"At first, Sarandos spent all his time securing rights to rent out films that were playing in theaters. But he was hoping to do more. He floated what he now calls 'a harebrained idea' to produce original content to supplement the company's DVD library. But higher-ups gave him only $100,000 for the project.
'This way you won't feel so bad if it doesn't work out,' Hastings told him - so Sarandos started small. He used the funds to sign obscure, overlooked films that had no theatrical or video distribution.
The first deal - a simple revenue-sharing agreement - was for a low-budget romantic comedy called Nice Guys Sleep Alone. He'd seen it at the 2000 US Comedy Arts Festival, in Aspen, Colorado, and knew that it had languished unsigned for two years. 'It was very funny,' he says. 'Nothing groundbreaking, but it deserved to be seen.' Sarandos told the film's director, Stu Pollard, 'Send me 500 DVDs. Every time it rents, we'll pay you something.' Pollard was eager to comply - he had thousands of copies of the film in his Louisville, Kentucky, garage.
Nice Guys Sleep Alone fared so well with subscribers that Netflix doubled and then quadrupled the order. 'An awful lot of people started renting this no-name title with zero marketing budget,' Pollard says. 'As a result, it was picked up by HBO.'
Since then, the division, called Red Envelope Entertainment after the packaging the discs are delivered in, has boosted the careers of many filmmakers. It struck a deal to distribute Born Into Brothels on DVD six months before the movie won an Oscar for best documentary. Sarandos also points to the success of Open Hearts, a picture by Susanne Bier, whom he calls 'the most popular romantic-comedy director in Denmark.' It bombed theatrically in the US but did so well on Netflix that Sony is considering picking it up for wider DVD distribution."
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The technology that makes Netflix profitable and Red Envelope viable is the company's recommendation system, which Sarandos swears skirts the annoyances of similar software used by a certain popular ecommerce site. ("I went through a divorce," he says, "and I bought a book on Amazon.com about coping with it. Now you would think I'm a divorce psychologist – those are the only suggestions I get.") Netflix's version is more effective, he says, because it has more data: During the same period that an Amazon customer might select one or two purchases, a Netflix user may select a dozen DVDs. And subscribers are surprisingly eager to rate the films they view – they've already submitted in excess of 1 billion ratings, an average of 200 per person. With rich data like that, the company can develop sophisticated profiles to anticipate preferences and tastes. "It can tell that you liked The Godfather because you love family immigrant pics, and I liked it because I enjoy gangster flicks," Sarandos says. "So the next film suggested to you will be Avalon, and the next one for me will be Scarface."
Knowing so much about your customers makes acquiring unknown film properties a little less risky. It's also how Netflix determined that a critical mass of subscribers across the country – particularly the ones who loved Garden State and Sideways – would probably like The Puffy Chair, and that a critical mass of subscribers in Boston, San Francisco, and five other cities would actually trek to theaters to see it.
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Naraghi is cautious about original productions. Even if a filmmaker is eager to strike a deal, Netflix will still have to wade through a morass of details – clearing music rights, remastering the film, creating menus and bonus features – for everything it signs. "There's a limit to the appetite of the company," Naraghi says. Hastings is much more enthusiastic. He maintains that original content will be an increasing part of the company's strategy from now on. Netflix will distribute finished movies, help filmmakers complete their pictures, and even collaborate on projects that are still on the drawing board. "We're agnostic about what stage of creation the film is in," Hastings says. "That can mean some production, some finishing funds – a whole continuum." He also outlines a scenario that outstrips Sarandos' lofty vision of acquiring every picture that plays at Sundance. "About 3,000 films are submitted; only 100 or so get in," Hastings says. Ultimately, Netflix wants to be able to pick and choose from the 3,000 submissions, he explains, and maybe even allow moviemakers to circumvent the festivals altogether.
There's a link two clicks away from the Netflix.com homepage where anyone can submit a movie for possible distribution. Netflix will not only rent it out, but may get it into theaters and then help you shoot your next flick. Soon the only barrier to success for filmmakers will be lack of talent.
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