Netflix may be missing an opportunity in horror

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

Jaap Arriens | NurPhoto | Getty Images

There’s a big money issue haunting Netflix.

In recent years, the streamer has spent heavily on flashy blockbuster-style action films like “The Gray Man” and “Red Notice,” which drove the company $200 million each. The films are the first steps in the bids to trigger event-level franchising. But they’re expensive, and it’s unclear how impactful they’ve been on Netflix’s bottom line.

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

Although the show 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 rivals have begun to shift their own content strategies to spend less on direct-to-stream movie content. 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 fortunately seen, by having access to all the data now, how direct-to-streaming movies are performing,” Zaslav said during the company’s second-quarter earnings call. “And our conclusion is that expensive direct-to-streaming movies … are no comparison to what happens when you release a movie in theaters, in theaters.”

Netflix doesn’t often release movies in theaters unless it’s seeking Oscar eligibility, so it budgets for movies, knowing that its only option to make money is through subscription growth.

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 bring in significantly more at the box office than they cost to make.

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

And while “The Gray Man” is being developed into a franchise, Peter Csathy, founder and chairman of the advisory firm Creative Media, suggested that Netflix is ​​overlooking franchise opportunities in fear 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 attempts 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 efforts that are being made,” he said. “And why not go for a reasonably safe thing that hits your targeted demo? Why not put your money there, instead of making these big prestige plays?”

Plus, Csathy added, the target audience for the horror genre also happens to be young — the 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 sticking to a variety of horror and rom-com projects, both of which tend to be relatively low-budget. With more modest budgets, missteps are not such a big deal.

“The cool thing about low budget is you can make mistakes,” he said. “Big budget, you just can’t make one. If you screw up, you’re screwed. So what’s riskier, a $150 million movie or three $50 million movies?”

Missing calculations

Part of the scrutiny of Netflix’s content consumption stems from the lack of clear metrics around the financial performance of streaming-first series and movies.

Theater release tickets and TV ad revenue are proven metrics. With streaming-only platforms, viewership data varies from service to service and paints an incomplete picture for analysts trying to figure out how a movie or TV show actually performed.

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

For Netflix, its commitment to big-budget films is a way to polish its image and silence criticism that it releases mediocre content. The company has strengthened its balance sheet, is cash flow positive and has a three-year window before a significant portion of its debt matures, which gives it some wiggle room to use.

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

Also, the fourth season of “Stranger Things” has become only the second Netflix series to surpass 1 billion hours watched in the first 28 days of availability. Comparing Netflix’s movies with the TV series is of course a bit like comparing apples to oranges, but it is the best data analysts have access to as long as the company keeps quiet about content consumption and success.

Many entertainment experts have tried to crunch 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 data, “The Gray Man” amassed more than 88 million hours of worldwide viewing during its opening weekend on the service, 60 million fewer hours than “Red Notice” pulled in during the same period last November. “Red Notice” held the top spot on Netflix’s top 10 for 12 days, while “The Gray Man” was usurped after just eight days.

As of Friday, the film holds 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 hit some behind-the-curtain values ​​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 is this success at Netflix and what is not,” said Dan Rayburn, a media and streaming analyst. “If [‘The Gray Man’] had bombed by their definition of bombing, whatever that is, we don’t know, they wouldn’t have announced an extended deal.”

As for how Netflix makes its content choices, Rayburn says that while data isn’t currently widely available, that could change once the streamer enters the ad market.

“Whether they will give us data or not, we will get more data as the years go by, because of the advertising side,” he said. “It 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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