Over the last week, I’ve had multiple conversations with incredulous streaming insiders about two Netflix developments. The first revolves around why various old, not-especially-popular movies continue to pop on the streamer, often surging to the top of its most-watched list. For instance, Dragged Across Concrete, a critically acclaimed but semi-controversial Mel Gibson vehicle that bombed at the box office in 2018, hit No. 4 on this week’s English-language films list.

The second pertains to the mystery of why Netflix is ignoring theaters. It’s a constant, and often aimless, talking point that resurfaced in recent days following the news that Apple and Amazon are looking to bring more feature films to exhibition instead of depositing them directly on their services. 

Even if they’re not particularly novel observations, they are worthy questions. Business models aren’t commandments written in stone: they oscillate as markets evolve and competitors experiment. Netflix, after all, has already adjusted several foundations of its model: adopting ads, for instance, experimenting with non-binge releases and live programming, like its recent Chris Rock special and the upcoming SAG Awards. 

But Netflix has repeatedly resisted calls to debut original movies in theaters (with a few exceptions) and continues to double down on its earlier, pre-Roma era strategy of licensing third-party films and TV to supplement its pricey originals. Netflix’s originally produced shows and movies reached a peak of nearly 60 percent of all content last year, according to a recent MoffettNathanson report, but that number appears to be trending down as executives shift back toward lower cost licensed content to hedge their downside risk.

On the surface, the answer to both questions comes down to the fact that Netflix is big. For comparison, of course Apple will open its upcoming Oscar-bait Martin Scorcese flick, Killers of the Flower Moon (starring Leo DiCaprio and Robert De Niro, among others) in theaters, partly because that’s what Scorsese wants and it’s a way to better monetize its big investment in the production. Apple TV+ has only 30 million or so paying subscribers, according to recent estimates. That’s less than half Netflix’s subscriber base in the U.S. and Canada alone, and less than 15 percent of Netflix’s global scope. Apple can’t release a movie on Apple TV+ and simply hope people show up; that’s like trying to light a fire without kindling. Sure, executives would love for Killers to make money at the box office, but the real goal is to rack up buzz and awards that serve as an advertisement for the platform and give the film a long monetization tail. 

Netflix doesn’t need the exposure, and, more importantly, exhibition is not an economical use of its time or resources. While its streaming rivals are all pivoting back toward a theatrical-first, platform-agnostic content strategy, Netflix’s unique advantage is its ability to leverage its massive scale and sabermetrics-style data supremacy to create its own buzz, and even do what no one else in Hollywood can: resurface overlooked, licensed content and turn them into bonafide hits.

Capital Efficiency

To understand Netflix’s financial calculus for ignoring theaters, it’s important to explain how most entertainment companies actually monetize films. After all, most movies don’t make their profits in theaters. With the high cost of production and marketing, plus the 50 percent cut taken by exhibitors, most films are lucky to break even in theaters. The real money for studios comes from the so-called Pay-1 and Pay-2 windows. 

For those unfamiliar: After a movie plays in theaters, whether it’s 45 days or 90 days, the film goes on a distribution journey. It’s made available for digital rental or purchase and then might play on HBO for six months before winding up on FX for another nine months. These are the Pay-1 and Pay-2 licensing deals. Not only are these windows important to the film, but they also drive revenue for the distributors that license them. That was the original model for HBO, after all: Home Box Office. 

Take a company like Sony Pictures, which released about 17 feature films in 2022, according to film tracking site The Numbers. Six of those films made about $50 million in domestic theaters. The highest-grossing film was actually a 2021 title, Spider-Man: No Way Home. Between marketing, talent compensation, and exhibitor fees, Sony still did well in 2022 compared to competitors. But where Sony really succeeded was in its Pay-1 window deal with Netflix, which will generate more than $1 billion, and its Pay-2 deal with Disney. The better Sony’s films do in theaters, of course, the better its initial revenue. But it’s the second bite of the apple, on streamers and cable, where Sony generates steady revenue with no additional cost. 

Netflix, by comparison, isn’t a theatrical company and, most importantly, doesn’t have a windowing strategy where it rents or licenses its content after a theatrical run. Some have argued that co-C.E.O.s Greg Peters and Ted Sarandos should reconsider this strategy. Obviously Netflix isn’t paying itself when it moves its own films, like Knives Out, from limited theatrical runs to its streaming platform. But all third-party data indicates that the theatrical exposure helps films perform better during their pay windows on streaming. Nevertheless, there is understandable reluctance at Netflix to pivot away from the company’s proven thesis in order to compete against incumbents in the theatrical space. 

