funded by a streaming service.

The Irishman is a risky film,” Scorsese told the Marrakech Film Festival just before Christmas. “No one else wanted to fund the picture. Netflix took the risk.”

Nonetheless the director seemed in two minds about the decision which might seem to relegate the big screen. “Everyone can make films today, but no one can see them. I have no idea of how the future will look in terms of presentation of visual storytelling as we have no idea what the developments will be.”

Amazon’s longer play

Although Amazon beat Netflix to become the first streaming service to produce an Oscar-winning movie when Manchester by the Sea won best actor for Casey Affleck and best original screenplay in 2016 (with nominations for best picture and best director) it has adopted a more low-key strategy.

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Manchester by the Sea: Scooped two Oscars

Like Netflix, Amazon Studios has primarily backed director-driven projects that appeal to art-house crowds and attract awards attention.

Unlike Netflix, its distribution strategy is more traditional and less disruptive. Rather than pick a fight with the studios, Amazon offers all its movie productions – which include Woody Allen’s Wonder Wheel, Spike Lee’s Chi-Raq, Lynne Ramsay’s You Were Never Really Here and Luca Guadagnino’s horror remake Suspiria – a theatrical premiere.

This could be because Amazon is less interested in making money from box office returns and home entertainment sales than it is in attracting subscribers to spend more time on its subscription platform, Prime - and consequently more cash on online retail.

A major 2019 release co-financed by Amazon and Warner Bros to look out for is an adaptation of Donna Tartt’s Pulitzer Prize winning novel The Goldfinch starring Nicole Kidman and Ansel Elgort lenses by 2018 Oscar winner Roger Deakins.

And the winner is…

According to Ovum, Netflix will account for around one in three online video subscriptions worldwide in four years’ time. In many countries, its market share will be well over 50%, leaving most rival apps fighting over relatively small numbers of subscribers.

Others think Netflix could already be over-reaching itself, particularly if Disney’s withdrawal of content from the platform is replicated by other content owners.

“Individually any one of the big Hollywood studio groups does not make up a huge proportion of Netflix’s catalogue, maybe 4% or 5% of total hours,” Ampere analyst Richard Broughton told The Guardian [https://www.theguardian.com/media/2019/jan/01/is-this-the-end-of-netflixs-golden-age]. “If one or two pull their content Netflix can plug the gap. But if the market gets more aggressive against Netflix, it is going to get tougher.”

Ampere points out that Netflix net debt was $8.34bn at the end of last September and that the spiralling cost of content and marketing could see the company in a negative free cash flow of $3bn to $4bn in 2019, or $3bn more than it earns from subscribers.

Netflix could reinvent itself as an Amazon Channels-like aggregator, posits Ovum, handling marketing, technology, and customer support for a range of smaller SVOD suppliers in exchange for a cut of fees from subscriptions it brokers or manages.

But there’s always Amazon itself, a company which has several times the market cap of Netflix and Disney as it stands and which has already made moves into that other vital audience hot spot – live sports.

Reading between the lines, Amazon is considered the company with the most muscle to be last one standing in home entertainment though it will likely get there by building partnerships not knocking them down.