September 26, 2022

A button to launch the Netflix app is seen on a remote control in this photo in Warsaw, Poland on April 25, 2019.

Jaap Arriens | NurPhoto | Getty Images

There’s a big money question haunting Netflix.

In recent years, the streamer has spent big on flashy blockbuster action movies like “The Gray Man” and “Red Notice,” which netted the company $200 million each. Movies are the first steps in promotions to spark event-level franchises. But they’re costly, and it’s unclear how much they’re affecting Netflix’s bottom line.

Meanwhile, the blockbuster hit “Stranger Things,” a horror-tinged supernatural thriller, has become a clear cultural touchstone. The series, which just hit its fourth season, has inspired Halloween costumes and video game versions of the monster-filled alternate universe.

While the series has a similar budget to those high-octane action movies — about $30 million per episode, or more than $200 million per season — its success has led some in the industry to question whether big-budget features are worth Netflix’s investment.

Netflix’s streaming competitors have begun to shift their own content strategies in order to spend less on streaming movie content. The CEO of Warner Bros. Discovery CEO David Zaslav said Thursday that his company has failed to find “economic value” in producing big-budget movies for its streaming services.

“We’ve seen, fortunately, now having access to all the data, how direct-to-stream movies perform,” Zaslav said during the company’s second-quarter earnings call. “And our conclusion is that expensive direct-to-stream movies … don’t compare to what happens when you start a movie in theaters, in theaters.”

Netflix doesn’t often release movies in theaters unless it’s chasing Oscar eligibility, so it budgets for movies knowing its only option for recouping costs is through increased subscriptions.

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

The horror genre, in particular, usually comes with lower production costs, making these types of films ideal for the box office, as they often fetch far more ticket sales than they cost to make.

Blumhouse and Universal’s “Get Out” cost just $4.5 million to produce and went on to gross more than $250 million at the global box office.

And while “The Gray Man” is set to become a franchise, Peter Csathy, founder and president of the Creative Media consultancy, suggested Netflix is ​​overlooking horror franchise opportunities that could save the company hundreds of millions per film.

“Scream”, “Insidious”, “Halloween” and other horror film series have won fans of the genre, as low-budget alternatives to more expensive franchise efforts such as Fast and Furious, Star Wars, Marvel or Lord of the Rings.

“The cost of production is a fraction, a fraction, a tiny fraction of what it is for these huge bets that are being made,” he said. “And why not go for a cheap sure thing that will hit your targeted demo? Why not put your money there, instead of making these big prestige games?”

Plus, Csathy added, the horror genre’s target audience also happens to be young — a demographic advertisers and streamers want to tap into.

Netflix has seen success from previous horror releases, including the “Fear Street” trilogy, and has a number of Netflix original releases in the genre, including “No One Gets Out Alive” and “There’s Someone Inside Your House.”

Michael Pachter, an analyst at Wedbush, suggested that Netflix could get more bang for its buck by pursuing a slew of horror and rom-com projects, which tend to be relatively low-budget. With tighter budgets, mistakes aren’t such a big deal.

“The nice thing about being on a low budget is that you can make mistakes,” he said. “Big budget, you just can’t get anybody out. If you get them out, you’re going to get screwed. What’s riskier, a $150 million movie or three $50 million movies?”

Missing metrics

Part of the control over Netflix’s content spending comes from a lack of clear metrics about the financial performance of its streamed shows and movies.

Box office tallies for theatrical releases and TV ad revenue are tried and true metrics. With streaming-only platforms, viewership data varies from service to service and gives an incomplete picture for analysts trying to determine how a movie or TV show is actually performing.

A $200 million-plus bill for a movie like “The Gray Man” is harder to explain when there’s no visible financial gain at the end of production, as seen by studios in box office ticket sales. Streaming subscribers pay fixed monthly or annual fees to access all available content. Netflix argues that its content keeps users on the platform and passes on subscriber fees.

For Netflix, the push into big-budget movies is a way to shore up its image and muted criticisms that it produces mediocre content. The company has shored up its balance sheet, is cash-flow positive and has a three-year window before a significant portion of its debt matures, giving it some room to spend.

It’s unclear how much Netflix spent per film on the “Fear Street” trilogy, and there is limited data on its performance on the platform. But Nielsen ratings estimated that “Fear Street 1994” generated 284 million minutes in its first week on the service and “Fear Street 1978” collected 229 million minutes. It’s unclear how the third film, “Fear Street 1666,” played out.

In addition, the fourth season of “Stranger Things” became only the second Netflix series to surpass 1 billion hours of viewing within the first 28 days of availability. Of course, comparing Netflix’s movies to its TV series is a bit like comparing apples to oranges, but it’s the best data analysts have access to since the company is tight-lipped about content spending and success.

Many entertainment experts have tried to compare the numbers on how streaming hours translate into revenue, retention and, ultimately, the strength of Netflix’s business. But much of how Netflix decides what to greenlight and what to cancel remains a mystery to analysts.

Based on Netflix’s own figures, “The Gray Man” racked up more than 88 million hours of viewing worldwide during its first weekend on the service, 60 million fewer hours than “Red Notice” in the same period last November. “Red Notice” stayed at the top of Netflix’s top 10 list for 12 days, while “The Gray Man” usurped it after just eight days.

As of Friday, the film sits in fourth place on the list behind “Purple Hearts,” “Tower Heist” and “Age of Adaline.”

So, was ‘The Gray Man’ worth the $200 million price tag? It seems to have achieved some behind-the-scenes measurement for Netflix, which is moving forward with a sequel and a spinoff.

“Netflix obviously has the data and the methodology that they believe is accurate to determine what’s a hit on Netflix and what’s not,” said Dan Rayburn, media and streaming analyst. “If [‘The Gray Man’] they had bombed with their definition of bombing, whatever that is, we don’t know, they wouldn’t have announced an expanded agreement.”

As for how Netflix makes its content choices, Rayburn says that while the data isn’t widely available right now, that could change once it goes live. enters the advertising market.

“Whether they want to give us data or not, we’re going to get more data as the years go by 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 the distributor of the Halloween series and Get Out.

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