Gary Dretzka
Leonard Klady
David Poland
Doug Pratt
Ray Pride
Jamie Stuart

August 19 , 2005

Welcome To MyopiaWood
by Bill Mechanic

When you read industry discussions about collapsing the theatrical and Home Entertainiment windows, there is a fundamental lack of understanding about how the movie business works as a business. For the past 25 years, it has become a better and better business in terms of income only because of sequential distribution. Take it down to a single market and the economics will collapse.

The fact that theatrical is essentially a mature business is no startling revelation -- it peaked in 1946 when it was roughly 85% of consumer leisure time spending! Any growth since then has basically come from inflationary ticket prices which may, indeed, now be too high for many consumers. Pay TV and then video brought fresh money into the business and years ago became the monster at the table. Domestic theatrical for the past decade has produced less than 15% of the ultimate revenues of movies.

So, going day-and-date essentially wipes out a major window of opportunity for winning pictures. Yes, if a movie fails in theatrical, there are losses that have to be made up (if possible) out of the subsequent markets. Eliminate the theatrical window and the same pictures that don't create a head of steam theatrically now will most likely fail to create a head of steam in video. And there will be no subsequent market to pick up the losses.

In the example of a film like Herbie: Fully Loaded, the marketing costs of $15 million in video would undoubtedly grow to the same level they now are in theatrical, so the costs can't be projected against the present day release pattern. There is also no reason to believe Herbie would do the same business in video, since it would only have one shot to reach an audience, not the two it has today. The $40 million (a conservative estimate) in marketing spent against theatrical greatly, greatly enhances the $15 million spent in Home Entertainment marketing later.

It is also myopic not to see the downward forces working in video (DVD) where product is currently glutted (see Dreamworks, Pixar) and it is clearly becoming as hit oriented as theatrical. The market glut combined with weak management has created a downward pricing structure which most likely will also continue. Library titles that used to be consumer priced at $15 are now available at $5. Hit titles which used to be consumer priced at $19 are now at $13 and there will be some desperate company that will reduce it to $10, which will then become the industry standard.

Many of the comments now being covered by the media also ignore the basic fact that quicker DVD release windows really matter most when they occur on the occasiona specific movie, not when the windows in general move up. If a single movie is released earlier than most other movie - just as if it is priced less than other movies - it enjoys a competitive advantage. When the whole market moves to a standard release date or price point, the success or failure once again relies on the commerciality of the individual movie.

There is no discernable difference in sales for a movie released in 4 months after theatrical or six months. Actually, the best sellers sometime enjoy greater success when they are released in peak selling seasons (X-Mas, Back-To-School, Easter), which often means they are released with longer breaks from theatrical.

There is a sequential business in place because it works. Any one market may go up or down, may mature or grow, but overall the business has climbed to an all time peak year after year. The fundamental problem the industry faces isn't moving up windows, it's controlling costs.