#Netflix: to exit or not to exit?

Netflix’s stock price (Nasdaq: NFLX) was up more than 19% in the latest after hours market trading due to beaten Q3-2016 earnings and subscriber expectations.

In fact, the streaming company generated net income of $51.5M, up 75%, or 12 cents a share (vs 6 cents expected) vs the period last year, on revenues of $2.29B (vs $2.28B expected), up 31.7%.

Just as important: streaming subscriptions beat forecasts. Netflix ended the quarter with 47.5 million domestic subs, an addition of 370,000. International was up 3.2 million to 39.25 million. They expect to add 1.45 million domestic subscribers by year end, and 3.75 million internationally.

“We are now in the fourth year of our original content strategy and are pleased with our progress,” CEO Reed Hastings and CFO David Wells say in a letter to shareholders. “In 2017, we intend to release over 1,000 hours of premium original programming, up from over 600 hours this year.”

All told, “we will continue to operate around break even, and then start generating material global profits in 2017 and beyond, by marching up operating margins steadily for many years.”

The execs reiterated their plan to raise debt “in the coming weeks” to support their expansion plans. The company had $14.4B in streaming content obligations at the end of September, up $1B in the quarter due to “the addition of both new original and non-original content to our library as well as expanded rights for our new territories.”

Netflix expects to spend $6 billion next year for content.

“Over the long run, we believe self-producing is less expensive (including cost of capital) than licensing a series or film, as we work directly with the creative community and eliminate additional overhead and fees,” the company note says.

However, if the post-market increase in the stock price holds tomorrow, then Netflix shares will be back to where they traded around the beginning of the year. Based on today’s closing price, the company is down 12.8% in 2016.


Despite the shift toward original content continues, Netflix is still starving for cash. Net cash used in operating activities was $462M in Q3-2016 and Non-GAAP free cash flow was negative $506M, which means that the company is burning cash every quarter, reason why they need to issue new debt. Proceeds from issuance of new debt was $1.5B in 2015, it is still none so far in 2016.

“With a debt to total capitalization ratio of about 5%, we remain underleveraged compared both to similar firms and to our view of an efficient capital structure.” – they say in the letter, but that can be as well read as an admission of financial struggle.

Netflix still uses the majority of their revenue to pay studios for licensing agreements– The Wall Street Journal reported in 2015 that of the Major Three, Netflix had planned on designating the most funds toward acquiring content, more than what Hulu and Amazon had projected on spending, combined – so its profit margins are low because they forfeit a lot of said revenue to overhead, distribution, and operating expenses. The ability to acquire strong content also depends on the willingness of producers to accept lump sums without any back-end.

The shift toward original content began in 2011 with a $100 million, 26-episode bet on ‘House of Cards’ which may however actually be seen as a shortsighted move since it did not entail their international expansion strategy because they left on the table the foreign rights to the producer MRC Studios.

Most of the content that Netflix brands as “original”, is actually licensed exclusively for SVOD exploitation, so if they want to control worldwide rights they will need to pay substantial sums, usually at least 120% of the production budget.

To be precise, in a negative pickup deal the show is never physically made by the network but by an associated production company, which in the studio model can be affiliated to the distribution entity. The same dynamic has allowed Netflix to neatly insert itself into the television ecosystem, first by licensing shows for online streaming, and then by simply joining traditional cable and broadcast networks as a fellow buyer. But the scenario leaves Netflix with being nothing more than a distributor, securing programs for a fixed period of time before agreements lapse and competitors have the opportunity to step in. By producing its own content from development to release, Netflix could ensure its new shows remain on Netflix and only on Netflix, an increasingly vital point as the dynamics in the streaming space shift more toward a battle for exclusivity. But they will need to form strong financial alliances and output deals, just like the major studios do.

Netflix seems now to be nearing its startup peak: so to exit or not to exit? They can certainly enlarge their customer base, especially internationally, but can they keep making/licensing great original content that drives organic growth without a studio/conglomerate attached? Data intelligence certainly helps.

As they increasingly rely on debt, and following the announcement of the exclusive streaming deal with Disney and the strong and reinforcing creative ties with Marvel TV, we may argue that we have a prime suspect. Nevertheless, for the love of innovation we should probably hope that they can stay independent and keep breaking rules for much longer.

