| June 4, 2021
In light of the theoretical showdown between Universal Studios and the exhibition business and the many opinions thrown around, a simple guide to how the current exhibition/distribution relationship works, in the broadest terms, is called for.
Movie theaters are brick & mortar outlets for a small percentage of the content produced by major studios. Via their labels, the majors release around a hundred movies a year via theatrical. They produce thosuands of hours of television each year that are never intended for theatrical release.
Majors spend between $20 million and $60 million domestically to bring a new movie to market. A hundred times a year.
Movie theaters charge the same amount for every movie in each theater, regardless of the cost of production or marketing. Theaters pay distributors, on average, 50% – 55% of box-office gross. The exhibitor’s cut of the gross represents about 60% of the revenue for a movie theater. So while we talk about expensive concession prices, exhibitors cannot run their theaters on $9 popcorn alone.
Exhibitors expand the screen count within each theater to accommodate the expectations for each film… Both their own expectations and the distributor’s. The physical expansion that allows for accordioning was a result of exhibition bankruptcies in the late 1990s and early 2000s. Exhibitors consolidated, got out of bad real estate leases, and started to build new mutliplexes to replace poorly chopped-up multis that were made out of bigger theaters.
This rebuild – at the expense of exhibition – has allowed for bigger and bigger openings over time. Another element of this is a worldwide 2008 co-funded effort between exhibition and distribution to replace celluloid projectors with digital projectors.
The ability to have these huge opening weekends – we have had at least six $100 million domestic openings every year of the last five years – has also indulged the impulse of the distributors to shorten the theatrical window, as a larger and larger percentage of the revenue is being generated in the first three or four weekends. The more distributors can make in theatrical in a shorter window, the sooner they can get to post-theatrical revenues… and they hope, the less they have to spend to market those post-theatrical windows.
This urge to shorten windows is directly connected to the DVD sell-thru market that started in 1997. This accelerated when DVD revenues surpassed theatrical revenues, both in gross and net. Distributors started leaving millions and tens of millions in theatrical revenue on the table in order to get to their DVD window, often driven by quarterly financial reporting (as in, “Get Batman into sell-thru for the Christmas window after a June opening!” or “We took some big losses and need Star Trek‘s DVD sell-thru to make our winter quarter work!” ).
But that financial reality hasn’t been true in more than a decade. Still, the fantasy of getting past theatrical quickly and cheaply lives on in the heads of bean counters.
As cable, then satellite, and then the internet made video-on-demand more viable for a wider and wider audience, the dream of shortened or nonexistent windows returned. But the industry ran into the same problem. VOD wasn’t generating that much money. It might have been cheaper than a Blockbuster rental, but there weren’t big enough numbers to seriously threaten anything. And thus, the fantasy of “fight pricing” – at$35 – $50 a rental for each film, figuring that if three or four people watched, it was cheaper than going out – never became more than a mirage.
Meanwhile, along came Netflix, first disrupting the DVD sell-thru model, and then destroying the idea of fight pricing like Godzilla destroying Tokyo with their streaming subscription model.
Back at the Stable Relationship of Exhibition and Distribution, the rules are changing. Why?
Not because there is a problem with exhibition for distributors. Things haven’t changed much in the last decade, aside from exhibitors spending more money to improve and adjust theaters to current standards and audience expectations of seating and projection. Domestic theatrical went from $10.6 billion to $11.4 billion. The cost of a domestic movie ticket went from an average of $7.90 to $9.16.
Internationally, theatrical exhibition has boomed. In 2010, it was $21.2 billion. In 2019, it was $30.8 billion. That has been a big change, to the benefit of both exhibition and distribution.
Likewise, digital has boomed in the last decade. As DVDs have subsided, the digital market has grown, with MPAA citing Digital passing the overall gross for Theatrical for the first time this year since the DVD boom ended a decade ago, with almost $49 billion worldwide. But keep in mind, this figure is dominated by subscription streaming.
DEG puts the entire domestic single-sell digital market (VOD and rentals) at just $4.6 billion a year with the streaming subscription market at about 3x that. In 2019, that single-sell digital market was down 6% on the VOD side and up 5% in rentals from 2018.
