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

The math may look appealing to studios, but a 10% drop in ticket sales would close more than two-thirds of U.S. theaters

Since Hollywood is now run by former television executives, it is hardly surprising that the studios are about to carve out for themselves a new video-on-demand window from what had been the exclusive realm of the movie theaters.

Called “Home Premiere,” and costing $30 a movie, beginning Thursday it will beam into couch potatoes’ homes a movie in high-definition just eight weeks after it opens in the multiplexes. This will allow the home audience to see a movie in the comfort of their home months before it is available in the video stores, vending machines or at Netflix.

Also read: Worst-Kept Secret Revealed — DirecTV Admits Premium VOD Plan

To these studios, the math looks appealing: The average ticket price in 2010 was $7.89. The studio’s share averages about 50 percent. So studios winds up with $3.95 per ticket sold. But for every Home Premiere viewing they wind up with $21 (after giving their enablers, Direct TV and Comcast, their cut.) Even if people watch it in groups, studios can afford to kill off five ticket sales at the box-office per home viewing, and still make money. According to the estimate of a Warner Bros executive familiar with the research, the studios expect this service will skim off no more than 5 percent of the theater audience, explaining “we cannot help but make money.”

Granted the studios will harvest a bit of money from this new service, and they may even draw away part of the Netflix audience, but it will be at a cost. What is conspicuously missing from the studios’ calculus is what the theaters might lose. Virtually every modern theater is in a leased premise, with fixed overhead, and a payroll to meet. It makes most of its money, not from movie tickets, but from popcorn sales and ads to the herds of movie goers. Food concessions have an 80 percent profit margin; advertising over 90 percent.

Studios do not get a penny from these operations but they provide 75 percent of the multiplexes operating income. So while studios might not care about a slight loss in ticket sales, it could strike at the heart of the theaters’ popcorn economy.

Also read: Theater Owners Ready to Retaliate Over Premium VOD

How seriously would a 5 percent drop in attendance hurt them? A former senior studio executive who was also responsible for that studio's movie theater investments, pointed out that in 2000-2002 just a 3-5 percent drop in tickets sold caused almost half of all the theaters in the U.S. to file for bankruptcy. He added ominously that “a 10 percent drop in ticket sales, and the attendant decline in concessions income and advertising income, will close over two-thirds of the American movie theaters — and they will never re-open.”

If so, the studios are undertaking a highly risky business. They are offering the public the possibility of watching new movies at home without the hassle and expense of hiring a baby-sitter, driving to a megaplex, and buying food at the concession stand.

True, such an offer may appeal to only a small part of the theater-going audience, but their assumption that it will not hurt theaters is “I-can-have-my-popcorn-and-eat it too” wishful thinking. At this stage no one can predict whether such defections will reach the critical 5-10 percent level.

If it does, this new studio harvest might well destroy the exhibition system that created Hollywood — and the movie experience that goes with it.