The current enterprise value of Netflix is $44.04B or about 140.34x EBITDA (vs Amazon’s $391.46B or 37.97x, or Apple’s $656.17B or 8.87x), its trailing P/E is 311.88 (vs Amazon’s 202.18, or Apple’s 13.70).


Sources: Netflix IR, Yahoo Finance.

p.s. for past analysis of Netflix check The FlixBiz.


#Reviews and #BoxOffice performance of recent #superhero #movies

Do reviews influence box office performances for superhero franchises?

The three most regarded movie ratings are:

  • The TOMATOMETER is the percentage of “Approved Tomatometer Critics” who have given the movie a positive review. The site RottenTomatoes.com also features an Audience Score, percentage of users who have rated the movie 3.5 stars or higher, although its influence is generally taken less into consideration.

The website was launched in 1998, sold to Flixster in 2010, itself acquired in 2011 by Warner Bros., then sold in 2016 to Comcast/NBCUniversal’s Fandango Media, in which TimeWarner/WarnerBros retains a 30% minority stake.

  • The METASCORE is a weighted average of the published critic reviews contained in the chart on that title. The site also features a User Score based on users’ reviews.

The website MetaCritic.com was founded in 1999, sold in 2005 to CNET, which is owned through CBS Interactive by the CBS Corp. (which after the split from Viacom in 2005 no longer owns Paramount Pictures).

  • The IMDb RATING is the weighted average of all the individual votes cast by IMDb registered users. The Metascore is also visible next to the title.

The site IMDb.com was launched in 1990, incorporated in the UK as Internet Movie Database Ltd in 1996, became a subsidiary of Amazon.com in 1998.

Now let’s play a game and see to what extent reviews influenced the box office of superhero movies, wide release, budget $100M+. There is perhaps no path and probably no correlation at all. But let’s have some fun anyways and see if we can creatively draw any kind of conclusions, first for each franchise and then in general.

First of all, please note that each title will be followed by five numbers which represent respectively: Tomatometer (%) | Metascore | IMDb Rating | Domestic b.o. ($,M) | Foreign b.o. ($,M) | Opening ($,M). Indicators below 60 or 6.0 will be colored red.

Also, we will find out average scores for each franchise. We will select five titles for each “universe”. Yes, of course, there will be some forced and some exclusions. Please don’t get mad, purists. The single best one-to-one comparison would probably be Guardians of the Galaxy.

Finally, after having seen how much has each franchise grossed on average, using forecasts for DC Extended Universe’s Suicide Squad, we will see totals related to reviews and box office performances for the superhero genre.


DC Extended Universe (Warner Bros.) | 58 | 60 | 7.8 | 381 | 505 | 149

The Dark Knight (2008) | 94 | 82 | 9.0 | 535 | 470 | 158

The Dark Knight Rises (2012) | 87 | 78 | 8.5 | 448 | 637 | 161

Man of Steel (2013) | 55 | 55 | 7.2 | 291 | 377 | 117

Batman v Superman: Dawn of Justice (2016) | 27 | 44 | 6.9 | 330 | 542 | 166

Suicide Squad (2016) | 26 | 40 | 7.2 | 300 | 500 | 140

DC Comics movies were not particularly appreciated by critics, although fans liked them more than any other competing franchise and they generally responded well at the box office. Suicide Squad is expected to follow a similar path. They have the worst score in terms of critics ratings, best from fans, although open as strong as the Marvel movies.


Marvel Cinematic Universe (The Walt Disney Pictures) | 83 | 68 | 7.6 | 400 | 656 | 146

Captain America: The First Avenger (2011) | 80 | 66 | 6.9 | 177 | 194 | 65

Marvel’s The Avengers (2012) | 92 | 69 | 8.1 | 623 | 896 | 207

Iron Man 3 (2013) | 79 | 62 | 7.2 | 409 | 806 | 174

Guardians of the Galaxy (2014) | 91 | 76 | 8.1 | 330 | 440 | 94

Avengers: Age of Ultron (2015) | 75 | 66 | 7.5 | 459 | 946 | 191

Marvel movies were loved even more by critics than fans, they performed great domestically and fantastic internationally and most importantly they seem to be on a growing path. Best critics reviews, second-best fans ratings, by far best international performance.