Domestic Theatrical: $11 billion
International Theatrical: $30 billion
Domestic VOD/Rentals: $5 billion
Estimated International VOD/Rentals: $4 billion
Estimated Worldwide Subscription Streaming: $30 billion
VOD is a declining market in a rising digital world. So why are distributors so hot to bet on it?
VOD delivery companies (iTunes, Amazon, etc) have no more vested interest in selling or supporting movies than they do music or toilet paper. Unlike the exhibition industry, there is no investment on the part of consumer-facing digital distributors that connects them to distribution.
Movie Theaters exist almost exclusively as a distribution portal for movie distributors. That is their design. That is their purpose. They are a fruit stand in a world of big-box grocery stores. Those big boxes used to be cable and television. Now they are streamers. But the economies of scale remain the same.
If you own a fruit stand and one of your half-dozen primary distributors decides to stop distributing a certain kind of fruit, you need to fill the space at your store. If it was a popular kind of fruit, it will probably affect your bottom line. And if it was a whole category – say, citrus – it may affect you so much that your store is in danger of closing.
In the current market, keep in mind that Fox is all but gone and that will already reduce inventory by 10% – 15% a year. They may have mostly delivered boring old Red Delicious apples, but those things are still a staple product, no matter how many Neon Asian Pears or A24 Guavas With Teeth we are selling to the cool kids.
To stretch this analogy past sanity, when you find out that your distributor is cutting out the citrus to your fruit stand because they have a new customer closer to their warehouse and hope to save 10% on gas, even though that new customer is a new fruit stand in a neighborhood where others have been closing… It might piss you off. And you may decide that you don’t want to carry that distributor’s fruit salad, which you sell so well that you represent 20% of their worldwide fruit salad business… because all you wanted was the same citrus you have been selling for decades, which is part of what stabilizes your fruit stand revenues.
Yeah, you might be willing to open a fruit-salad-only store, but that would require that you sublease three-quarters of the store you have and the profits would be marginal and once you have shut down most of your old store, your distributor might well see that it has an advantage and squeeze you for more money per fruit salad, like Disney did. After all that, you’re out of business anyway.
Okay. Enough fruit. (But really, it’s accurate.) I don’t think Universal or Jeff Shell are evil. I don’t think they want to drive theaters out of business. I don’t think they want to sell just fruit salad. But while AMC and Regal and Cinemark aren’t mom-and-pop retailers, they spend a lot of money to maintain and operate a nearly single-revenue stream business. And Universal has decided, after a LOT of private talk, to try out something over their partners’ objections. They had a modest success with a single movie under one unique circumstance that encourages them to keep experimenting.
But only one side of this couple is satisfied. Exhibition and Distribution aren’t dating, they have been married for decades. For better or worse. For Pete Davidson or James Bond. And what either side of the relationship thinks is a sweet experiment may not be so good for the other side.
Reading about this disagreement, you would think that only one half of the couple matters… or in fact, that they aren’t really a proper couple. Distribution is sexy and powerful and rich and Exhibition is homely and needy and desperate?
But if you think that you aren’t doing the math. In business, no one cares who is sexy and who is homely… they care where the money is. Exhibition does desperately need the big hits to pay their leases. But you can’t find another math equation that leads to any movie getting to a gross net over $500 million with VOD as the primary revenue stream in anything but the most fluky of circumstances, much less an equation that will take over a dozen movies there each year (which we had last year).
The problem is that when you come back to the relationship and expect to get the parts of that relationship you love after “experimenting” in ways your partner finds degrading of the relationship, the problem is real. And it’s not always going to be rational. It isn’t all on one side, “failing” to accept the other’s choices.
If Noah Baumbach is writing it up, it will all work out in the end. Both sides will grow and learn and find their next love. But I tend to imagine it will end more like a David Simon script. A truce forced on both sides after a lot of filthy language has been uttered and gallons of blood are spilled.
Let’s hope HBO Max cancels this one before it gets to air.
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