Few people know it, but Netflix has been acquiring movie theatres in recent years. These include Los Angeles’ Bay Theater, New York’s Paris Theater, and more recently Hollywood’s 100-year-old Egyptian Theatre. The stated aim of these acquisitions is to organize major premieres and to showcase some of the company’s original films. Although Netflix has always stated that there is no intention of acquiring an entire movie theater chain , it has indeed invested in bricks and mortar. That’s a fact. How can we explain this strategy, which may seem surprising at first sight from a company that has managed to survive by withdrawing from the offline side of the business?
In our book, we are quick to warn against the temptation to oppose the platform model against the more traditional value chain model, also known as pipeline. We describe reality more as a spectrum along which companies can move over time to build a hybrid business model. We provide the reader with several examples of companies that start as pure platforms, and then choose to include some pipeline aspects into their operations at some stage of their development. While platformization can be seen as the addition of platform-like elements to a pipeline business, we argue that the reverse path is equally observable.
In simplified terms, the argument explaining such a choice is to consider that there are not only advantages to being a platform, and the same goes for a pipeline. This desire to move towards hybrid models could therefore be a way to take advantage of the best of both worlds. However, it is possible to take the analysis a step further.
First of all, one could argue that while watching a movie at home or in a theater offers the same product and meets the same need, it does not provide the same experience. In a context where customer experience is increasingly central, forgoing the ability to offer a service that goes beyond simply screening a film could be a mistake, according to an expert quoted in an article in Forbes magazine:
"If [Netflix] doesn’t get into the cinema business, [it]’ll miss the entire ‘experience entertainment’ economy. If they continue to invest as heavily as they have with film, they need to get into the cinema business to take advantage of this. […] Streaming is eventually going to become commoditized and when that happens, how will Netflix remain on top?"
Then there's the question of revenue and pricing model. With a subscription model on the platform, it's complicated to measure the financial return on a particular film, since it's part of a complete catalog that's accessible on an ongoing basis. In the case of cinema, the success of a film is easily measured by the number of tickets sold. Therefore, a very big production with a 5-star cast will generate more revenue if it proves to be a box office hit at the cinema than if it is released on a platform. Having both distribution channels would therefore potentially allow greater latitude in terms of distribution strategy.
Lastly, there are still a wide variety of customer segments, some of whom are still exclusive and consume films in movie theaters. Opening up to a traditional model would therefore be a way of broadening the consumer base without creating a risk of revenue displacement, as Stephan Paternot, co-founder of online film finance marketplace Slated, quoted in the same Forbes article, says:
“You need to find a way to capture the offline world and create a 24-hour a day footprint. Netflix can get you at home but how do they get you when you leave? At some point, Netflix needs to go offline where there are still billions of untapped potential consumers.”
In conclusion, we see that between the two extremes – platform VS. pipeline, there is a richness of hybrid business models, which differ in the degree of control that the firm maintains over transactions, but which can bring additional opportunities to get more differentiated and closer to market expectations.