X-Men (20th Century Fox) | 64 | 58 | 7.3 | 190 | 304 | 80

X-Men: The Last Stand (2006) | 58 | 58 | 6.8 | 234 | 225 | 103

X-Men Origins: Wolverine (2009) | 38 | 40 | 6.7 | 180 | 193 | 85

X-Men: First Class (2011) | 86 | 65 | 7.8 | 146 | 207 | 55

X-Men: Days of Future Past (2014) | 91 | 74 | 8.0 | 234 | 514 | 90

X-Men: Apocalypse (2016) | 48 | 52 | 7.3 | 155 | 379 | 66

X-Men movies were not particularly appreciated by critics although fans liked them, however they performed relatively poorly domestically due to bad openings but significantly better internationally in the medium run.


Spider-Man (Sony Pictures) | 74 | 67 | 6.9 | 316 | 477 | 102

Spider-Man (2002) | 89 | 73 | 7.3 | 404 | 418 | 115

Spider-Man 2 (2004) | 93 | 83 | 7.3 | 374 | 410 | 88

Spider-Man 3 (2007) | 63 | 59 | 6.2 | 337 | 554 | 151

The Amazing Spider-Man (2012) | 73 | 66 | 7.0 | 262 | 496 | 62

The Amazing Spider-Man 2 (2014) | 52 | 53 | 6.8 | 203 | 506 | 92

Critics liked Spider-Man movies and fans were also happy on average, hurrying to purchase movie tickets especially in the early chapters of the franchise and despite relatively low openings.


Totals | 70 | 63 | 7.5 | 320 | 483 | 118

All in all, critics are only fairly excited by superhero movies whereas fans love them and respond exceptionally well hurrying to see them immediately in a movie theater and for long time after openings, in the United States as well as internationally. As expected, bad reviews by critics don’t seem to affect significantly their performance in the medium/long-run, although (with the exception of Batman v Superman) there seems to be a moderate correlation with the box office performance in the opening weekend.

Is China slowing down?

The Chinese box-office is up by 21% in the first 6 months of 2016 compared to the same period of last year when it amounted $3.22B. Last year it surged by 49% to $6.78B for the year.

So, are Chinese movie tickets sales slowing down?

It should be taken into account that in the first 6 months of last year Furious 7, Avengers: Age of Ultron, and Jurassic World, which together grossed $860M were released, whereas this year the top 3 Hollywood releases, Zootopia, Warcraft, and Captain America: Civil War grossed $647M . In total, imported films have seen only 5% growth year-on-year, whereas domestic films have fared better, with receipts growing 33% from $1.5 billion to $2 billion in the first half due mostly to the exceptional results of The Mermaid, which grossed about $527M.


‘The Mermaid’ grossed $527M in China.

Therefore, so far we can’t claim any “conclusive change” in the general growth trend in the market, but a shift related to the titles that have been released so far in 2016 compared with 2015.

In addition, it should be taken into account that the 6-month average CNY to USD rate has fallen from 0.1608 to 0.1529 or 4.91%.

What we can claim for sure by now is that Chinese moviegoers have different tastes. For instance, Warcraft grossed $221M and only $46M domestically, on the contrary Star Wars: The Force Awakens grossed $124M in China and $937M domestically.

There is another big difference. Movie tickets are relatively more expensive in China than they are in the US, at least in the cities. The price of 2 tickets to the movies in Beijing is 元117 (元117) or $18 (about the same price of monthly utilities in a luxury studio in downtown) even though the average price is starting to slip — down about 2.5% to $5.36. IMAX and 3-D premiums are continuing to hold up and driving overall revenue. Also, another opportunity is given by the fact that movie tickets are usually cheaper when purchased online in advance.

All in all, China saw a 40% growth in screens, now totaling about 32,000 or about 23 every million people but box office was up 48% in 2015.

To sum up, there is still room for substantial growth in terms of exports, due also to their greater openness to welcome foreign product, however the Chinese market is now already mature enough to be worth of being considered in terms of major investments in local productions, co-productions, as well as joint ventures and stable distribution partnerships.

#GoldenGlobes and the box office


The five nominees in the Best Motion Picture, Drama category.

