Member Mailing #258 Preview: Netflix Bets A Half-Billion on Benoit Blanc
Netflix’s $450MM bet on the Knives Out franchise is not Netflix flexing its muscle, but rather reimagining how to deliver "cultural impact" with less DTC spend
You are reading a preview of PARQOR Member Mailings. To get read the rest of this Mailing and to get deeper analysis that ties the big picture of the streaming marketplace to executive and investment decision-making at streaming companies, click below to subscribe now.
Key Takeaways
Why are the two Knives Out sequels alone worth nearly half a billion dollars to Netflix? A simple but abstract reason is: after reducing advertising spend by $432MM in 2020, Netflixis evolving its marketing model away from direct-to-consumer marketing
Netflix’s growing bets on expensive, star-driven Hollywood movies have proven to be the best investments for a feedback loop between marketing and its recommendation engine for users, in both the short-run and the long run.
Perhaps the best way to think of Netflix’s $450MM bet on the Knives Out franchise is not as Netflix flexing its muscle, but rather as a necessary step in its reimagining of how Netflix will deliver “cultural impact” in a world where DTC marketing has fewer returns.
…it’s not unusual for a Hollywood studio to spend 50%, 70%, sometimes 100% of the production budget of a film in marketing to get people out to the box office on opening weekend. Now, we do a fraction of that for our advertisers — in terms of paid advertising for our films and yet, we’re getting 70, 80, 100 million folks turning out to watch those movies in its first 28 days, which is like a $1 billion box office in terms of cultural impact. So when I look at that and I think that’s the enormous promise of the scale and the recommendation engine, the value of the recommendation on Netflix to make sure you have a great experience and come back looking for the next one.
Above is the first part of an answer from Netflix Co-CEO Ted Sarandos during its Q3 earnings call. The sentence in bold came to mind after reading the news that Netflix will spend $450B on a deal to make two sequels to the 2019 hit mystery movie Knives Out. Director Rian Johnson will reunite with actor Daniel Craig, who will reprise his role as super sleuth Benoit Blanc.
Why are these two movies alone worth nearly half a billion dollars to Netflix?
The quote above offers the simplest answer for why Netflix made a bet that big: if it can get “70, 80, 100 million folks turning out to watch those movies in its first 28 days” at the Average Revenue per Membership (ARM)1 of $10.87 from Q4, both movies can attain the streaming equivalent to “$1 billion box office in terms of cultural impact” in two different years.
That phrase, “$1 billion box office in terms of cultural impact”, taken on its own elicited skeptical responses, best reflected in “Is Netflix actually making the cultural equivalent of billion-dollar movies?” from The Verge.
But, that is not Netflix’s ROI equation for investments, nor is it a new ROI equation that Sarandos was proposing to investors. Rather, Sarandos was answering the second of a two-part question from research analyst Kannan Venkateshwar of Barclays Bank PLC for Netflix management, which can be summed up as:
How much of content consumption is driven by the recommendations that you put up on the screen versus other sources potentially?
As they evolve the Netflix platform, how do they measure performance? And, in particular, how do they measure performance for the content team?
I think Netflix management’s answers to these two questions help to tease out why Netflix made a $450MM investment in the Knives Out franchise. They are especially helpful because so much of this story seems to suffer from a black box problem:
the auction was “discreet”, according to Deadline
we do not know how Netflix is calculating ROI on the investment
we do not know why Apple and Amazon each projected ROI on the two films at bids near $450MM given that neither has yet to disclose paying subscribers
We may not get THE answer for why Netflix made such a large investment because there is so much opacity to the deal. But in exploring Netflix’s answers to these two questions from Q3, we do get a better sense of why they spent nearly $500MM on two movies whose original was produced for a reported $40MM.
The simple but abstract reason is: Netflix needs to evolve its marketing model away from direct-to-consumer (DTC).
This has been a preview of this week’s Member Mailing. Subscribe today for just $33 per month to connect the dots to unlock your competitive edge!