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Netflix's Next Revolution: Making Original Movies for Theaters, With Streaming on Opening Day

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Will your local theater survive?

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After making the local video rental shop a thing of the past, Netflix (NASDAQ:NFLX) is about to obviate cinemas as well.

First, Netflix was just a mail-order DVD rental company which pivoted toward streaming. It essentially did for TV and film what Apple's (NASDAQ:AAPL) iTunes did for music: help the industry adjust to a brave new world where endless copying and piracy is possible. As with iTunes, Netflix streaming is not as lucrative for movie studios as the more traditional distribution channels, but viewers are willing to pay a small price to legally consume media. Netflix actually checks piracy sites to see what consumers want but can't legally get when it decides which shows to buy.

Some content creators such as HBO (NYSE:TWX) refuse to allow streaming, which is less profitable than syndication, and some films disappear from the streaming service when licensing deals with Netflix expire. So Netflix started producing its own award-winning shows, such as House of Cards and Orange Is the New Black. It has also talked about producing its own feature films, documentaries, and stand-up comedy shows.

The next logical step is releasing its own big feature films in theaters and on Netflix on the same day. This is what Ted Sarandos, Netflix's head of content, said in a speech for Film Independent (via Peter Kafka at AllThingsD).

"What we're trying to do for TV, the model should extend pretty nicely to movies," Sarandos said. "Meaning, why not premiere movies on Netflix, the same day they're opening in theaters? And not little movies - there's a lot of ways, and lot of people to do that [already]. Why not big movies? Why not follow the consumers' desire to watch things when they want?"

If this works out, it would put tremendous pressure on Hollywood's business model. Traditionally, the studio "windows" releases: a movie goes to the theaters first, and then goes to video and streaming later. Putting a movie to DVD quickly is an admission of failure in the business. But Netflix sees this model as taking options away from viewers. Whether you go to a theater or you stay at home to watch a movie should be your choice, the company says. Sarandos also pointed out that some independent movies already go to other distribution channels, such as iTunes, at the same time as the theater release.

Even if Netflix starts producing films for the big screen, Hollywood will be slow to change. Conventional theaters rely on the big blockbusters to keep the lights on. Big theater chains like Regal Entertainment Group (NYSE:RGC) and Cinemark Holdings, Inc (NYSE:CNK) operate hundreds of cinemas in the US, and they are very influential when it comes to marketing and hype. It's hard to imagine them living in a world where they don't have at least a small window of exclusivity in which to sell overpriced popcorn.

For more on the incredible disruption that Netflix has already fostered in the entertainment industry, this five-minute speech by Kevin Spacey is a must-watch.




Twitter: @vincent_trivett
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No positions in stocks mentioned.
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