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David Poland

By David Poland

Delivelution 4411: Is It “The End Of The World?” (Part 1 of 2)

20th Century Fox co-chairman Jim Gianopulos is not dumb man. However, his Sunday morning phone interview with the New York Times tells us that he is either ignorant of history or spinning his ass off on behalf of the studios.

In fact, Jim G made things even worse for exhibitors by exposing the ultimate goal for the studios here… which is to so destroy the windowed structure of the film business that they are all but guaranteed to disappear. And not only does he not suggest that there is any room for negotiation with exhibitors, but he kinda brushes them off like he could not care less what they think is good for their business… studios are going to move forward regardless.

For the record, I have been told by a source that I trust completely in this situation, that the studios had no intention of releasing news of the DirecTV deal while CinemaCon was going on, that studios were almost as angry as exhibitors that it happened (laying the blame on DirecTV’s loose lips), and that they completely understood why it was so irksome for the exhibitors. So… perhaps not as much of an asshole move by the studios as it seemed.

But still, in the end, the other shoe dropping on shortened windows, however announced, is a serious matter. And moreover, the studios continue to talk about this entire paradigm shift as though the exhibitors are a non-issue and the studios should feel free to experiment this way and that way and determine, as the mood takes them, what is most comfortable for them.

The single biggest thing that the studios are not taking into account or pretending not to understand is that as they destroy long established structure, it cannot be as easily rebuilt as torn down.

Gianopulos offers what I will assume is the MPAA position to be… “You survived TV… you survived VHS… you survived DVDs and Videogames… you’ll survive this. So stop whining and improve your theaters.”

But he is either unaware or playing possum by not acknowledging the price that was paid as each of these changes came along. TV did, after about a decade, functionally end The Studio System as it had existed for the first 4- 5 decades of the movie business. What most critics think of as The Golden Age Of American Cinema, the late 60s and early 70s, was not often a function of good intention, but of mass confusion, as the studios turned everything upside down, were sold to new owners with no movie business experience.

MCA bought Universal in 1962, rich with money from TV and music, and then dumped the agency business. Gulf & Western bought Paramount. Disney was barely in the theatrical business, shifting resources to TV and losing its founder. Fox struggled with the end of the Zanuck era, getting new life with Alan Ladd, Jr, but still being sold a year after Star Wars hit. Columbia struggled after Harry Cohn died, then found some success under David Begelman, but then lost steam again as he got caught forging a check, and was finally sold to Coca-Cola in 1982. Warner Bros was sold in 1966 and then again in 1968. MGM was sold in 1966 and then, again, in 1968 to Kirk Kerkorian (the first time).

That would be a complete reboot of the film industry.

But the industry survived. So now, it is ancient, little-mentioned history.

VHS arrived in the US in 1977. VHS was primarily a rental business, by design. Tapes of films were generally $79.95 and above, in inhibiting the sell-thru business and in essence, paying the studios for the money being made in the rental business. In 1981, HBO went 24/7, creating another competitor for exhibitors, though 15 movies a day was the absolute maximum that could be broadcast in the daily time frame and it was usually fewer than 6, as the films repeated each day they played. Blockbuster launched in 1985.

As all of this was happening, business for exhibitors was not just going on as usual. Star Wars was a wide-release smash… that never got past 1100 screens. Even with Star Wars, Raiders, and other franchises developing, filling the massive single-screen theaters was a problem. The plex-ing era had begun, which involved some multiplexes built from scratch, but mostly meant splitting bigger theaters. Even though it was brutal in terms of the quality of the movie experience, It was a matter of survival for exhibitors.

Studios were happy to be getting in new revenue streams and the exhibitors were paying to redesign and rebuild their theaters. 1982 was the first $3 billion theatrical year domestically. $4 billion in ’84. $5 billion in ’89. $6 billion in ’97.

The industry survived rental VHS. So now, it is ancient, little-mentioned history.

But why did it take 8 years to get from $5 billion to $6 billion on domestic screens? I would argue that a change in policy about VHS made a big difference. In 1989, Batman became the first mega VHS-sell-thru movie, priced at under $20 retail and available widely for about $15 just over 4 months from theatrical release. In 1988, the two biggest movies, Rain Man and Who Framed Roger Rabbit? grossed over $1m a weekend for 24 and 17 weeks, respectively. In 1989, after Batman announced that it would be on sell-thru VHS by Thanksgiving, in spite of having the then-biggest opening in movie history, it was under $1m a weekend in 14 weekends.

