Struggling Movie Theaters Could Be a Boon for Netflix

With its destruction ofBlockbuster, Netflix (NAS: NFLX) taught us that the envelope is mightier than the store. Now it seems that movie theaters may be next on the chopping block for the streaming and DVD-by-mail service.

Last year was another forgettable one for Hollywood. Revenues from ticket sales were off 4.5% from the year before, and attendance dropped 5.3% after going down 6% in 2010. The number of tickets sold reached its lowest number since 1995, continuing a decline that started in 2002. Taking into account recent innovations like 3-D and IMAX, which boost ticket prices, only makes the drop in sales that much starker.

The blame game
Studio execs and critics have pointed fingers everywhere, from increased competition for leisure dollars, to poorer content, to an improved home-movie-watching experience.

Strong sales of video games have left some industry insiders scratching their heads. Said Dan Fellman, a president at Warner Bros., "You look at the new Call of Duty selling $400 million in its first day and say, 'What? How is that even possible?'" Activision Blizzard's (NAS: ATVI) Call of Duty series has helped it become the largest video-game company in the United States, robbing movie theaters of the teenage eyeballs it covets. Sales of the most recent edition, Modern Warfare 3, reached $1 billion in 16 days. For comparison, North American ticket revenue for all of 2011 was about $10.1 billion.

While video game-makers have been one of the many culprits driving down theater sales, it seems like the improved quality and options of home entertainment is what's really making movie night worth staying in for. Entertainment technology is constantly evolving, and in the age of HDTV, 50-inch flat screens, on-demand services, and video streaming from the likes of Hulu, Netflix, and Amazon.com (NAS: AMZN) , consumers are finding fewer reasons to venture to the local theater.

Netflix's next move
As last year's failed negotiations between Starz and Netflix demonstrate, content providers tend to view distributors as the enemy. But the declining importance of movie theaters may force the studios to take a friendlier approach to distributors. These filmmakers need to find an audience, and their customers seem to be saying they'd rather watch these movies at home. With more than 20 million subscribers and a huge lending and streaming library, Netflix is the best potential partner for studios to make up for lost sales, especially for producers looking to fight Hulu, a joint venture of Comcast, Disney (NYS: DIS) ,and NewsCorp, and premium TV options like Time Warner's HBO.

Foolish final thoughts
Netflix's stock could be facing a make-or-break moment when it reports earnings on Wednesday. Analysts are worried about losses the company is projecting as it expands into the U.K., but I think continuing revenue growth will be a more determinative factor than any near-term losses. At the very least, demonstrated sales growth and a large customer base make Netflix an attractive acquisition target for Amazon or one of the studios, and the long-term trend away from movie theaters certainly favors distributors, outweighing any short-term expansion losses, in my mind.

Interestingly, one diamond among the morass of bad news from the movie industry was the surprisingly solid performance of independent, foreign-language, and documentary films last year. Just the kind of movies that Netflix has helped popularize through its enormous library and sophisticated recommendation engine.

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At the time thisarticle was published Fool contributorJeremy Bowmanholds no positions in the companies above. The Motley Fool owns shares of Activision Blizzard and Amazon.com and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Walt Disney, Activision Blizzard, Netflix, and Amazon.com and creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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