Best Motion Picture, Drama
Carol (The Weinstein Company) | $7,004,358 +  $8,402,177 | N/A
Mad Max: Fury Road (Warner Bros.) | $153,636,354 + $222,200,200 | $150M
WINNER: The Revenant (Fox) | $41,383,741 + $20,487,466 | $135M 
Room (A24) | $5,166,724 + N/A | N/A
Spotlight (Open Road) | $28,546,477 + $309,218 | N/A

‘The Revenant’ won the award and opened strongly, but the outsiders ‘Room’, ‘Carol’ and partly ‘Spotlight’, for some the most important movie of this batch but a difficult one, will hopefully gain stronger market traction in home video windows thanks to the visibility provided by the Golden Globes. The big “loser” in this category is ‘Mad Max: Fury Road’, which instead seems to be the only title meant to become a cult for the years to come and perform exceptionally in home video for long time, as showed by the extraordinary reception from the public: George Miller’s long-awaited return to the dusty dystopian Aussie badlands, which also won the prize for best-reviewed science-fiction movie, was named the top film on wide release after scoring a 97% “fresh” rating on Rotten Tomatoes. How many times have you seen it? I watched it three times and I would watch it again. Pure adrenaline. Hopefully will get some recognition from the Academy.


The five nominees in the Best Motion Picture, Musical, or Comedy category.

Best Motion Picture, Musical, or Comedy
The Big Short (Paramount) | $42,724,340 + $9,700,000 | $28M
Joy (Fox) | $46,531,854 + $23,679,037 | $60M
WINNER: The Martian (Fox) | $226,486,935 + $369,269,299 | $108M
Spy (Fox) | $110,825,712 + $124,840,712 | $65M
Trainwreck (Universal) | $110,212,700 + $29,296,198 | $35M

Although funny at times, ‘The Martian’ should simply not have been placed in this category. Nonetheless, having grossed 62% outside the US, it “travels” much better than the usual comedy, thanks also to a very smart marketing campaign and, we shall say, thanks to Matt Damon. ‘Joy’ could have performed better but the release date (Christmas day) did not play in his favor. It is a wonderful story but, despite the amazing acting performances, seemed incomplete and pretentious sometimes. ‘The Big Short’ is the most original and even eccentric film in this category but as expected it has been struggling overseas due to the US-centered subject, despite the star-filled cast. ‘Spy’ and ‘Trainwreck’ both exceeded expectations, especially the very funny Paul Feig’s movie.


‘Inside Out’ producer Jonas Rivera and director Pete Docter.


Best Motion Picture, Animated
Anomalisa (Paramount) | $486,076 + N/A | $8M
The Good Dinosaur (Disney) | $117,438,706 + $148,700,000 | N/A
WINNER: Inside Out (Disney) | $356,461,711 + $499,668,421 | $175M
The Peanuts Movie (Fox) | $129,152,908 + $92,114,145 | $99M
Shaun the Sheep Movie (Lionsgate) | $19,375,982 + $64,100,000 | N/A

‘Inside Out’ is hands down the best animated film of 2015 from all point of views and a masterpiece for the years to come. Thanks, Pixar. Well done again, Disney. It also performed exceptionally well at the box office due to its cross-generational appeal, which is partially missing in the other nominees. ‘Anomalisa’ is a little gem that will be enjoyed by many in VOD.


Legend: Title (US Distributor) | Domestic gross + Foreign gross | Production budget

Source of data: BoxOfficeMojo.com

New trends in film distribution: experiential, global, digital, promotional

From Imax premieres to early home entertainment debuts or day-and-date release, independents and now studios are rewriting the rules of how they movies to the consumer market, with mixed results. Compelling television programming and an endless selection of online content are making it tougher than ever either to get eyeballs into theaters. Despite the value chain is still strictly connected to the theatrical release, monetizing the other windows and increase the ancillary revenue streams is key. Therefore it’s increasingly imperative to seek the right business model that maximizes the potential of each movie.

'The Walk' started with a limited Imax release.

‘The Walk’ started with a limited Imax release.

Universal and Sony aimed at building word-of-mouth by launching the spectacular ‘Everest’ and ‘The Walk’ on limited Imax release before expanding to more theaters, with the intention of grabbing the willingness of people to pay more to maximize their experience.

