Discussing the implications of playing squid for Netflix and its competitors. Analyzing the situation in cinemas with far-reaching conclusions.
Disclaimer: when we talk about, that something has grown, we mean a comparison with the same quarter a year earlier. Since all issuers are from the USA, then all results in dollars. When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
Squids start and win
Even if you do not classify yourself as a connoisseur of South Korean cinema, you have probably already heard about the triumph of the streaming service Netflix (NASDAQ: NFLX) South Korean series "The Squid Game", which is already discussed even in official diplomatic correspondence.
The success of the series is very clear demonstration of the strategic advantage of Netflix over its competitors from Disney. (NYSE: DIS), Amazon, HBO Max и Apple: Unlike listed companies, Netflix has invested in original content production in countries over the years, where is she, Netflix, was officially presented. By the way,, the service is already making original content even for Russia.
Cinema, like the stock market, - it's always a guess: you never know, which movie or the series will be able to "shoot" for an international audience. In the case of Russia, for example, these were the series "Epidemic" and the comic book movie "Major Grom". That's why, spreading investments widely around the world, Netflix is very wise: content from the regional market may suddenly be liked by viewers and from America or Europe, increasing the overall attractiveness of the platform in the eyes of users.
And that, investing in original content outside the US is very cost effective: the cost of labor in other countries is much lower than its quality. For example, production of one season from 9 The Squid Games episode cost Netflix $ 21.4 million. This generated approximately $ 891 million in revenue for the company through an influx of subscribers., according to company data. It's hard to say, whether it's subscription revenue or something else: internal metric "Benefit".
By the way,, content, created outside the USA, has historically shown very high profitability due to “re-exports” to the USA. Take, for example, spaghetti westerns, filmed mainly in Italy during the period 1960-1970. For comparison: American "Magnificent Seven" cost 2 million dollars and raised 4.5 million, and the Italian "Good, bad, evil" cost 1.2 million and collected almost 25 million. If you take the relatively cheap Italian "A Fistful of Dollars", it was also a very profitable investment.: cost only 200 thousand dollars, grossed 3.5 million at the box office.
Little has changed since then: even the developed countries of Western Europe are more profitable than America. English TV series "Peaky Blinders", which is now owned by Netflix, cost $1.5 million per episode, while the American TV series "Bloodline" cost at least $ 7 million per episode - and the same success, like "Visors", obviously didn't have. Actually, the cheapness of European labor explains the dominance of the British in Hollywood. Well, you already know the prices of South Korea.
So the sudden insane success of "Kalmar" increases the chances, that Netflix will be able to save a lot on content production without hurting the business. In one of the previous news releases, we analyzed the problem of a possible increase in the cost of content for Netflix, because she will have to compete with Disney for the work of superstars and popular authors. 'Kalmar' could turn the tide in Netflix's favour.: why pay a lot of money to produce a new James Bond, if for the same money you can make more than ten "Squids" - and one of them will definitely bring a lot of money, and the rest will probably more or less pay for themselves?
Years of Investment Outside the US Automatically Gives Netflix a Big Head Start. How the film business is structured extremely opaque, personal connections and previous work experience play a huge role in it.: maybe, did you pay attention to, how directors drag the same people from one movie to another. So if we assume, what, say, Disney will now try to replicate the success of Netflix and organize projects for the local market in other countries, this event will take time, and money - and generally without a guarantee of success. After all, there, where local filmmakers have already worked with Netflix, they have, probably, will not be willing to take risks with Disney.
Here you also need to understand the specifics of the film industry.. She's all about freelancing., almost the entire film crew gets paid only then, when there is work. Shooting period, like in the construction industry, limited to warmer months - so almost all films and series are filmed at the same time. As a matter of fact, filmmaking is a seasonal job, how, for example, at summer resorts: when the shooting ends, everyone lives on what they earn until next season. Therefore, content creators cannot physically take on several projects from competing studios at once.. And the number of efficient content producers in each country is limited - and, frankly,, hit, inflicted by the pandemic on the entertainment industry, does not contribute at all to the growth of the labor pool in regional film markets.
So if Disney expands to South Korea, it will have to compete with Netflix for the same workers.. AND, honestly, given Netflix's established reputation among non-American production crews, I see no reason for that, to have them all go to Disney. Stability for content producers is everything. For example, Patrick Stewart should never have gone to the US to play Captain Picard in Star Trek, because, wasting time moving and filming the pilot in America, he risked his theatrical career in England, which gave him small, but more or less stable money, - and the series with him might not have been extended to a full season, not to mention ordering subsequent seasons.
In this regard, analysts expect the financial performance of Netflix to grow in the report, which will be released tomorrow. In my opinion, it's premature: the report will be the situation as of the end of September, before the start of the rampant "squid mania", - think, the main effect will be in the report, which will be released next year.
