The bursting of the Netflix bubble: where does it leave movies?

Netflix’s troubled 2022 is being eagerly watched in Hollywood, amidst the belief its movie strategy now has to change.

At the start of the year, the biggest public relations challenge facing Netflix was which story to celebrate first. Ratings had boomed for the streaming service across a range of its shows and movies. The Power Of The Dog was widely expected to become the first Best Picture winner from one of the streamers, films such as Red Notice and Don’t Look Up had scored zillions of eyeballs over Christmas. A new season of posh porn show Bridgerton was on the horizon. All was looking rather rosy.

Yet in the past six weeks or so, in the land of Netflix, tits have gone up. At least it reads that way by the headlines it’s been attracting. Shows are being cancelled? Sure, but that’s the norm (coming to that). More worrying, the colossal growth in subscribers to the service has come to an end, and in its last quarterly results, Netflix lost 200,000 of them. It reckons it’ll shed another two million by the middle of this year. For a company used to pumping out nothing but good news to its investors, it came as something of a shock.

It shouldn’t have done, of course. Companies can’t grow forever, and whenever they stop making extra billions on top of their existing billions, the – sigh – stock market responds as if they’ve lost their trousers in a theme park. Shock, horror, and taking their money elsewhere. Netflix’s stock price fell 35% when news of its subscriber fall came to light. Never mind that it brought in nearly $8bn of revenue in just three months: the golden tap has apparently been turned off.

The stock market rebounded in the weeks that followed of course, but the damage was done. Netflix lost some of its sheen as a massive success story, and the cost cutting began. A small number of layoffs are being reported, and a selection of projects cancelled. Nothing drastic, but again: when your story has been non-stop growth, it’s a very clear change in message.

It’d be fair to say that Hollywood has been watching this story in hawk-like fashion. With no small amount of schadenfreude too, I’d imagine. Traditional studios who’ve been routinely outspent sniff a playing field that might just tilt a little back in their direction.

After all, since Netflix inked its – yep – game changing deal with Adam Sandler back in 2014, it’s been the core disruptive force in modern mainstream cinema. The Hollywood studios have struggled to catch up.

Sandler, after all, might have peaked at the box office a few years before, but he was still capable of pulling in a crowd for a comedy. Say what you like about Jack & Jill for instance – and I’ll happily give you a tight 20 minutes on it – but it made money and got lots of people in cinemas. Sony had, just a year or two before, been considering a $200m feature with his name attached.

Yet when he was still in a position to command an eight figure fee per movie, Netflix took Sandler off the market. It considerably outspent Hollywood, and snapped him up for a four-picture deal, that’s been extended several times since. Sandler has become a very rich man, Netflix has enjoyed a regular stream (arf) of hits.

It was a deal sneered at when it happened. Sandler’s only signing up for one last big payday! He’s not the star he was! Less than a decade on, it’s hard to find a major movie star who hasn’t had a Netflix cheque, and again, not a small one. The sheer spending power has taken traditional stars out of the grasp of many traditional studio projects.

To give a flavour of how much sway Netflix had, it was said to have offered twice the price that Lionsgate could afford to snatch the Knives Out sequels to its service. Lionsgate, that had gambled on the original, never stood a chance.

Netflix hasn’t just been paying top dollar. It’s been redefining what top dollar is.

In its defence too, it’s backed films that otherwise simply wouldn’t have got made. Martin Scorsese battled for eons to get a studio to fund one of his passion projects, The Irishman. In the end, Netflix was the only place in town willing to spend a hefty nine figures on it. Dwayne Johnson, Gal Gadot and Ryan Reynolds meanwhile were each said to have earned at least $20m apiece – all in the same film – for Red Notice, a movie that Universal backed out of when it got too pricey.

Yet that’s what the growth of Netflix has in part done for cinema. It’s priced studios out of a large number of projects, and talent in front and behind the camera have had their heads turned by the shattering of salary ceilings. All the while, Netflix has been reluctant to share its movies with cinemas, albeit to varying degrees.

Just in terms of switching off the emergency sirens, Netflix isn’t going anywhere. This apparently troubled company will still bring in nearly $8bn in three months again. It might be down to its last – checks notes – 220 million subscribers paying monthly into its coffers, but it’ll try and cope. It’ll be a long time before it goes broke.

But also, its business model now has to alter a little, and Hollywood knows it.

It’s well known that Netflix has been built – unlike Amazon and Apple’s services – with other people’s money. It’s got a debt mountain to service, even though it now turns a profit. That debt requires market confidence, and Netflix is moving to the next phase of its business: it’s grown, now it has to consolidate.

We’re already hearing noises of a crackdown on password sharing, and a possible ad-funded subscription option. But beyond that, the deals have to change too. Netflix is still likely to outspend its rivals, but the spending has to be tempered somewhere along the line. Something has to give. Will it be those expensive risky movies that tempt Oscar voters? Will it double down on smaller thrillers, romcoms and fruity movies?

The truth is we don’t quite know the answers, just that questions are being asked. It’s worth noting that Netflix has what studios also don’t have: a massive data warehouse, full of intelligence about what every single one of its subscribers is watching. It can more precisely tailor its films to those subscribers. Don’t be surprised if we get more of that, and less gut feel.

After all, it’s already long known that when it comes to series, outside of the top end TV shows, Netflix will give most of its programmes two seasons and that’s your lot. After that, what’s the point? Longer running shows generally don’t pull in new subscribers, and Netflix needs to keep people interested. New, shiny things do that. Season six of a middling show doesn’t.

That ruthlessness when it comes to television recommissioning is likely to transplant more heavily to film too. Given that Netflix has commissioned most of its movies for the next 18 months, it’ll be some time before we see how things alter, but in much the same way studios rely on franchises and big name properties, don’t be surprise to see more of Netflix going the same way.

Which begs the question: where does this leave the studios? Irreversibly changed, I’d suggest. Disney, Paramount, Universal and Warner Bros – four of the remaining majors – have all pivoted to streaming services of their own. MGM has been sold entire to Amazon. The other, Sony, is regularly selling its films to streamers rather than risking them against the whims of a cinema audience. Note how Sony’s upcoming Matilda movie is a Netflix co-production, where the film will only be getting a full cinema release in the UK.

Streamers have been a useful tap of funds for studios, especially since box office and physical media revenues have been so squeezed. And therein lies a threat: if Netflix is spending less on its own films in the future, then it’ll likely spend less on studio fare too.

Studios have chased the streaming bucks, with reasonable success, and the old model of business is gone. Now it feels like a case of jostling for position, for subscription revenue, and the occasional box office hit.

For the time being, the movies though will be unaffected by the last two months of Netflix news. Certain ships have already sailed, and cinema is already facing the challenges of luring audiences back, and shorter exclusivity windows. What Netflix’s position brings, for the minute, is more uncertainty.

But still: the streamers, even slightly diminished, remain by distance the biggest players in town. It’s just the free spending era might just be starting to end, and Adam Sandler might get slightly less for his next deal.

Don’t expect a massive change in the status quo. But don’t be surprised if studios and streamers work a little more hand in hand going forward…

Certain images: BigStock

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