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  • Jeff Ulin

Fatal Disruption: Streaming Alone Cannot Sustain Movie Budgets & Studios

The future of movie theaters was already in doubt, and the economic viability of making theatrical feature films in question, amidst the wreckage wrought by the Corona-19 pandemic. In the gloom of what used to be halcyon box office days between Thanksgiving and New Year’s, some consider the recent actions of Universal and especially Warner Bros. to signal a dramatic shift in, if not end to, the tried and true methodology of releasing movies made to be seen first in theaters. Given the nature of my book and deep discussion of windows, I wanted to offer some high-level thoughts on what is going on: is this the beginning of the end, or a necessary evolution that will be as healthy as controlled burns that prime forests for future health?

First, a synopsis of recent galvanizing events. As discussed in each of my three editions of The Business of Media Distribution- Monetizing Film, TV and Video Content in an Online World, studios orchestrate the release of content in a carefully choreographed pattern. This controlled sequencing is designed to optimize the financial return of an intellectual property that has taken millions of dollars to make, and years to develop, produce, and release; this release sequence has come to be known as “windowing” and each sub-market, such as theatrical/playing in movie theaters, referred to as a window (the “theatrical window”). Tensions flared in April, 2020, when Universal announced it would skip showing some films in theaters and take several movies straight-to-streaming, prompting AMC (also owner of Odeon) to ban all Universal movies from its cinemas worldwide. AMC’s CEO not only announced a ban on Universal movies, but to stop the bleeding further threatened a similar ban on any moviemaker that abandoned the then-current window practices without first negotiating with the chain. For its part, Universal, in the face of shuttered cinemas given the pandemic, had just released Troll’s World Tour (an animated film produced by its DreamWorks label) on premium video-on-demand (PVOD) to significant success. Pricing the film at $19.99, it had reportedly garnered around $100Million via streaming rentals through enabling platforms such as offered by Amazon and Apple; a corollary and significant factor for Universal, is the studio keeps more of the cut from PVOD revenues than from theatrical box office, meaning that it can still yield better returns from a PVOD release even if that PVOD release generates less gross revenue than it would have seen from box office receipts. One gazillion dollar question, which lies at the heart of the dilemma today, is what is that breakeven point? Namely, if a film may have grossed $100M at the box office, what does it need to gross from PVOD to equal the same return?

Before I address that question in the context of the broader economic picture, though, let me complete the news cycle, as the Universal announcement was amazingly just the tip of the iceberg. Universal and AMC resolved their dispute in the summer, with a July 2020 announcement that allowed Universal to move films into PVOD availability 17 days after the

launch in cinemas—in essence, shrinking the theatrical window to 17 days of exclusivity into movie theatres. This was a profound shift from a window that, under pressure, had moved from 90 days down to 31 over the last years. If trade reports are accurate, then a critical incentive for AMC’s assenting to the window shrinkage was that part of the deal cut them in on a share of the revenues generated from the PVOD window. What part of the roughly $20 PVOD rental fee will be shared has not been disclosed. Then toward Thanksgiving, Universal announced it had struck a similar deal with Cinemark, the third largest cinema chain. Blockbuster movies that opened to $50Million or more would be allowed to move to PVOD access within 31 days of release in theaters, and all other films would be allowed to move to PVOD access after 17 days of theatrical release. This flexibility guarantees that big budget films that perform in line with expectations stay in theatres for a month (when in most cases they have earned 80%+ of their box office revenues) and hedges studios’ gambles by enabling over- performing movies to stay in theaters more than a couple of weekends. The downside for theatres is that tentpole/event pictures that may have otherwise stayed in cinemas for weeks may now move to PVOD sooner, truncating box office and in tandem sales of popcorn.

This tussle over windows, as discussed in my Chapter 1 (Boycotts as a Result of Window Changes), has been going on for years. Boycotts periodically popped up, for example, when a studio wanted to release a movie on video/DVD sooner than a traditional theatrical window would afford, often to capitalize on seasonality. In fact, some argue that studios are simply using this opportunity to finally win their long running feud with theaters who could always play the boycott card. This change in tides feels like vindication for studio executives hailing from digital backgrounds who have long argued that it makes no sense to window content. To them, having to wait to launch other platforms (PVOD, Pay TV, DVD, etc.), and spend fresh money to re-market properties for downstream window exploitations, is an antiquated practice.

The foregoing is now a mere prelude to the shock that Warner Bros. unleashed when it announced in early December that its entire slate of movies set to be released in 2021 would be made simultaneously available on HBO Max and in theatres. In industry parlance, the films would be launched “day and date” with its affiliated streaming service, WarnerMedia Studios and HBO Max both under ATT’s corporate umbrella. Not only does this announcement shrink the 17-31 day exclusive theatrical window negotiated between Universal and multiple chains down to zero, but it eliminates the PVOD buffer. The Universal deal was somewhat blunted by the fact consumers would have to pay a premium ($19.99 or thereabouts for PVOD access) to what it would have cost them to see the film in a cinema; some of that premium was then being shared with the theatres, theoretically, to amortize their losses from reduced cinema attendance. All of that partnership, and sharing costs to defray the pain, was seemingly upended by Warners latest move.