While digital players such as Netflix are entering the theatrical distribution business to get collateral publicity effects from an Oscar nomination, perhaps the most revolutionary studio gambit is Paramount giving exhibitors a slice of digital grosses in exchange for launching the films on demand just 17 days after they leave most theaters, in theory saving on marketing costs but risking to leave money on the table by killing the theatrical run too soon.

'Paranormal Activity 6' home video release will happen only 17 days after the theatrical run.

‘Paranormal Activity 6’ home video release will happen only 17 days after the theatrical run.

With new OTT channels popping up, it is increasingly important for the industry to ensure measurability and for content companies to utilize smart rights management systems to maximize the profit potential of their libraries.

Satisfying the request of consumers for accessibility and the need of digital businesses for a bigger market is the rationale behind the EU’s digital single market plan, but many argue that would hurt the typical territory-by-territory financing scheme of independent films.

As OTT improve their offerings and cord-cutting progresses, more young viewers are forgoing live TV to watch shows later, as shown by the Fall season ratings dropoff in 18- to 34-year-old audience.

As studios are producing bigger budget movies and spending more money for global marketing campaigns, release dates are being locked years in advance for maximizing cross-promotional synergies and powerful licensing deals and to scare away competition while reassuring investors.

With $390 million, 'Furious 7' had the highest box office in China in 2014.

With $390 million, ‘Furious 7’ had the highest box office in China in 2014.

The focus on tentpoles and franchise releases has improved the overall performance of film divisions of media conglomerates, while steady trimming of annual release slates and leaner operations have improved profitability. Future growth depends on digital distribution and developing countries.

Chinese box office ($4.8 billion) increased 34% in 2014, becoming the first international market to exceed $4 billion in box office but its quota system still allows only 34 foreign films to be released theatrically, with the use of overlapping dates and “blackout periods” for protecting local product.

Massive marketing budgets are being put up through tie-ins with hundreds of corporations and licensees and retail global partners. ‘Man of Steel’ had more than 100 global promotional partners and $160M in collective promotional support, with Walmart becoming the first retailer to sell tickets to an advance screening of a studio film, with the clear objective for the studio of pumping up early demand for home-video and boosting merchandising sales.

Just like Sony scooped $150M global tie-ins for 'The Smurfs 2', studio release strategies are increasingly all about creating cross-promotional value.

Just like Sony scooped $150M global tie-ins for ‘The Smurfs 2’, studio release strategies are increasingly all about creating cross-promotional value.

When an animation feature like ‘The Smurfs’ becomes an unexpected phenom, for the following installment of the franchise studios like Sony are able to attract global promotional partners like McDonald’s and Toys R Us and develop massive marketing campaigns to let consumers live the brand by using other people’s money so that they can maximize profits even when the bare box office doesn’t meet expectations.


Brent Lang, “How ‘Everest’ and ‘The Walk’ early Imax runs could shake up the movie business” – Variety, Sep 20, 2015

Anthony D’Alessandro, “As exhibs snub ‘Paranormal Activity 6’ & ‘Scouts Guide’, is Paramount’s early VOD experiment bad business?” – Deadline, Oct 15, 2015

Dennis Kneale, “Rights insight: Hidden Fortune” – Broadcasting & Cable, Sep 24, 2015

Thomas James, “Why film bizzers are still outraged over Europe’s digital single market plan” – Variety, May 5, 2015

Stephen Battaglio, “More young viewers forgo live TV, watch shows later” – LA Times, Oct 10, 2015

Todd Cunningham, “Distribution strategies: Studios are escalating the tentpole race, claiming the best dates into late 2018” – The Wrap, Jul 1, 2013

Cynthia Littleton, “Changes in new report on film economics” – Apr 18, 2013

Ben Fritz, “International distribution: China marketing, windowing, potential & conflict” – LA Times, Aug 28, 2012

Marc Graser, “Walmart first to offer tickets to early screenings from a major studio” – Variety, Apr 2013

Nikki Finke, “’Smurfs 2’ scoops $150M global tie-ins for Hollywood’s unexpected blue blockbuster” – Deadline, Jun 15, 2013