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David Poland

By David Poland poland@moviecitynews.com

Smashing Wide-Release Theatrical Windows: Murder or Suicide?

The theatrical business is not dying.

There are no actual stats that suggest it is. Total revenue is up. Ticket sales were up for the second straight year in 2016, though there is a “new normal” since ticket sales (as we sloppily measure them) peaked in the modern era in 2002. And this is just domestic. Internationally, theatrical has been booming for years, though it is now maturing into a more certain groove.

So why do so many of the major studios seem inclined to break the infrastructure of what works?

About two-thirds of major studio releases (Disney/Fox/Paramount/Sony/Universal/Warner Bros) grossed $100 million or more worldwide in 2016. And about one-third grossed less. That one-third is what all this hullabaloo is about.

Basically, a short window would allow distributors to cut the cost of marketing flops at the next level of release, home entertainment, a dream since the days of VHS. Also, there might be some money created by easy, early availability… before the stench sinks in.

The marketing argument also speaks to the $100 million-plus grossers, but there are more variables and a lot more risk to the more successful films.

For instance, a movie like the $125 million domestic-grossing/$239m ww Sully didn’t drop under $1 million for a weekend until Weekend 8. But Inferno, which did $220 million ww but only $34 million domestically,  dropped under the $1 million line in Weekend 4. WB wouldn’t want to get in the way of Sully playing strong by having it head to VOD on Weekend 6. Sony, on the other hand, was so done with Inferno after three weekends that it cut the screen count to 770 on Weekend 4.

It is all well and good to say, “Well, obviously you push Inferno to VOD as quickly as you can.” But a 6-week window for Inferno is not just a window for Inferno… it becomes an expected standard. It’s a big, major studio sequel from Ron Howard, starring Tom Hanks and Oscar-nominee Felicity Jones.

We have been through this before, as the choice of going to the movies became, “Do I need to go or wait for the rental?” Then it became, “Do I need to go or buy it for $9.99 at the grocery store?” Now, it’s “Do I need to go or can I wait for it to stream?”

How the studios treat their content becomes an object lesson for consumers. When you saw piles of DVDs in the discount bin for $5.99, the brand new Blu-ray with all the bells and whistles somehow doesn’t seem worth $24.95 (or more), even if the Blu is your biggest hit movie and the stuff in the bin is 7 years old. When you put three Oscar-winners in a package for $9.99, you are telling the consumer that your films have little value.

And the sales of DVD, then Blu-ray, confirm this position.

So what are distributors pushing for shorter windows using to bolster their faith that shorter windows won’t discourage spending in theatrical?

I don’t know that they have an argument. They just shift the conversation to the wider margins on VOD over theatrical exhibition. That difference will, they seem to think, not only make up for the theatrical losses, but to create greater profits.

And it could, I guess… if the same number of VOD units were being sold as theatrical tickets. But as far as I know, no film has ever, over any amount of time, sold as many as 15 million VOD units. And almost 20 million people went to go see Beauty & The Beast in the US alone two weekends ago.

Shift the conversation again… charge “fight prices” for the early VOD of movies. $50. $30. Profits are even greater.

Let’s not even get into how many people might watch the pricey VOD showing in the same room at the same time. (There is a company out there pushing a camera that will scan the room to see how many people are watching and charge accordingly… all the invasive discomfort of the mall, now in your home.) Let’s just have a pricing conversation.

You can do as many surveys as you like. People who make $250k+ a year will buy almost anything without sticker shock. You can get them. But Average Ticketbuyer, now paying $85 for 300 channels and another $10 a month for Netflix? Are they really going to spend when they pay for half a month of endless amounts of filmed entertainment to watch one movie at home that will expire in 48 hours or less?

Media loves talking about the Netflix threat. The threat isn’t that they will so dominate the marketplace. The threat is that a $10 price point for that amount of content sets a low enough bar that it not only makes $30 for one showing of one movie seem silly, it has actually kept the studios from moving forward towards the real future, which is a much more densely competitive streaming environment. (Another column.)