A further consequence that is receiving a lot of attention is that talent (stars, directors, producers) cut their deals based on expectations of sharing in a film’s profits (sometimes deferring or trading upfront fees), and all studio profit definitions are inextricably entwined with theatrical box office revenues. Agents, whose fees are themselves a percentage of those percentages, are up in arms, and reportedly when Warner Bros. moved Wonder Woman 1984

to a day-and-date 2020 Xmas release in theaters and on HBO Max they first agreed to pay the director and lead actress millions of dollars to keep them happy (the change and elimination of previously expected exclusive theatrical window set to undercut box office). This Wonder Woman 1984 accommodation was done before the Warners bombshell about moving their full 2021 slate. Now talent and agents are asking how are people supposed to be compensated when fundamental rules have been changed? In Jerry McGuire terms, they are literally asking Warners to “show me the money.”

Despite many other factors at play, window arguments are rooted in economics, and for years studios and theater chains have negotiated ways to split the pie to maintain the robust health of the symbiotic ecosystems. A stunning recent example is the shift to digital cinema—it was not many years ago (in fact only my 2nd edition) that the shift to D-Cinema was struggling, and one way the logjam was broken was when studios agreed to pay virtual distribution fees to help defray the infrastructure costs of upgrading theatres to install digital projectors and servers. This partnership enabled a rapid shift from film to digital projection in a few years, and was so profound that today virtually all distribution is digital and film stock is an artifact of history.

Articles are now pointing to a myriad of reasons why this seismic shift in the theatrical window is either good, bad or inevitable, with finger pointing and tensions running from high to immediately litigious. To cite just some of the flashpoints or justifications:

  • Moving films to in-home streaming access immediately is necessary to compete with Netflix. Get on board now or be obsolete. [Netflix has won: get on the digital train]

  • This move is temporary and a justified response to shuttered cinemas given the pandemic [closed theatres from pandemic vs. lack of trust/exploiting the pandemic to reduce the theatrical window (which theater chains have always fought)/ can’t put the genie back in the bottle once theatrical window broken]

  • Big budget movies are made to be seen/experienced in theaters, and this is the next step on a slippery slope that will see the extinction of cinemas, and will ultimately kill the art form [preserve the magic and sanctity of the theatrical experience argument]

  • Big conglomerates are self-dealing, using the movies as loss leaders to build and brand their new steaming services (HBO Max, Disney+)—while the corporate entities may benefit, and their stock prices may be pulled up along with subscriber counts, the producers of the films will earn less money by the studios foregoing or dramatically shrinking the theatrical release (and thus box office receipts) [greed and profits/corporate entities squeezing the artists/talent]

  • Leverage will shift if key talent/producers/guilds opt to work with studios or entities that will guarantee theatrical releases, not wanting or perceiving their “film” being downgraded as “direct to streaming” (the taint of “direct-to-video”, a term sometimes associated with projects that were in trouble and no longer justified the expense of a theatrical marketing campaign and release, still fresh in collective Hollywood memory) [choice and leverage of content is king arguments]

  • Talent will never go along without being bought off, as the big money deals, and deals where upfront fees may be reduced or deferred to help budgets and traded-off for a share of backend profits, are tied to profiting from percentages of box office gross [who ever thought stars/agents would actually lobby to keep what they long railed against as unfair Hollywood accounting?]

  • There will always be hubbub about the prestige of a theatrical release, and related awards and festivals whose competitions may be considered compromised depending on the qualifications of entry (Netflix films have been shunned by the Cannes Film Festival which requires a minimum period of release in cinemas) [prestige and celebrity culture impact]

  • Releasing day-and-date in theaters and on a streaming service naïvely minimizes the impact on box office, as pirated copies will proliferate once available on streaming services [a threat to counter a threat]

So where to begin? I could write a book, or rather I could update a book. Short of another edition, though, I am only going to comment on three aspects here.

First, all of these implications are real, threatening careers and investments alike. Emotions, arguments, and opinions will run strong, and likely belie biases, depending on where someone sits in the chain. That is the challenge of disruption. I talk in my 3rd edition about what does the term “film” mean today (the lines blurring with TV, video, streaming), how is a studio defined (while they finance, market and produce projects, they are ultimately distinguished by their distribution arm—which means how studios choreograph and exploit windows to optimize revenue/profit), and how do studios deal with the almost existential threat of a potentially FAANG (Facebook, Apple, Amazon, Netflix and Google) dominated marketplace where, Netflix aside, return on film investment may not matter if these digital goliaths choose to treat content as a loss leader or mere marketing expense to drive other related businesses? All of these challenges are now amplified and made more urgent by these recent events.

Second, I argued in my 3rd Edition that digital distribution, and more specifically subscription video-on-demand (SVOD)--which is a fancy way of describing a streaming service such as Netflix—had already reached a tipping point. The old debate was about the impact of SVOD cannibalizing the video market, which video/DVD market itself had for years held up the studio ecosystem and accounted for basically half of all total revenues generated by films. If there was any doubt about the digital tipping point having been reached, then it should now surely be put to bed. Whether SVOD will now gobble a second window, having devoured video, is the new battleground.