Netflix will also start selling merchandise with the symbols of its films and series.. Understandably, that the share of these sales in the total revenue structure will be small, but, On the other hand, over long distances this is a significant plus. The magic of cinema is, what's popular content, gaining cult status, remains popular for decades - and you can earn good money on related products. For example, the Star Wars franchise, "Pokemon", "Batman", "Winnie the Pooh" and "Mickey Mouse" make the main money on goods with their own symbols.
Not the last movie
Now let's discuss the cases of other filmmakers.
Note: studios get about 50% from fees in cinemas. That's why, so that a $ 100 million movie would just recoup the costs, his fees should be approximately $ 200 million, and preferably even more, since it is unknown, how much exactly was spent on marketing. The film industry is notorious for the opacity of many spending items - marketing is the worst, the costs of which are sometimes included in the total amount of the budget, sometimes it doesn't turn on.
All in all, when the article says, that the film "didn't break even" or "turned in profits", this means: we divide the box office in cinemas by two and consider the unprofitability or profitability of the film already from this result.
Data from American cinemas arrived in time - and they are generally positive. The latest "Bond" collects money at about the level of the previous parts, though it hasn't paid off yet.. "Venom-2" has already brought the creators a profit - approximately 23%, even though it's not over yet. This debut weekend, the new part of "Halloween" has already recouped the costs of its creation for the studio-creator and brought about 25% arrived.
The "Halloween" case is most interesting, since the film was released simultaneously with the theaters on the streaming service Peacock, which is owned by Comcast, - but not seen yet, to spoil the fees. Certainly, this is noticeably worse than the $ 76 million of the first film, but you have to blame the pandemic, not a hybrid release. Also, the new Halloween is closer to the Kalmar in terms of recoil: the film is very cheap - a budget of 20 million dollars. Very likely, that content producers in the US will target roughly the same level of investment.
"Venom-2" is indicative in its own way: he demonstrates the benefits of saving on English labor - a new film about the symbiote, unlike the previous part, filmed by Englishman Andy Serkis, and Tom Hardy has not become less English since the release of the first part. Overall, the film only cost $110 million - which isn't that much., Considering, that the first part was worth 100 million. So the increase in expenses was actually at the inflation rate., which is almost a miracle, considering the huge box office of the first film, - after all, after the big box office of the first film, the costs of sequels often grow, as the team asks for more. Therefore there, where American studios can, they will save on large projects by using cheap European labor. This, certainly, only palliative, not a solution to the problem of low profitability of expensive blockbusters in an era of perpetual pandemic.
New "Bond", as the most expensive film in today's box office - a budget of 250 million, - in a pandemic, it may not recoup the costs. In my time, when the pandemic was just beginning, they wanted to sell it to a streaming service, but did not find a buyer at the price of interest to the creators. The pandemic, meanwhile, has become the new normal., and if the new "Bond" does not bring enough money to the creators, then we can wait for the revision of the policy of creating content by large studios in the direction of abandoning large projects, which can only pay off in cinemas and only under normal rental conditions.
All the movies discussed now are parts of major franchises., which is also not very good for customer studios, how streaming, as well as cinema. Rights to established franchises or just new content from established authors can be expensive. So, Netflix spent $31 million on the rights to make content based on Mark Millar's comics. You can say, got off easy, but the Blackstone investment fund bought Reese Witherspoon's film studio for about 900 million. Maybe, studios will spend money on buying the rights to any more or less promising content.
For example, Paramount, which is owned by ViacomCBS, bought the film rights to the thriller Razorblade Tears by Sean Cosby, which must have cost them little: Cosby lives in the rural backwoods of the American South and has gained moderate popularity more recently.. But buying up intellectual property and more famous authors may not bring the expected results.: Neftliksov TV series "The Legacy of Jupiter" based on Millar's comics, judging by the news of its cancellation, did not justify any 130 million budget of the series, nor the company's hopes for milking Millar's legacy. So with spending on content, American studios are not even waiting for a lottery, and Russian roulette.
However, it's more of a disaster for Netflix and Apple, whose intellectual property fanbases are still more modest, чем у HBO Max, which has "Game of Thrones", DC Universe and ViacomCBS with their Star Trek. Therefore, one can expect, that both companies will compete fiercely for the rights to new content. And Apple's bottomless pockets will come in handy here.: thanks to the company's core business, it will also have money for the studio, and on the stars. However, on the example of "Kalmar" we have already seen, that a fan base at Netflix could suddenly appear out of nowhere. It is very typical here, that the creator of the "Squid Game" 10 years looking for funding for his project and at some point he even had to sell his laptop due to financial difficulties.
Hollywood strike of 40,000 workers ends before it starts, since the workers have agreed with the studios, and with streaming services about wage increases. The consequences of this will be reflected in the reporting of the respective companies during this year - and, probably, worst way, therefore, shareholders of film content studios should prepare for bad news. However, there is some good news here: studios have been able to avoid downtime and will be able to start producing content soon, which will then attract subscribers to their services - and viewers to cinemas.