The next year, Home Alone and Ghost were both back up in the 20+ weekends of $1m or more at the box office… which befit their VHS releases scheduled at least 8 months after release for each film.

VHS Sell-Thru was eating away at the theatrical window already, but the VHS revenue was increasing while the rental business was controlled by the studios via Blockbuster and a deal that put more copies of the films onto the rental company’s shelves while giving the studios a more stable return on rentals.

By 1996, just before DVD launched as a sell-thru first business, the summer blockbusters were presumed to be heading to VHS in time for Christmas gifting, 4 – 5 months. And so, ID4 and Twister had 18 and 16 $1 million dollar weekends, respectively. The #3 film of the year, Mission: Impossible had just 9 such weekends.

The studios had shortened the window by shortening the VHS sell-thru window and getting people used to that expectation.

But the industry survived VHS sell-thru. So now, it is ancient, little-mentioned history.

And then on March 26, 1997, DVD arrived. Studios agreed from the start that it would be a sell-thru medium. And it sold. And it sold on a level that was well beyond studio expectation. The first DVD from a studio was Twister and it was released 10 months after it launched theatrically.

As the DVD wave was becoming a bubble, the exhibitors, inspired by the cheap capital floating around because of the dot-com bubble and the threat of DVD as the highest quality home entertainment experience ever available, started building new movie palaces, with each seemingly attempting to out do the last. Some of it started even before 1997, though the most infamous megas opened just about the same time as DVD launched, at Ontario Mills, CA, where AMC opened a 30-plex and Edwards/Regal (then Edwards) built a 22-plex with an IMAX screen, just across the parking lot.

This kind of thing was happening all over the country. There was a lot of fighting over who controlled what region in different cities (including here in LA).

1999 – $7 billion domestic gross. 2001 – $8 billion domestic gross.

But the increasing grosses were not the #1 story for exhibitors. Their bottom line was that as the dot-com bubble burst and interest rates rose quickly, from 1999 -2001, Regal Cinemas, United Artists, Carmike, Sony’s Loews-Cineplex, Edwards, Silver Cinemas/Landmark. and General Cinema (GCC) all filed for bankruptcy.

Exhibition did not collapse. In fact, it was revitalized. But most of the single screen houses were gone. Mom & pops were decimated. And it’s not as though going through the bankruptcy process to get a new generation of theaters was an easy or pleasant journey for the big players either.

One of the major casualties in this was the second run business. With the combination of DVD quality, a shorter window, older and less comfortable facilities, landlords that were looking for 1st run rents, and studios moving things along, the business collapsed.

Still, the exhibitors survived. And the distributors had an even better set of tools through which they could hock their wares. So now, it is ancient, little-mentioned history.

2002- $9 billion cracked. 2004 – $9.38 billion

2005 – The False Slump is created almost single handedly by The New York Times. The box office ends up down for the year by almost 6%… after the biggest year in the history of the movies to that date. Twenty years earlier, almost the same thing happened, as the first $4 billion domestic grossing year led to a 7% drop in 1985.

2005 was about $540 million behind 2004. But because that discrepancy started in February – where 2004’s The Passion of The Christ outgrossed 2005’s biggest Jan-Feb film, Hitch, by $190 million domestic – the choice to disregard the anomaly made it possible to spin the numbers to look like a problem. The theory was that home entertainment systems, video games, the internet, and texting were keeping the audience away from the theater.

With adult dramas Kingdom of Heaven and Crash leading off Summer 2005 instead of 2004’s Van Helsing, there were 3 May blockbusters instead of 4… more “proof.” Instead of considering the schedule, journalists made the case for weapons of mass distraction from movies that they wanted to make. In July, War of the Worlds didn’t do Spider-Man 2 business and there was nothing to replace the $100m phenomenon of Fahrenheit 9/11.

When the worm started turning in July, with Wedding Crashers, Charlie & The Chocolate Factory, and Fantastic Four, the Slumpers stuck to their guns and started counting how many weekends of the year hadn’t matched up… and then started talking about ticket sales vs gross. As the week-to-week comparisons started to go the other way, there was silence in the Slumpers camp. There was a resurgence in October, when DWA released Wallace & Gromit, which was no match for 2004″s Shark Tale. But the slump talk was pretty much over.

Because the New York Times started it, it lingered… and lingers to this day.

Still, it was just media frenzy… until some studios started using this to get serious about attempting say-n-date releases of DVD. (Please note: Streaming is not what makes this issue heat up… technology is just an excuse.)

