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by Anthony Kaufman
July 23, 2008 4:18 AM
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Netflix Folds Red Envelope; Exits Theatrical Acquisition and Production Biz

Netflix.com

Netflix, the online film rental juggernaut, is adhering to its name: Getting out of the theatrical business altogether, abandoning film production, and focusing solely on Internet and new media distribution platforms. With the move, the company has folded its nearly 3-year-old division Red Envelope Entertainment (REE), which purchased all-rights to indie films, and will be letting go its 5-person staff, which includes veteran exec, Liesl Copland, head of Red Envelope Entertainment.

In its short life, Red Envelope acquired 126 films, including the Golden Globe nominated "Sherrybaby," co-produced a slate of movies for IFC TV (including Kirby Dick's "This Film is Not Yet Rated") and partnered on theatrical distribution for such micro-hits as "2 Days in Paris" with Samuel Goldwyn, "No End in Sight" with Magnolia Pictures, "The Puffy Chair" with Roadside Attractions, and "4 Months, 3 Weeks and 2 Days" with IFC Films.

Due to changing marketplace conditions and the natural evolution of Netflix, according to Chief Content Officer Ted Sarandos, the company decided it was time to move on. "The one thing we learned this year is that there's no shortage of produced movies and there's no shortage of money for viable projects," Sarandos told indieWIRE yesterday. "The best role we play is connecting the film to the audience, not as a financier, not as a producer, not as an outside distributor or marketer."

"It was a relevant effort," Sarandos said, speaking of Red Envelope. "But relevance and meaningful are two different things. We're very proud of the films, which were successful critically and commercially. But we don't have to own the rights to make that happen."

According to Sarandos, Netflix got into the production and acquisitions business, initially, to show distributors there was meaningful revenue to be had from Netflix. "To prove that," said Sarandos, "sometimes, you have to put your money where your mouth is."

At the IFP's Filmmaker Conference in 2006 (left to right): Netflix's Ted Sarandos and Liesl Copland, producer Jeb Brody, and directors Laurie Collyer and Michael Skolnik. Photo by Brian Brooks/indieWIRE

"But now we don't have to do that," he said. "Those distributors have deep relationships with us and they know the possibilities on Netflix. It was basically risk mitigation for existing distributors."

Since January, Red Envelope moved away from theatrical acquisitions and focused exclusively on acquiring streaming rights for Netflix, further offering distributors the "proof of concept," as Sarandos called it, "that there was revenue to be had here, both on the streaming and DVD side."

Indeed, even though Red Envelope will no longer be a key partner in theatrical acquisitions, indie distributors who have worked with Netflix still see the company as a crucial part of their business model, offering both returns on DVD and providing a licensing fee for streaming rights in the same way an HBO or Showtime pays up for cable broadcast rights. According to Sarandos, Netflix routinely provides some 75% of DVD and electronic revenue for specialty films, "and for foreign and documentary, even more than that."

With sliding DVD sales and diminishing TV licensing deals for indies, according to one distributor, "Netflix is still a place where indies overperform. So it was a great partnership."

"We had good experiences partnering with them, on 'The Puffy Chair,' in particular," said Roadside Attractions' co-president Howard Cohen. "But I think that capital-intensive theatrical releasing -- via Red Envelope co-funding releases -- was not their core business so it's no surprise that they're getting out of it."

Over Red Envelope's tenure, Sarandos said he was disheartened to see "very talented companies release some extraordinary movies with very strong campaigns, pay seven figures on P&A and only getting five figures in returns. When this happens, distributors, exhibitors and producers all lose," he said.

"I often referred to our buying all rights to movies as a necessary evil, to get to the underlying rights we needed to innovate the release windows," Sarandos added.

Liesl Copland, who said she is likely to find another job in specialized distribution that focuses on new media, said in a separate conversation that Red Envelope's closure is in some ways a result of its own success. "It was a strategic move," she said. "It's just no longer strategically necessary to buy one movie at a time when they have a tremendous amount of deals with a huge segment of the independent sector. It's been a very fast evolution."

Distributors also no longer need to see Netflix as a rival. When Red Envelope was buying streaming rights from producers, it was effectively taking licensing money from distributors. ("Unique partnerships can create channel conflict in this new evolving world," Sarandos admitted.)

But what happens to indie films without distributors? In the last year, Red Envelope had pioneered some innovative approaches to stirring buzz on unaffiliated indies to drive DVD rental traffic on Netflix, such as holding over 1,000 private screenings, with B-Side, of Michael Blieden's marijuana documentary "Super High Me" ("it's done more business on Netflix than [Fox Searchlight's] Young@Heart," touts Sarnandos) or using non-profit money to hold promotional screenings for the human-rights music doc "The Refugee All Stars," which helped drive the title's Netflix performance.

Sarandos, again, suggested that the industry take note of such experimental endeavors as a "proof of concept," paving the way for others to do the same. "What was great about ["Super High Me" star] Doug Bensen and Michael Blieden is that they had no preconceived notion about where the audience would be," Sarandos said. "The idea that it has to be in a theater doesn't serve anybody well."

Copland also said filmmakers and the industry need to move away from a theatrical emphasis. "It's incumbent upon them to release movies more cost effectively and more creatively and accelerate the downstream windows for independent film. I would hope the indie sector at large realizes how much it benefits from getting to Netflix or iTunes or whatever cost-effective ancillary platforms as quickly as possible, and not chase theatrical revenue."

As Sarandos said, "I think the lack of success in theaters for specialty films necessitates innovation online. Sometimes, the sky has to fall to be able to recreate and build new models."

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2 Comments

  • bert duckwall | July 25, 2008 5:46 AMReply

    Netflix Itself will fold within 5 years. Do you think that the studios will just let this firm make huge money off of their libraries? Either it will fold or a consortium of studios will buy it.

  • dixiefilms | July 24, 2008 8:14 AMReply

    Interesting article....this is good to know! I'm glad things are working out for Netflix...this makes us indie filmmakers just work harder!