SHIFT! It doesn’t matter whether Average Ticketbuyer is willing to do. Short-window VOD will expand the size of the audience.

Will it? This is the easiest debunk in the game.

There are roughly 350 million people in North America.

Half the tickets sold to movies are sold to 27 million of those people, aka Frequent Moviegoers (12x a year or more).

The other half of the tickets sold are to people who go tot he movies about 3 times a year, aka Occasional Moviegoers. They number about 175 million people.

About 5 million people say they go once a year.

That leaves about 145 million North Americans who NEVER pay to see a movie in a theater.

Is there any reason to believe that another of those 145 million people are suddenly going to start buying high-dollar VOD so they can see a film a couple months earlier? Or the 5 million who go once a year?

How about the 175 million Occasionals? Well, they spend an average of about $27 a year going to the movies. So how much are they going to spend to watch a movie at home? It is true that some of those 175 million people are seeing movies 10 times a year… or 8… but also, some see 2 or 3. MPAA & NATO haven’t made those detailed stats available.

Let’s be generous and say 20% of the Occasionals are on the high end and perhaps more open to high-ticket VOD. 35 million. And the 27 million Frequents.

So realistically, the market, at best, starts with 62 million North Americans. 18%

Is Netflix the competition? They have about 43% of North American households subscribed and those subscribers currently spend more for the service than all but 27 million North Americans (The Frequents).

And forget about Cable/Satellite? Over 90% of households. And at a price greater than 100 movie tickets bought annually.

Studios have convinced themselves that there is a bigger VOD market than they already have, driven by shorter windows. But it’s not realistic that they will, with higher prices and shorter windows, expand the share of people for spending on the individual purchase of access to movies. The expansion of revenues will have to come from the small market that already spends money to this end.

By the way, you can tell me about the surveys that say people want day-n-date at home. They do. But at what price? And is there a real openness to the higher price point the month after the first bill arrives? History says, “no.”

So let’s look at the, say, 35 million North Americans who are the legitimate targets of this effort. Then, let’s cut that number in half, assuming that at $30 or $50, at least 2 people who might otherwise go to the movies, will watch at home together. 17.5 million. $30 a viewing. $535 million. Let’s say that they do this 4 times a year. $2 billion!!!

Now deduct the $1.26 billion that the same group, who have already shown a willingness to go to theaters and pay for movies, would have spent seeing those movies in theaters. Still… $750 million!!!

And let’s say that the distributors get 85% of the gross (very generous). $640 million!

And let’s add the 30% that they wouldn’t have gotten from the theatrical ticket sales we took away two paragraphs ago. Add that $380 million and the “new” revenue is now just over $1 billion.

Oh wait! Distributors are claiming that want to share 10% of this business with exhibitors (aka The Carrot). $200 million. Now we’re down to $800 million in a scenario that is extremely generous to the whole project, given the history of PPV and VOD.

$800 million ain’t nothing.

But then… look at the potential cost of adding 3% – 5% to the overall movie revenue stream.

If it worked this well, one has to assume there is some cannibalization, even with the focus on Frequent Moviegoers. Four times a year wouldn’t likely lead to cannibalism of 1/3 of the Frequent Moviegoer (at least 12 a year) market. But 20% wouldn’t seem unlikely. And those moviegoers are half the market, so a 10% cut in the market to exhibition.

What does that mean? Broadest strokes, a company like AMC, which netted just over $100 million on revenues of just over $3.2 billion would take a $300 million hit. So even with, say, $120 million in savings on film rentals and food costs, this would turn the company’s net gain into a net loss.

Does that exhibitor keep expanding and remodeling regularly if they are operating at a loss? They can only save on rent ($500m annually) if they shut down theaters (though they have long leases that make this hard).

Theaters continue to operate, unimproved. This drives more people towards VOD. And eventually, you get what happened twice in the last 38 post-DVD-sell-thru years? Well-considered bankruptcies and a reconfiguration of what the theatrical market looks like.