The $1 million per weekend window had been winnowed down by the studio push to front-load and get out the DVDs to just 10 such weekends for the biggest hit of 2005, Star Wars: Episode III – Revenge of the Sith. The DVD window was just under 5.5 months. War of the Worlds… just under 5 months.

The problem is this… there is no way to know how these windows change the theatrical viewing patterns. Would more people be going back to Star Wars after Weekend 10 if they didn’t know the DVD was less than 4 months away at that point? And would that business gained be worth a delay in the DVD release for Lucas or Fox?

There was a lot of talk about “fight pricing” back then. All the rationalizations we’re hearing now were mouthed then.

I was reminded recently that at a SXSW panel, I argued that cinemas would be shuttered by now if this push to day-n-date was continued.

2006 – $9.2 billion, up 4.6%. 2007 – $9.6 billion, up 4.9%

The fever broke. Day-n-Date was abandoned… for the time being. Happy cash flow has that effect on studios.

The exhibitors had survived anti-theater hype and the threat of day-n-date. So now, it is ancient, little-mentioned history.

2009 – cracking $10 billion domestic theatrical.

But the DVD bubble is burst… big time. And library valuations are cut to a third or what they were just a few years earlier.

Studios have cut the DVD window down to about 4 months.

2010 – The highest grossing movie in history, Avatar, beats the previous champ, Titanic, by more than 50% on worldwide gross. Titanic was ahead of its then-#2 (Rings:ROTK) by 64%.

Netflix has broken through the streaming barriers and is now paying studios premium prices for aging content, pushing the value of libraries back upwards.

Disney wants to cut the DVD window to 3 months, gets resistance, and negotiates terms with exhibitors, which basically call for a couple of exceptions a year.

2011 – Studios decide on a 60 day window, not for regular DVD, but what they are calling Premium Video On Demand. No negotiation with the exhibitors. No clear offer of plans for what films will be sold this way. Test films have all already played at least 8 weekends in theaters, making it impossible for exhibitors to punish them retroactively.

Is the sky now falling?

My answer in Part 2.

13 Responses to “Delivelution 4411: Is It “The End Of The World?” (Part 1 of 2)”

  1. leahnz says:

    my god, after all that there’s a PART DEUX?

    (nah, just kidding)

  2. movielocke says:

    it wasn’t TV that killed the studios, though TV is often blamed. Television absolutely Did Not have the market penetration to affect the amount of change attributed to it.

    Rather it was:

    1. The Paramount Decision – the most important court decision in the history of hollywood.

    2. The GI Bill / Suburban migration – by 1950 soldiers have finished college, got a job, moved to suburbs, and started families. Those that didn’t go to college have probably relocated to an area with industry to support a well paying blue collar union job, and after about the equivalent amount of time (four years) have married, moved to the suburbs and started a family.
    — There were no theatres in the suburbs.
    — Without exhibitors people couldn’t go to the movies as casually, and they turned to the Radio and also to television for entertainment.
    — if There are a shit ton of younglings around (the fuckers that are bankrupting the country right now with their single payer socialist health insurance known as medicare) it’s hard to herd kids to the theatre for a casual family outing.
    — there really was a slump caused by all the courtship years post-war being followed immediately by the new family years of the fifties. When the Teenagers of the early 50s started courting accompanied by driveins (suburban exhibition at last!), things picked up again.

  3. movielocke says:

    the whole point of the above, btw, was that a hefty change in exhibition (Paramount decision coupled with the suburban migration) triggered the complete reboot of the studio system. That’s the situation we’re looking at going through over the next five-fifteen years.

  4. David Poland says:

    Locke, I’ve read that penetration was at 90% in 1960. And we’re talking about the train running full off the rails as the 60s progressed.

  5. IOv3 says:

    I will continue to emphatically state this: “NEVER GOING TO HAPPEN.” There’s just too much fucking money involved for them to be this wreckless with their product. Sure, they will try, but I refuse to believe this is the answer. I am starting to think that this will lead to the answer but for the moment, this shit is so going to blow up in their faces like a CD/DVD.

  6. El Bicho says:

    Thanks for the history lesson about the business. Good to have it all in one place when memory fails

  7. Bradford says:

    Please supply links to explain background jargon mentioned.
    windowed structure of the film business
    Paramount Decision

  8. Triple Option says:

    Wait, I’m confused. You said that from ’99-’01 revenue increased a full billion dollars, yet 7 major chains filed for bankruptcy. How does this happen? You mentioned increase of interest rates, so I’m assuming that means theater leases got too fat, is that it? That coupled with the culling of the mom & pop and 2nd run market seems like quite an astonishing blow despite a significant uptick in revenue. One that continued the following year to hit $9 Billion in ’02. I guess exhibitors survived in that we can still see movies in theaters but it to me seems like a bit of a failing.

