Feb 1, 2016 · 6 minutes

Last week, I read close to a dozen stories on Amazon and Netflix utterly dominating the bidding at Sundance. The analysis has ranged from:

  • This is horrible and short sighted for filmmakers to go for quick cash rather than a traditional box office opening
  • This is some Quentin Tarantino-like revenge plot for being mostly shut out of bidding last year. (A film that the Weinsteins could have bought on the cheap in a pre-streaming era…)
  • Netflix and Amazon don’t “get” content. They can’t possible make profits at the prices they are paying. Ten million dollars for Manchester By The Sea? Without a theatrical release? Ha! There’s no way anyone makes money off that deal, Hollywood guns tell reporters with glee (off-the-record). Indeed, there’s a string of Sundance darlings that never make money-- and that’s at the prices Hollywood used to pay. The market is the market for a reason and these two players just don’t get it.

The characterizations of these two companies range from some variation on Rodney Dangerfield in Caddyshack to The Wal-Mart of movie studios to machiavellian lucifers making deals with naive filmmakers while they twirl moustaches.

Few publications have made the obvious point, and maybe that’s because it’s too obvious. There’s one reason Amazon and Netflix are wildly outbidding everyone else and making deals that seem crazy under traditional structures: They operate under totally different rules.

Actually, rules doesn’t quite cover it. They operate under fundamentally laws of gravity.

It’s not just that Netflix and Amazon have some new way of amalgamating eyeballs that can get the movies in front of more people-- although that may well be true in the case of Netflix and its data. But simply put: The movies being acquired by these two companies don’t have to make money.

Netflix in particular doesn’t look for hits. It looks for things to resonate with deep affinity audiences. CEO Reed Hastings said in a recent interview with Re/Code that he was stunned Making of a Murderer did so well. And as anyone in a creative field knows, you get mega-hits by not only trying to produce can’t miss/ profitable mega-hits.

Netflix only needs you to think the aggregate value of what it commissions and licensees is worth a small fraction of what you’ve been paying in cable for decades. It’s not uncommon for someone to buy a pay-TV package just to watch Sex in the City/ Sopranos/ Game of Thrones/ Homeland, so Netflix only needs you to feel that way about one or two of the things it produces. Doing more projects that resonate with people differently is the best way to make that strategy scale.

And all you have to do is hear Hastings talk about how he watches the data to know why the team is spending on risky, gutsy indie content. Also at the Code Conference, he said watching the number of people turn off House of Cards after the dog was shot in the opening scenes didn’t convince him he needed more or less dogs shot on Netflix shows. It just told him who can tolerate that kind of edgy content in the future.

It’s fundamentally different math. But at least Netflix wants prestige, art, quality and all the things that filmmakers wish they could prioritize over cold box office receipts and picture-by-picture profitability.

Amazon is even more fundamentally different. Say insiders at Amazon’s content machine: We can commission whatever the hell we want, as long as we help sell more shoes. Amazon’s approach to film commissioning is similar to its approach for paying authors crazy advances to join its publishing imprints or bedeviling players like Rackspace by offering better, cheaper hosting plans than anyone can match. It’s the same reason Amazon may well drive a DoorDash or Instacart out of the market. It has insane leverage on the cost side because it does so many things at such a huge scale, and intense collective purchasing power on the consumer side via Amazon Prime. Prime is like a Costco membership on steroids. You sign up for free shipping, and next thing you know you are ordering basic goods via same day shipping five days of the week, and watching TV and ordering movies on Prime because you can.

Because Amazon has built an ecommerce juggernaut that’s based on can’t-beat-em low prices, it can afford to pay can’t-match-em high prices when it comes to creative, talent and other new businesses. And as we were reminded last week, Amazon doesn’t even play by the same rules as other large tech public companies.

Amazon is a lot like Google. Google wrecked a handful of industries and startups post its 2005 IPO, because it had the strange combination of needing a big secondary revenue stream next to search, but had insane money to subsidize new products because of search. Gmail gutted the need to pay for email storage. Google Apps killed god knows how many small business cloud software businesses. And Google Drive is causing mega-headaches for Dropbox.

Even more extreme: YouTube music. Its presence in the world has united Pandora and Spotify with the RIAA, because -- for God’s sake-- at least those are companies that rely on someone paying something for music, whether it’s subscribers or an ad program that works. YouTube music, by comparison, never has to charge anyone, and by its nature can only do so much to control what is uploaded and what isn’t. Sure it can crack down, but users will just upload another version. It’s a powerful bully pulpit to force more advantageous licensing arrangements. YouTube tells the record industry they’ll all make money from ads. But ads from YouTube music aren’t gonna move the needle on Google’s quarterly earnings. The incentives are hardly matched.

On the media front, it’s a big reason Bloomberg can out report a lot of other business publications. It makes a shit-ton from its terminals. The publication that used to be known as BusinessWeek doesn’t need to be profitable. Other magazines do.

What do you do when you are competing with a company that literally doesn’t need to make money off its version of the thing you do? You can scoff that they don’t get the industry. Or maybe, they are just changing it before your eyes.

At least in film, Amazon and Netflix are being “spoilers” in the best possible way. Unlike music, they are frequently bringing larger paydays with more creative freedom to artists. They’ve hired people with experience in the industry. Even the less-cool Amazon is headed up by Ted Hope, a god of the golden age of indie movies. And users are getting amazing content at a tremendous value.

But if your job is to get an indie movie on the cheap, yep, it’s bad. And Netflix and Amazon taking a bath on the movies they just bought aren’t gonna change things. When you operate by different laws of gravity you can fly around until you get bored by it or decide you are sick of flying and want to walk again.