Has Netflix Truly Found Religion in Movie Theaters?
I'm old enough to remember when the head of Netflix wasn't just downplaying the importance of movie theaters to the industry, he was eviscerating the entire concept as "outdated". That is to say, I'm at least eight months old.
Yes, not even a year ago, Ted Sarandos was giving very public comments on stage to that effect. To the point where my headline in writing up his remarks was: Ted Sarandos Screams "Fire!" at the Movie Theaters. The comments were especially noteworthy because he was also in the news at the time being floated as a potential external candidate for the Disney CEO role with Bob Iger on the retirement clock. Sarandos was quick to shoot down such rumors, but what else was he gonna say? Well, as it turns out he could say things about the theatrical business that make it clear he could not possibly run Disney with such a stance. As I wrote at the time:
On the other hand, there's no way you could dare say such a thing and have a job running any major movie studio – yes, even in 2025 – besides Netflix...
Forget the CEO job of Disney, Sarandos may end up as auteur enemy number one with these comments.
I think it's safe to say that he's not getting the Disney job. But his company just made a bid in which he'd be in charge of the only studio with a higher share of the theatrical market right now. Awkward.
But also fairly in line with Netflix's history of proclaiming very loudly that they'd never do something, only to turn around and do it. This is exactly why I predicted just over a year ago that Netflix's next backtrack would be on their theatrical stance. And here we are.
At the same time, I didn't expect us to get here exactly this way! That is to say, Netflix seems to be backtracking on their theatrical stance not on their own, but by backing into a new one: that of the company they're acquiring.
Reading all the reports about the deal, it almost seems as if Sarandos decided Netflix had a unique opportunity here with Warner Bros and he was going to do it no matter the cost. Well, maybe not no matter the cost – we may see that soon enough depending on how high Paramount is willing to go to try to snatch victory from the jaws of defeat! – but no matter what stance he had to backtrack on. And now he's flipping that script and saying that part of the rationale for the deal was getting into the businesses that Netflix has not historically been in – including theatrical distribution.
Here he was singing his very different tune at the UBS Conference yesterday:
"In this transaction, we pick up three businesses basically that we’re not currently in, meaning we have no redundancies currently, but one of them is a motion picture studio with a theatrical distribution machine. There’s been a lot of speculation what we would do with this. I think it’s important to note that all we are going to do with this is staying deeply committed to releasing those movies exactly the way they’ve released the movies today, all three of these new businesses we want to keep operating largely as they are, the theatrical business we have not talked a lot about in the past, about wanting to do it, because we’ve never been in that business. When this deal closes, we are in that business, and we’re going to do it."
Obviously, the real key to that entire statement is "redundancies" – it's the corporate code word for layoffs. Sarandos is saying that a Netflix deal would lead to far less job loss in Hollywood than a Paramount deal, where "synergies" will be key to getting costs in line. But note the wording on his specific theatrical business remarks. Clearly, there's still some wiggle room in that statement – in particular, "largely" may be doing a lot of work. But the wiggle room seems to be shrinking by the day with such proclamations by Netflix around their theatrical aims with Warner Bros. What started as "expects" has grown into "largely" – from Netflix's own press release about the deal last week:
Netflix expects to maintain Warner Bros.’ current operations and build on its strengths, including theatrical releases for films.
But actually it started before that, with leaks around the news indicating that yes, Netflix intended to keep Warner Bros in the theatrical business with this deal – at least for now. But I mean, what else was Netflix going to say? That they were acquiring Warner Bros and shutting down the theatrical arm as soon as the deal closed? Come on. There may have been literal riots in Hollywood.
This is perhaps the biggest question – amongst the many, many questions – that Netflix is going to keep getting about this deal. And that's in no small part because of the previous comments from Sarandos. Netflix isn't just battling Paramount here, they're battling Hollywood too – a place which you'd think would prefer Netflix take over one of the studios versus another studio full of "redundancies" just waiting to happen. But then again, they know David Ellison loves theatrical releases. Everyone saw Top Gun: Maverick, perhaps the most theatrical of theatrical releases this side of Christopher Nolan.1
And the reality is that right now, that one aspect may matter more to the town than anything else – even political bents. Because if Netflix removes Warner Bros from the theatrical equation, the show is over.
Again, while changing stances is nothing new for Netflix – and actually seems to be one of the keys to their continued success – the previous theatrical rhetoric is clearly coming back to bite Sarandos in the ass here. And the hostile counter-attack is certainly not going to help. Ellison is going to hammer this point home again and again. So Sarandos will need to go even more over-the-top to try to change Hollywoods' collective mind about his intentions. You're seeing it already: it's not just a commitment to seeing Warner Bros theatrical commitments through, it's now that Netflix is doing the deal in part to get into that business.
I mean, it certainly sounds like total bullshit spin. But is it?