Perhaps as a result of broader economic headwinds, and macro factors like the Fed’s rising interest rate policy, Hollywood has pivoted from Kilarian futurism to Zaz-like realpolitik. As I’ve written before, so many decisions in the entertainment industry these days essentially boil down to the question of capital efficiency: How do you squeeze the most money from every single solitary entertainment asset? For Warner Bros. Discovery, that has meant an increased openness to licensing formerly prized content, such as Westworld, to other platforms. For Apple and Amazon, it might mean justifying the cost of theatrical debuts as marketing for subscription bundles that include streaming video. 

For Netflix, capital efficiency seems to mean making fewer originals, staying out of theaters, and tactically scooping up previously underperforming and under-optimized titles from competitors. Those movies may not mean as much to a general entertainment platform with one third the subscriber base, but on Netflix, where everything old is new again, trying to create a theatrical business through massive investment and then finding windowing opportunities to make that opportunity grow (like licensing to a FAST channel or to linear partners) may not make sense. Even if everyone in the industry is screaming at Netflix to do the opposite. 

Borrowed Rotating Highs

Indeed, it may be that the entertainment ecosystem is evolving toward a new equilibrium where Netflix, like Blockbuster before it, is effectively the final destination for certain films. (Irony alert: as everyone knows, a high-on-its-own-supply Blockbuster once turned down an opportunity to buy Netflix for $50 million.) This is a great opportunity for films with a large potential audience that, for one reason or another, failed at the box office. 

Dragged Across Concrete is the best recent example of this phenomenon, but it’s hardly the first. The same thing happened with 2011’s Tower Heist and 2015’s The Age of Adeline. With those films, Netflix isn’t simply operating as a second or third stop for a film after its Pay-1 or Pay-2 window on cable—it’s functioning as a uniquely powerful discovery platform.

I have a term for this: borrowed rotating highs. Since Netflix doesn’t have a steady stream of its own well-known original films to cycle through, like HBO Max, or a Friends or Big Bang Theory-type show to generate rotating highs from its own content house, the company has to make its borrowed content feel new. This is why five-year-old movies like Dragged Across Concrete have a “New” tag on the thumbnail, and why Google Search results pick up on people talking about the “new” Netflix title. This isn’t necessarily a fresh practice; people thought Riverdale, which Netflix added to its slate in 2018, was a Netflix show because Netflix advertised it as such internationally. Nevertheless, it’s a savvy tactic that’s made all the more powerful by Netflix’s elegant homepage design.

If you look closely, you’ll notice that Netflix inserts older, non-original titles alongside new, original series or films to make everything appear fresh. The first or second row might target subscribers with “New on Netflix” language for two-decade-old films, but whether a subscriber knows it’s a Netflix original or not, it’s inherently new to their Netflix experience. That makes it seem more valuable than stumbling across an old film playing on TBS, where the labeling isn’t “new to basic cable.” Somehow, Netflix has managed to make reruns feel surprising.

The Most Valuable Real Estate in Hollywood

Netflix’s other superpower, of course, is the gobs of data it collects from its 230 million subscribers across 190 territories and markets. In the case of Squid Game, for instance, Netflix gathered early signals that engagement was spiking in South Korea, then Japan, for example, and then perhaps in Singapore. Netflix saw that spark ignite the kindle across country to country starting with the original market. The team in Los Gatos then quickly surfaced the series onto homepage carousels in other countries to keep up with social buzz. As initial data proved out an emerging thesis, Netflix reconfigured its in-app experience to ensure that as many subscribers as possible were introduced to the series when they next logged on. 

This viral hit-making ability has made the carousel on Netflix the most valuable piece of real estate in Hollywood. Squid Game doesn’t happen with every title, obviously, but the refresh of the borrowed rotating high provides many opportunities. Could Netflix start windowing  some of its bigger films? Could it license them to a competing platform for a few months, and then bring them back to Netflix? 

I don’t think so—that’d be like Disney licensing Black Panther: Wakanda Forever to Netflix and then bringing it back to Disney+ nine months later, causing brand confusion, among other financial leakage. But if the bet is that Netflix’s audience is the reason for a film’s second-wave success, the company could presumably find a windowing strategy that offers a second gasp for its own productions that might not have popped, for whatever reason, the first time around.

This feels like the principal question that needs to be answered before Netflix starts putting films in theaters. But it’s also worth highlighting something Netflix film chief Scott Stuber said to Bloomberg—before conversations about theatricality, Netflix needs to make theatrical-caliber films. This isn’t just important for a strong box office outcome; it’s necessary for negotiating strong Pay-1 and Pay-2 windows. And until Netflix has that figured out—ramping up a theatrical marketing division, for instance, and working with agents on trickier talent deals—don’t expect a major theatrical push any time soon.