There’s a big money question haunting Netflix.
In recent years, the streamer has spent big on flashy, blockbuster-style action movies like “The Gray Man” and “Red Notice,” which ran the company $200 million each. The films are the first steps in bids to spark event-level franchises. But they’re costly, and it’s unclear how impactful they have been for 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 videogame versions of the monster-filled alternative universe.
While the show has a similar budget to these high-octane action flicks — around $30 million per episode, or more than $200 million per season — its success has led some in the industry to question whether high-budget features are worth Netflix’s investment.
Netflix’s streaming rivals have begun to shift their own content strategies in order to spend less on direct-to-streaming film content. Warner Bros. Discovery CEO David Zaslav said Thursday his company has been unable to find an “economic value” in producing big-budget films for its streaming services.
“We’ve seen, luckily, by having access now to all the data, how direct-to-streaming movies perform,” Zaslav said during the company’s second-quarter earnings call. “And our conclusion is that expensive direct-to-streaming movies … is no comparison to what happens when you launch a film in the motion picture, in the theaters.”
Netflix doesn’t often release films in theaters, unless it’s seeking Academy Award eligibility, so it budgets for movies knowing that its only option for recouping spend 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, typically comes with lower production costs, making these kinds of films ideal for the box office as they often rake in significantly more in ticket sales than they cost to make.
Blumhouse and Universal’s “Get Out” cost just $4.5 million to produce and went on to generate more than $250 million at the global box office.
And while “The Gray Man” is set to be developed into a franchise, Peter Csathy, founder and chairman of advisory firm Creative Media, suggested Netflix is overlooking franchise opportunities in horror that could save the company hundreds of millions per film.
“Scream,” “Insidious,” “Halloween” and other horror film series have won over fans of the genre, as low-budget alternatives to more expensive franchise endeavors like Fast and Furious, Star Wars, Marvel or Lord of the Rings.
“The production costs are a sliver, a fraction, a small fraction of what it is for these huge bets that are made,” he said. “And why not go for an inexpensive sure thing that hits your targeted demo? Why not put your money there, rather than doing 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 past horror releases including its “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 Netflix could get more for its money by sticking with a lineup of horror and rom-com projects, both of which tend to be relatively low-budget. With more modest budgets, missteps aren’t as big of a deal.
“The cool thing about low budget is you can make mistakes,” he said. “Big budget, you just can’t make any. If you screw up, you’re screwed. So which is riskier, a $150 million movie or three $50 million movies?”
Missing metrics
Part of the scrutiny on Netflix’s content spend stems from the lack of clear metrics around the financial performance of streaming-first shows and movies.
Box office tallies for theater releases and TV ad revenue are tried-and-true metrics. With streaming-only platforms, viewership data varies from service to service and paints an incomplete picture for analysts trying to determine how a film or television show has actually performed.
A bill upwards of $200 million for a film like “The Gray Man” is harder to explain when there’s no visible financial gain at the end of production, like studios see in box office ticket sales. Streaming subscribers pay flat monthly or annual fees to access all available content. Netflix argues its content keeps users on the platform and handing over subscriber fees.
For Netflix, the push into big-budget movies is a way to burnish its image and quiet criticisms that it churns out 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 wiggle room to spend.
It’s unclear how much Netflix spent per film for its “Fear Street” trilogy, and there’s limited data around its performance on the platform. But Nielsen ratings estimated that “Fear Street 1994” generated 284 million viewing minutes during its first week on the service and “Fear Street 1978” tallied 229 million minutes. It is unclear how the third film, “Fear Street 1666” performed.
What’s more, the fourth season of “Stranger Things” has become just the second Netflix series to cross 1 billion hours viewed within the first 28 days of availability. Of course, comparing Netflix’s films to its television series is a bit like comparing apples to oranges, but it’s the best data analysts have access to as long as the company keeps quiet about content spend and success.
Many entertainment experts have tried to crunch the numbers on how streaming hours translate to 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 in worldwide viewing during its opening weekend on the service, 60 million fewer hours than “Red Notice” pulled during the same period last November. “Red Notice” stayed in the top spot of Netflix’s top 10 list for 12 days, while “The Gray Man” was usurped after just eight days.
As of Friday, the film holds the fourth spot on the list behind “Purple Hearts,” “Tower Heist” and “Age of Adaline.”
So, was “The Gray Man” worth its $200 million price tag? It appears to have have hit some behind-the-curtain metric 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 isn’t,” 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 would not have announced an expanded deal.”
As for how Netflix makes its content choices, Rayburn says that while data is not currently widely available, that could change once the streamer enters the ad market.
“Whether they want to give us data or not, we’re gonna get more data as the years go on, because the advertising side,” he said. “That’s gonna help us better understand content.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC. Universal is the distributor of the Halloween franchise and “Get Out.”