But in the next generation of reconfiguration, the screen count gets smaller again, as exhibition is forced to focus more closely on event films, where there is still an intense, short-window hit. And then there aren’t enough screens to support a “middle class” (or lower class) of studio films.

We’re not quite done. This is where it gets scary.

This may be what the studios, now small parts of massive corporations (except Disney and Paramount), want to see happen.

The top 26 studios movies in 2016 generated about 2/3 of all the box office revenue created by American-distributed movies, all the grossers of over $300 million. The only film that was not a sequel, part of a franchise or a brand (like Illumination, DWA or Disney Animation) was The Mermaid, a Stephen Chow film (which is a brand in Asia), which grossed just $3.2 million domestically.

The 71 other releases by major studios generated less than half of what those top 26 films grossed theatrically. Some were highly profitable. Some lost quite a bit. Only 12 of those 71 were sequels or wannabe franchises. Only Ghostbusters, Assassin’s Creed and The Huntsman: Winter’s War were big scale movies.

What makes this especially scary is that the old saw used to be (ht to Peter Guber) was, “Why don’t you just make the good ones?.” Now, you can really separate the top of the box office from the rest.

There is still downside. I would estimate that 5 of those Top 26 lost money in spite of grossing over $300m worldwide. And the cost of production on most of the Top 26 is much, much higher (on average) than the second tier of 71. But the cost of marketing is not.

As greedy as multinationals are, they are equally risk averse. They want to able to predict what is coming. And if what is coming is 4-6 big budget, nearly-guaranteed mega-movies and everything else is, quite literally, TV, they might well take that deal. Smaller companies. Down and dirty. Hire on freelancers as needed to ramp up a release every two months or so.

Releasing Silence, Florence Foster Jenkins, Zoolander 2, Fences, 13 Hours: The Secret Soldiers of Benghazi, Ben-Hur, 10 Cloverfeld Lane, Office Christmas Party, Allied, Jack Reacher: Out of the Shadows, Arrival, and Teenage Mutant Ninja Turtles: Out of the Shadows is hard work… and expensive… and not all that profitable. The thinking of a corporation is, why bother? At least 4 of these films have loving, loyal, passionate audiences. But, financially… why spend all that energy?

And if that is the case… distributors are not foolishly chasing new revenue, but are consciously aware that sipping the Kool-Aid may lead to the death of a significant portion of this industry.

Can you make Florence Foster Jenkins or 10 Cloverfield Lane or Office Christmas Party for $10 million and stream them on what will be one of the 10 top streaming networks in a few years? Yeah. Probably. But the rest just disappear, because the idea of Netflix or any future streamer making a bunch of $40 million and $70 million movies (or pricier) and surviving is a fantasy. There is no business plan in which that makes sense long term.

I don’t mean to be picking on Paramount. The same is true everywhere… except Disney, where they are already close to giving up on anything that isn’t uber-IP.

So maybe I need to stop whining and just deal with reality. If they want to kill the industry – or shrink it by half – they are on a good track. They just want to be in a different business.

I think there will be enormous regret, especially when the long tail really stretches out and we can access virtually every piece of filmed entertainment ever made at a low price (likely by subscription, not unlike cable packages).

Maybe there will be a “rebuild the movie palaces” movement. Or maybe we will all just have to get a bigger TV or goggles to make it feel more immersive… all without much human contact. Evolution… in the Twilight Zone.

5 Responses to “Smashing Wide-Release Theatrical Windows: Murder or Suicide?”

  1. locked cut says:

    “Hire on freelancers as needed to ramp up a release every two months or so.”

    If you cut production to the scale you describe prior to this sentence there are no freelancers–at least not within a few years after the market collapse you describe. Because if movies scale down to the degree described you have a california recession and the pool of talent that would be your “freelancers” have moved away, changed careers, and generally do not exist in any way shape or form to make and market these tentpolls.

    That’s the thing, if there are 400 domestic films made per year, and the top 5% make 2/3 of the revenue, that sounds terrible but it is actually a sound investment strategy, think of those 400 films as an “index fund” and you are able to index the entire film market by maintaining that level of production, and this allows you to reap the incredible returns from the top 5%

    If the business men only want to make the top 26 films annually, ask them why they invest in any company on the stock exchange that isn’t in the top 26 ROI?