Again, I already made the case a year ago why I believe Netflix would backtrack on this stance. As I laid out, there are a few reasons that basically boil down to: the relationship with talent, the power of marketing/halo effects, and yes, the fact that they can actually make money doing it – provided they do it smartly, which they presumably would.
It's entirely possible that something woke them up to these notions over the past year – or a few things. Maybe it was losing out on Wuthering Heights to... Warner Bros (despite offering more money). Maybe it was Greta Gerwig forcing Netflix to submit to an IMAX release for her upcoming Narnia project. Maybe it was the groundswell of support that Frankenstein saw for a bigger theatrical push. Or the notion of how much money they're – once again – leaving on the table with the Knives Out franchise. The Stranger Things finale strategy (after losing the Duffer Brothers to... Paramount). And the cherry on top may have been the success of KPop Demon Hunters. The movie that exploded at the box office weeks after it had already been on Netflix.
Clearly, there's something to be done here with movie theaters. The opportunities have kept falling on Netflix's head like one of those Looney Tunes anvils.
Something else: if Netflix truly wants to become the first $1T media company, the only thing that matters is growth. They managed to get halfway there on the back of the streaming business, and can undoubtedly push it a bit further – and certainly Warner Bros content will help! – but they need other lines of business too. It makes sense that theatrical would be one of them. Warner Bros should do between $4B - $5B in box office revenue this year. Netflix overall did about $40B last year, so it wouldn't be a massive chunk of the business, but also not nothing.
And the real key may be leveraging such distribution to create "halo effects" for their other businesses. Obviously streaming itself, but what if, say, they start to delve more into theme park-like experiences? Like, perhaps opening up giant "Netflix Houses" in the carcasses of old shopping malls? You know, the places that used to house movie theaters? Funny that!
Can cruise ships be far behind? Poop Cruise anyone?
But really, throw in toys, merchandise, etc, and you can quickly see how Disney brings in around $100B a year. Sports also drives a good chunk of that – something else Netflix has backtracked on, hard, but really it's the IP straw that stirs the whole drink. And theatrical is a key part of creating a maintaining that value. Yes, in a way I'm saying that Netflix needs to become Disney before Disney can become... you get the picture.2
All I'm saying is that it's not insane to think that Netflix may actually have changed their mind on theatrical. And if that's the case, it might not be total bullshit that they're planning to remain committed to it with Warner Bros.
Granted, I still believe the thinking will morph over time. As it should! And while Sarandos' remarks may have made the wrong kind of headlines if you want to say, buy a major movie studio in a few months, that doesn't mean he was totally wrong. The overall theatrical model actually broke a long time ago – long before COVID gave the industry a fall guy – as it has been in a state of overall decline for decades, with only jacked up ticket prices masking free-falling attendance. The situation was not tenable and streaming – yes, largely Netflix – just sped up the inevitable.
That doesn't mean theatrical is over – see: above – it means it needs to morph into a business that's appropriate for the 21st century. And Netflix, having now found religion on this topic, is uniquely suited to help usher in that reality.
The other tech players all see this too, undoubtedly because they're not drunk on the nostalgia of what once was. And so Apple and Amazon can also help guide the way here – at which point the people in Hollywood reading this are probably vomiting. But the point is to find the correct model that works, not to prop up the one that doesn't.
I know that's what Hollywood is hoping that Sarandos means with his new comments. That he will use his studio to save the theaters. But deal talking points aside, this clearly won't happen the way Hollywood hopes. Again, that doesn't mean Netflix is lying about this new stance, but it likely means they're going to figure out how to make it work on their terms. That's scary to hear too, but better than the alternative. When the alternative is a continued slow death.
In the meantime, there's almost no way this deal is getting done for at least another year, and maybe two – if it ever does. So if nothing else, obviously Netflix can't say anything to rock the current boat while it's still in the water for the foreseeable future. But even when the deal closes – if the deal closes – I suspect the status quo with Warner Bros and theaters will be in place for at least another year and maybe two depending on pipeline.
Again, if not, key Hollywood talent that has worked with Warner Bros – the Denis Villeneuves of the world – are going to take their talents elsewhere. They still might out of concern about this Netflix future, but hey, Villeneuve is also making a Bond film for Amazon. Amazon! So let's not clutch those pearls too tightly...
The bigger question may be what happens if Netflix doesn't buy Warner Bros? Do they still opt to go down the theatrical path? I still bet they do...
M.G. Siegler
M.G. Siegler
M.G. Siegler
M.G. Siegler
1 And you can just ask Tom Cruise – or maybe, don't! ↩
2 But also, Netflix can't become too much like Disney, lest they start attracting the same stock multiple, which would be a huge issue for Netflix going forward – with Disney trading around 16x forward P/E versus 30x for Netflix! It still has to be all about growth. And tech. Andy making Wall Street believe they are not a traditional Hollywood player now... ↩