    You seem to be quick to discount there being any significance to the statistic of # of tix sold. From a break even analysis pov, isn’t this vital information to studios and exhibitors as it would tell the number of films they could reasonably expect to support? If X-number of tix sold = $7 B and X-10% (hypothetical) = $8 B and yet another decrease in tickets sold, like X-20% = $9 B, wouldn’t supply and demand dictate that the number of tix sold will continue to decrease as such that the increase in cost won’t cover the revenue shortfall? E.g. if at $10/ticket 100 people would be willing to see 12 movies a year. At $12/ticket 90 people would be willing to see 12 movies a year. Continuing at that rate, what happens at $16/ticket? Your business is already past stagnant and you’ve failed to recognize the issue because the bottomline looks the same as it did previously.

    So, if now, hypothetically, only 96 movies are being supported as opposed to 120, what does that do to the industry? Are problems really going to be solved by erasing the windows? Wouldn’t the studios need a way to make sure X+20% are obtaining their films through DVD or PPV or whatever? What I’ve seen is ways for studios to get to that 2nd cycle sale quicker without actually expanding the 2nd cycle.

    Again, I know I just pulled these numbers out of the ethosphere but theoretically, isn’t that what we’re looking at? What are the studios going to do? Say, oh actors and writers, you don’t need to make that much, we’re gonna lock you out? That really doesn’t address the issue. Just like dropping the price to $5 and hope to hell 240 people will start seeing 144 movies a year, cuz that’s not viable either. More people need to pay to see more movies in one form or another or a new way to generate income has to be made or else to me they’re sweeping piles from one spot to another without really helping themselves.

    EDIT – Slight number change on my hypotheticals.

  9. Joe Leydon says:

    “What most critics think of as The Golden Age Of American Cinema, the late 60s and early 70s, was not often a function of good intention, but of mass confusion, as the studios turned everything upside down, were sold to new owners with no movie business experience.”

    Very true.

  10. anghus says:

    so let me ask this, because i think this is what the conversation inevitably eludes to but never goes.

    what happens when there is no longer a window?

    it’s moving to this. this is the conclusion.

    part of me thinks that the theatrical experience and the business that surrounds it is a tether to a bygone era that exists because a) it currently makes money and b) we don’t know any other way.

    at some point we will look at the theatrical experience as a dinosaur. they’ll joke about having to get everyone in a car and stand in line for tickets and overpriced snacks. They’ll marvel at the fact that there was a kid whose job it was to tear the ticket you had just bought minutes earlier. they’ll joke that movies could only be seen 4 or 5 times a day.

    What do we lose by losing the window?

    A naive question, i know, but i’m curious to hear theories on a post-theatrical world.

  11. SamLowry says:

    I guess I’m already living in a post-theatrical world. It’s an amazing year if I go to see more than 2 movies, since I usually just wait for the DVD. And I know for a fact that I really would have gone to see Tron Legacy if I didn’t also know that Disney would release the DVD as quickly as humanly possible, which they most certainly did.

    Kids, two jobs, and poverty all play roles in this, though–far cheaper to buy a DVD than treat the family to a theatrical outing during a rare day off.

    (That trip to Sucker Punch was pretty much a fluke–first day off in a while, and I was having chest pains that may have been due to caffeine abuse; I figured if such a high-powered action flick could distract me from the thudding in my chest, then I probably wasn’t in need of a defib. Boy, that sounded grim: I’m still here and after five days without caffeine the beats have calmed. Maybe I should see a doctor, once I’m able to afford it.)

  12. anghus says:

    im the exact opposite. i rarely buy dvd/blu rays. i watch a lot of movies streaming on netflix and i go to the theater a lot. mind you, the theatrical trips are half “want to see the movie” and half “write for local alternative weekly”.

    if i had the option of watching a new film in the comfort of my own home the same day it would be released in theaters, i’d jump on it.

    to me, the theatrical experience has been declining. I’ve had some great experiences at a handful of theaters in cities like Austin and New York. But the typical theatrical experience has become a chore. i never had a problem with theaters until the last ten years where cell phones have taken over. I can’t get through most movies without someone getting a call, making a call, checking their email, screens lighting up in all corners of the theater. maybe i’m just easily distracted.

    but at this point with a 50 inch 1080p tv and a surround sound system, there are few films that are ‘must see’ theatrically.

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