As Premium VOD Readies for Flight, Studios Face the Fallout

As Premium VOD Readies for Flight, Studios Face the Fallout

As the controversial premium VOD plan kicks off Thursday, studios are hoping for a longterm payoff. But in the short term, they have nothing but headaches

Hollywood studios are betting that Thursday's debut of premium video-on-demand on DirecTV will help cure the ailing home entertainment market.

But as they struggle to withstand massive blowback from exhibitors and the National Association of Theater Owners (NATO) over shortened theatrical windows under the program, a cure feels very far off indeed. 

There's more than enough bad blood to go around, as the four studios backing the controversial platform scramble to smooth the ruffled feathers of theater owners and prevent a rebellion among major cinema chains.

Privately, they're quick to point fingers at holdouts Paramount and Disney as the source of a leak that almost ruined CinemaCon, the annual love fest between Hollywood and theater owners.

The consortium of studios got even more heat Wednesday over the early VOD program from a slew of high-profile film directors, including tentpole titans James Cameron, Michael Bay and Peter Jackson.

“We in the creative community feel that now is the time for studios and cable companies to acknowledge that a release pattern for premium video-on-demand that invades the current theatrical window could irrevocably harm the financial model of our film industry," the letter read. 

Also read: Cameron, Jackson, Bay, 20 Others Join NATO in Blasting Early VOD

Against this backdrop, the usually simple process of negotiating theater screens with exhibitors has become a battlefield. “It’s been incredibly stressful,” one studio distribution executive told TheWrap.

On Tuesday, DirecTV officially unveiled Home Premiere, which will put select titles from Warner Bros., Fox, Universal and Sony on the satellite service eight weeks after their theatrical debut. Starting on Thursday, DirecTV subscribers can watch Sony’s “Just Go With It” for $30.

Overall, only three other titles were announced for the upcoming distribution platform — Warner Brothers' “Hall Pass,” Universal’s “Adjustment Bureau” and Fox Searchlight’s “Cedar Rapids.”

But exhibitors are asking for licensing concessions from all titles originating from the four Home Premiere studios.

Studios typically take 50 to 60 percent of initial box-office revenue. Now exhibitors are demanding a larger cut for movies that may fall under the Home Premiere window.

That has made once-routine negotiations with exhibition chains to put movies into theaters “very difficult,” conceded a distribution executive.

To leverage their demands, theater chains have threatened to pull trailers — or even pull films — that are released early from their screens. 

Also read: Theater Owners Ready to Retaliate Over Premium VOD

Yet, if premium VOD does work, the economics are sweet enough that studios are willing to withstand an exhibition firestorm.

Studios take away roughly 70 percent of the revenue from VOD and do not have the shoulder the same production and distribution costs associated with keeping a film in theaters into a third month.

And as a film's theatrical run drags on, exhibitors' cut of the profits increases from the original 50 to 60 percent, making studios less inclined to keep films in theaters longer. 

Analysts say that most films' box office runs are largely over by the time the new windows would take effect. However, exhibitors are concerned that if they don't hold their ground over this early VOD program, studios will continue to shorten the amount of time between a film's premiere and its home entertainment release, potentially cannibalizing their profits. 

"It could cause great problems. There are so many things we don't know yet. Will the studios continue to move release dates forward or backward," Edward Jay Epstein, author of "The Hollywood Economist," told TheWrap. "It's like global warming, you can't predict it, but it could destroy the entire theater system." 

Epstein says that if theatrical revenues decrease by even 5 percent as a result of the move, it could force many theaters into bankruptcy. Writing in TheWrap, Epstein pointed out that between 2000 to 2002, just a 3-5 percent drop in tickets sold caused almost half of all the theaters in the U.S. to file for bankruptcy.

Also read: Hollywood Is Slitting Its Own Throat With DirecTV's Premium VOD

Adding to the headaches, as Wednesday's open letter from filmmakers demonstrated, premium VOD is causing tension between studios and talent. In addition to Cameron, Bay and Jackson, 20 other filmmakers, including Kathryn Bigelow to Brett Ratner, added their names to the list of signatories. 

Relationships are also being strained between the studios, with executives for the four Home Premiere studios accusing non-consortium member Paramount of leaking stories about their premium VOD plan to the press and ramping up tensions with exhibitors.

Paramount could certainly benefit from goodwill with the exhibitors, given its active summer release slate. 

"Paramount has a fantastic 2011 lineup and they’re the sweetheart now of exhibition. They’ll get as much screen space and trailer time as they need, and all of it to support what looks like a really strong slate," Marla Backer, a media analyst at Hudson Square Research, told TheWrap.

But there doesn’t seem to be any conclusive evidence that Paramount planted the March 31 Variety story that publicized DirecTV’s launch plan, while infuriating exhibitors. The timing of the leak, arriving as it did just hours before Warner Bros. was slated to give its annual presentation to theater owners at CinemaCon, left some privately calling foul.

Warner Brothers was saddled with the unenviable task of effusively praising exhibitors while star director Todd Philips ("The Hangover") and producer David Heyman ("Harry Potter") publicly seemed to side with theater owners. 

Likewise, Disney — another studio not signatory to Home Premiere — is catching flack from consortium-studio officials.

 “The Mouse is the Cheshire Cat,” said one consortium-aligned studio executive. “They’re just sitting back there, smiling, but if you’re worried about windows, they’re probably the most dangerous of them all."