Third, and to me most interestingly, none of the high-level summary points I have cited above focus on the greatest danger or issue posed by these recent actions to dissolve or truncate the theatrical window. Namely, without windows, and without the theatrical window, studios will not be able to afford to make movies as we have known them. The economics will simply not sustain the costs and risks. And this holds true not only for the Hollywood studios, but anyone trying to step in, including Netflix. Why? Let me start by quoting part of a section in my book titled “What Does Distribution Really Mean?” (itself part of a section titled “Defining (Historical) Studios by Their Distribution Infrastructure”):


Intellectual property rights are infinitely divisible, and distributing a film or TV property is the art of maximizing consumption and corresponding revenues across exploitation options. Whereas marketing focuses on awareness and driving consumption, distribution focuses on making that consumption profitable. Additionally, distribution is also the art of creating opportunities to drive repeat consumption of the same product. This is managed by creating exclusive or otherwise distinct periods of viewing in the context of ensuring that the product is released and customized worldwide...Ulin’s Rule (see below) posits... content is optimized by exploiting the factors of time, repeat consumption (platforms), exclusivity, and differential pricing in a pattern taking into account external market conditions and the interplay of the factors among each other...To earn the same lifetime value on the Internet/via video-on-demand (VOD) streaming access for a product that would otherwise flow through traditional markets, not only must initial consumption expand to compensate for a decline caused by cutting out markets in the chain (or reduced because a driver such as exclusivity is removed), but also it must compensate for the cumulative effect of losing the matrix of drivers that have been honed to optimize long-term value.


Diagram: Ulin's Rule


Basically, streaming alone cannot expand enough to compensate for the decline or disappearance of other windows/markets, and the inevitable consequence is that the overall pie will shrink. Accordingly, while we can run models to answer the question of what must a film earn via PVOD to compensate its distributor for lost box office revenues, the exercise is a bit of a non-starter. Yes, if the distributor keeps 70% of PVOD revenues, for example, versus 50% of what an imputed box office may have yielded, we can create models justifying the different release pattern (note, this reminds me a bit of the good old days when we would perform breakeven analyses on whether to release video into the rental or direct for sale/sell through markets). However, the bottom line is about the bottom line: in an industry where everything imaginable has already been done to drive upfront consumption, the notion that further driving people to SVOD consumption in droves can make up for massive lost repeat consumption revenues is naïve.

Even Netflix, now a studio itself, is not immune. Its content commitment budget is arguably unsustainable but for an ever-growing stock valuation (Netflix’s content budget was originally $100Million when its first premiere original series House of Cards debuted in 2013, climbing to

$8 Billion/yr in 2018 during House of Cards final year, and now reportedly well past $10B/year with its parallel ramp up in feature film production). Recent articles and projections analyzing how Disney+ subscription growth may see it catching up to Netflix certainly point to heightened competition where (at least for the next few years) the leaders will no doubt increase revenues and costs to keep apace. Even with incredible subscriber numbers, projections pointing to Netflix finishing 2020 with a mindboggling ~200million global paid subscribers, the net results are figures that currently posit resting on the precipice of breakeven. That is a sobering milestone when further taking into account the risks to the cable and Theatrical/mobile & home entertainment markets, both of which $100Billion+ markets (per MPAA 2019 Theme Report) are under attack. Gargantuan platforms may become winners, but the absorption or rebalancing of neighboring windows, without expanding the overall pie, is more than a scary prospect for producers that rely on downstream revenue cushions and guarantees to greenlight projects in the first place—a fiscal reality in a business where hits pay for misses. Technology and new access points (think TV, pay TV, video/DVD, online—in essence, windows!) have enabled a decades-long expansion of the pie, and with it increased budgets, but we are now seeing a potential drastic contraction of windows without a concomitant expansion of the pie. If, as Ulin’s Rule suggests, the economic factors enabling optimization are not choreographed, and the pie shrinks rather than expands, then the disruption could tilt toward fatal. For a more detailed description of why there is not enough room/possibility for upfront expansion (think more people watching initially on streaming access) to compensate for the loss of downstream revenues, and the dynamics of how the system now fatally disrupted had served to optimize revenues and sustain an inherently risky business, please read the book...

A business that thrives on high-rolling venture capital type risks, and was already struggling with major disruption, has now become even riskier—that will mean even more consolidation (as only those with enough scale can absorb those risks long-term), more tinkering, and ultimately more failures. So yes, at one level all this is a necessary reaction to the reality that we are past a digital tipping point and SVOD is here to dominate; however, economically, persistent VOD access, and the elimination or material reduction of windows that enable profitable repeat consumption means that less money will be ultimately be earned—as long as producers and the new era studios can adapt to that inevitability, tame budgets, and find enough scale to temper risks and still produce a range of quality content, then the ecosystem will find a new equilibrium. No doubt this is a major forest fire, but only pockets of turf will be burned beyond repair. As this plays out, and we see new winners in the digital distribution wars, sit back and enjoy the show- content will still be king.


The 3rd edition is now available on Amazon using this link or through Routledge here.

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