    Additionally, there is the employment factor to consider, People are able to go make Jurassic World because they worked on the “Farm Team” of Safety not guaranteed. Those other 375 films made each year act as skills training and development, and the top talent filters up.

    I mean sure it helped that Trevorow has dangly bits between his legs (which indicates he can be trusted with 200 million dollars, sight unseen), and is white (even more trustworthy!), but the value of the Los Angeles Farm team making films like Safety and Whiplash because that talent gets to be hired on to the top 5% projects, get paid very little relative to a Spielberg et al, and you’ve completely outsourced the job training costs to the bottom 95% of films, so you don’t have to pay for your grips to learn the difference between a scrim and a gel.

    In other words, there is massive arbitrage to be taken advantage of on all the top 26 films by having a farm team of talent to draw from to make those films, versus relying on expensive name talent.

    Finally, consider the “let detroit go bankrupt” problem. It’s not just the writers and producers and grips and editors that leave los angeles if production is cut to the degree DP outlines, the problem is in the supply chain that feeds the production of those films.

    How many rental shops go out of business if there’s a 95% reduction in film? probably 70%? If 70% of the competition disappears, how much do rental prices increase? probably 400% at least, because if there is no other option to rent your equipment from, you have to pay for the privilege. That means that the cost of making your top 26 just went up even more. You can offset this somewhat with cutting labor costs, why pay a million for the next Guardians script if there are 9000 out of work former WGA members willing to do it for 50,000? but you also run the risk of a death spiral and further eliminating your already depleted talent pool in trying to pursue these sorts of cost savings.

    Of course, nothing happens in a vaccumm and if film production is cut by 95%, then you’re going to see some of that labor slack absorbed by streaming and television series, so things probably won’t be apocalyptic bad (70% of equipment rental houses closing) but they are not going to be especially good.

  2. PcChongor says:

    ^^^
    *starts a slow clap* Spot on analysis!

  3. lockedcut says:

    Also, every strategy to make money has already always been attempted in Hollywood.

    The studios have TRIED to make only the top 5% before, the result was a disaster. After the 1948 Paramount decision, the studios divested of their permanent staff and quickly happened upon the solution of making only tentpole mega pictures that were responsible for the vast majority of their annual cash flow. por ejemplo

    Ten Commandments (can’t miss!)
    2001 (mega bucks!)
    Lawrence of Arabia (yay!)
    Cleopatra (ummm, guys)
    Doctor DOOLITTLE!!!! (wait, what?)

    In pursuing a strategy of making only the road show tentpole mega comic book movies of their day, the studios caused themselves to implode to a truly incredible degree.

    MGM owned basically all of Culver City, sold off all that real estate capital to survive this decision.

    Fox owned so much real estate capital (that they sold off to pay for Cleopatra and Doolittle) it would be valued at MORE than a _Trillion_ dollars today.

    to those money men: losing a billion dollars isn’t cool anymore, know whats cool? losing a trillion dollars!

    That’s the result of abandoning the “index fund” approach of the current market to try and beat the market by being a “stock picker”. The result is you wind up losing a trillion dollars in capital.

  4. brack says:

    “Theaters continue to operate, unimproved.”

    Not sure how accurate this statement is when we have screens with improved picture quality (i.e. Dolby Cinema with Dolby Vision/Atmos) and more comfortable, reclining seats that seem to get me to go see films more often these days, when I was just about to give up going to the theater.

  5. John Rieber says:

    David,

    this is terrific analysis. And this idea that we MUST get these movies home faster because these kids today DEMAND IT is a farce – the largest moviegoing demo has the least amount to spend, so they won’t spend the big $ to watch something at home, and actually enjoy the theatrical experience.

    Just as the business killed off a huge profit center in DVD, they are walking into another equally disastrous outcome for theatrical – your stats show that clearly. Great article.

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