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Netflix Reportedly Considered Buying Theater Chain

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A week after its chief content officer announced that Netflix would pull its films from Cannes, one of the world's most prestigious film festivals, after they were barred from competition, the Los Angeles Times - a paper known for having its finger on the pulse of the entertainment industry may have just foreshadowed the next big bricks-and-clicks deal: Netflix, the LA Times reported, was in talks to buy Landmark Cinemas, the independent movie theater chain co-owned by Mark Cuban.

However, Netflix backed off the deal, reportedly because Landmark was asking too high a price.

Netflix, the global streaming giant that has dramatically changed the TV industry and clashed with movie theater owners, may be ready to move onto the big screen in a new and surprising way — by owning cinemas.

The Los Gatos, Calif., company has explored the idea of buying movie theaters in Los Angeles and New York that would allow it to screen its growing pipeline of feature films and documentaries, according to people familiar with the situation.

Netflix executives considered acquiring Los Angeles-based Landmark Theatres, the circuit co-owned by Mark Cuban, but recently backed off the idea, said two people who spoke on condition of anonymity because the plans are private.

One of the knowledgeable people said Netflix decided not to pursue a deal because executives believed the sale price for Landmark was too high.

Although no cinema deal has materialized, the idea of Netflix buying a theater chain would mark a new phase in the company's rapid ascent to become one of the most powerful players in the entertainment industry.

Of course, anybody who has been paying attention would know that Netflix (or even its streaming rival Amazon) buying a movie chain is a scenario that has long been the subject of analyst chatter.

As Frank Gristina recently discussed in a column published on the Street, while some smaller chains have tried to innovate by offering comfortable reclining seats and meals and beverage service in their theaters, the crux of the movie theater business model is hopelessly outdated, and must be updated for the digital age.

Netflix and Amazon are probably the two companies best-positioned to revitalize these businesses by leveraging their subscription models and content engines to fundamentally change how people pay to see movies in theaters. Ultimately, the theaters would become extensions of the streaming content.

We have outlined the issues with the current movie and theater experience. To oversimplify, there are too many parties trying to achieve scale over their unique cost structures, and there is no quality control, accountability, or feedback loop. This is the next industry to be disrupted, or it will continue to languish. Disruption will require new pricing models, vertical integration and technology. I think it will require an industry outsider (or at least a one-time outsider)

A hypothetical purchase, Netflix buying AMC Entertainment, may be the best way to illustrate how the disruption might work and what it would mean for the top line, profit margins and the industry. Were Netflix to buy AMC it could disrupt the entire industry. The consumer and disruptors would benefit. As is the case for most disruptions, the middlemen would go away, and the studios would lose some control.

MoviePass was perhaps the first company to try pushing the theater chains (which are unsurprisingly and formidably entrenched in their ways) toward a more contemporary business model - but it got raked over the coals when theater chains refused to offer concessions on ticket prices and is now hurtling toward bankruptcy at an alarming rate.

But Netflix has deep enough pockets to force the theater chains into acquiescence, simply by buying them out.

Netflix has attracted its 125 million subscribers worldwide by releasing dozens of original films and TV shows annually on its fast-growing streaming service, bypassing the traditional theatrical market, as well as the cable bundle.

Netflix has promised to spend up to $8 billion this year on original and licensed content for its subscribers who pay a monthly fee to binge shows and films. The company said in October it would release 80 original movies this year alone, and has done film deals with such high-profile figures as Adam Sandler, Martin Scorsese and the Duplass brothers.

...

The company's interest in cinemas may seem like an about-face, given Netflix's longstanding view that the traditional model of releasing movies in theaters before they hit streaming services is antiquated. Sarandos has consistently advocated for simultaneous release of movies in theaters and on Netflix, an idea that is an anathema to most theater owners.

Owning a theatrical outlet would give Netflix a boost for awards consideration and make it more attractive for filmmakers who still want to see their movies play on the big screen.

"It seems Netflix would like to get some of its movies for Oscar contention or other types of industry awards," said Eric Handler, an analyst with MKM Partners who covers the major theater chains. "They're trying to get credibility. Netflix took off when a couple of their own titles got nominated for Emmys. That lent credibility to what they're doing. If they can do that for various awards, that might raise the platform a little bit."

Since Netflix revolutionized binge watching with "House of Cards", its TV shows have been showered with Emmys. Its films haven't been met with quite the same level of acclaim.

And when it has tried to get its films into theaters, the chains have closed ranks and shut it out. Amazon, by comparison, has chosen a less combative tack whereby it partners with studios and distributors who already have relationships with theaters. The LA Times's sources claim that Landmark would be the perfect size for Netflix, because the company doesn't have quite enough heft to go after one of the bigger chains, especially after a recent wave of consolidation (as tantalizing as the AMC-Netflix hypothesis proposed by Gristina must sound to the Rainmakers on Wall Street who are clamoring for the next big tech deal).

In either case, a Netflix buyout of even a mid-sized theater chain would draw the inevitable comparison to one of Netflix's biggest rivals: Amazon. And while we imagine analysts would scramble to be the first one on CNBC to share their theory about how Reed Hastings is heading down a Bezos-esque path of expansion, we think there's a more apt comparison here.

Yes, Netflix is trying to become like Amazon by pivoting into massive cash-burning legacy projects that hold aloft the promise of future profits that would accompany its eventual market dominance - once the company manages to completely integrate every aspect of the moviegoing experience.

What's next? Producing their own concessions?

Netflix futures moved higher on the news:

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