Welcome back to What I’m Hearing+, my weekly deep dive into the data and dealmaking behind the streaming business. Tonight, a look at why Netflix is resisting the industry-wide rush back to theaters, and how its content strategy connects to that 2018 Mel Gibson flick that’s suddenly trending.

But first…

• Peacock’s Cable Play: Compared to a new Rian Johnson project or simulcasting NFL games, the inclusion of CNBC and MSNBC’s morning programming on Peacock may not seem like big news. It is, however, arguably one of the biggest attacks on the linear TV bundle and, to put it in Hollywood terms, the call is coming from inside the house. It’s not Netflix or Apple or Amazon taking on additional news programming, but Comcast digging into its own cable offering to beef up its streaming platform.

  The big concern, of course, is that this will further erode the cable package and hasten the decline of Pay TV. But everything I hear from executives in the space is that while live sports or in-demand news shows (like Squawk Box) are especially meaningful for streaming properties, the effect on the cable or broadcast business is immaterial. They’re different audiences—for now—and putting Sunday Night Football on Peacock didn’t take away from viewership on NBC. It certainly didn’t make NBC any less valuable, from a fees standpoint, to cable providers.

  Instead, the objective here is to bolster Peacock as a habitual service—a place where you can start and end your day, with news in the morning and Poker Face in the evening. Plus, advertisers can target different audiences with the same programming if they’d like. The bigger domino effect I’m following is what it might mean for CNN and HBO Max. Everything will be dependent, I imagine, on how the carriers feel about this move and how well CNBC or MSNBC programming performs for the Bird.

• A Matthew Ball Bonus: It’s always a fantastic day when Matthew Ball, strategist extraordinaire, master of the Metaverse, and former head of Amazon Studios strategy, publishes. Matt also happens to be a good friend of mine, and an investor in Parrot Analytics, where I work. So I was treated to an early look at his latest mini-book on streaming—how we got here, where we’re going, and how the players are building it. The Streaming Book can be read here.

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.

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.

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.

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.