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Netflix's Long Tail is Forcing the Entertainment Industry to Evolve

03/02/2014 13:55 GMT | Updated 05/04/2014 10:59 BST

Netflix is threatening the giants of the entertainment industry. The company started by targeting cable channels, leveraging a huge catalogue of content to build a subscriber base and challenge these businesses' distribution models. Now it's set its sights on cinemas.

Ted Sarandos, Netflix's head of content, used a keynote at the Film Independent Forum to announce the service may follow-up on its small screen success by producing movies. It makes sense, but it's the scathing attack on theatres that followed, which raised eyebrows: "The reason why we may enter this space and try to release some big movies ourselves this way is because I'm concerned that as theatre owners try to strangle innovation and distribution, not only are they going to kill theatres, they might kill movies."

Television and cinema executives listening to Sarandos' speech must have felt like the heads of large newspaper groups in the mid-2000s. The increase in broadband speeds have allowed streaming services to build new content platforms, which question the validity of their distribution models in the same way the internet challenged print publications.

The long tail theory suggests there's a huge demand for products beyond the high-volume items brick-and-mortar shops can offer, thus Amazon's huge warehouses help it outperform HMV. In this mould, Netflix licensed a huge library of content to target niche demand and build its subscriber base. It was able to use this 'tail' business to invest original programming, from the Emmy-award-winning House of Cards to a recent Disney deal for four new Marvel shows.

Netflix plans to challenge cinemas' tradition of showing films before other platforms like it challenged the tradition of releasing dramas by region and airing episodes on a week-by-week basis. These companies rely on these distribution windows, which Sandros describes as "antiquated", to maximise revenue in a low-margin business.

This means streaming services' strategies can better cater to the evolving habits of viewers. In a TV executives' roundtable titled Frustrations with Netflix panellists pointed out that people are waiting for on-demand releases, rather than joining in mid-series. Subscribers have also started to 'binge-watch' TV shows and the lack of advertising lends itself to exactly the kind of movie-quality programming that has been on the rise since Tony Soprano ran down degenerate gambler Mahaffey in the opening scene of the hit TV show.

The question remains how television channels, and indeed theatres, will meet the kind of structural change in distribution Netflix and its competitors are advocating. Larger channels are investing in on-demand services, but they can't generate the kind of revenue needed to sustain their production, advertising and distribution activities.

It gets more difficult when you look at smaller operators. I imagine a channel like Dave views Netflix's business model with a certain level of trepidation. The "home of witty banter" was a pioneer in its own way, winning record-breaking digital audiences by bringing back cult TV series Red Dwarf in a similar fashion to Netflix's bringing back Arrested Development. It's hard to believe viewers would be willing to tune into the re-runs that make up the bulk of Dave's programming when they can get the same shows on demand and advert free.

You can imagine steaming services forcing large networks to concentrate on bigger shows, reality TV and live events to maintain their dominance, while smaller companies go out of business. The worse thing that could happen is that the industry drags its feet or these companies think their long-term status as gatekeepers guarantees their survival. Cinema chains are already teetering on the edge and, as Sandros suggested, will fight tooth and nail against any challenge to the "theatrical window".

For Netflix the question is whether it can sustain its huge investment in programming. The only monetary benefit headline-grabbing series like The House of Cards provide is from new subscribers, they don't generate additional revenue from existing viewers, and this leads to diminishing returns. It's also facing increasing competition from other streaming services. Amazon Prime just launched two original dramas and others are set to follow.