We've Got Hollywood Covered

Hollyblog: Studios Are Determined to Kill the Film Business

Their lack of knowledge of the economics of the theaters is stunning – but worse is their lack of interest in hearing points of view other than their own


Film studios seem determined to kill the movie business completely. After putting video stores out of business by authorizing Redbox to rent videos for $1 per day from what amounts to a Coke machine, now they want to put movie theaters in a coma by authorizing a new at-home video-on-demand release during what has until now been the exclusive first-run theater window.

This comes after demanding for the last 10 years that theaters spend $ billions on digital sound, stadium seating, digital projection, 3D projection and new locations.

Now James Cameron wants a completely new system put in place with enhanced frame rates for further $ billions.

In a stunning suspension of disbelief, many studio executives argue that an enhanced early at-home alternative will encourage MORE people to go to the movie theater — do people this naive really exist? It sounds exactly like the last ten years of internet gurus and solons calmly insisting that free (stolen) music would encourage higher CD sales. See how well that worked out. Fool me once … call me a record executive; fool me twice … what do they think, we're politicians?

I ask: "Are you a movie without a movie theater?"

If you answer “yes” a movie is a movie even if released just on television, then go ahead.  In fact, if that’s true why aren’t you doing it now? The TV networks have no exhibitor relationships to destroy, why aren’t they spending $300 million to produce Avatar, or $150 million to produce “the Hobbit” or even $60 million to produce “The Hangover?” I know why because I’ve asked TV network heads in the past. They say it’s ludicrous to assume they could spend like a movie studio for TV product.

The TV movie model does not support the economics of a major feature film.  It is the theatrical release that makes a movie a movie and builds the momentum and interest that enables it to gross over a billion dollars. For a major worldwide hit, it is also the largest contributor to the profits of a movie. Don’t be fooled by “retail” numbers.  Home video was a very big retail number but the share to the studios was around 35 vs. 60 percent for a major hit in the movie theater.

Further, a major theatrical hit has an unlimited upside while a major video hit is intrinsically limited. Video and television are great for catalog, but they do not fund a front line release schedule — for that you need the movie theater with its higher per capita income and greater share to the studio.

As for the impact on theatrical attendance, I believe it will be devastating. However, among studio execs the best case quoted to me was a 10 percent drop in attendance with the executives insisting that, "Some theaters will close, others will raise prices … it's all good."  The reality is that a 10 percent drop in total attendance, across the board and permanent, will cause 2/3 of all the theaters in the U.S. to close their doors and never open again. 

When I brought this up, the response was that movie theaters were just a real estate play anyway so profits didn’t matter to the theater companies — something which hasn't been true for 30 years. Today, virtually all theaters are in leased premises rented from mall owners with only older, outdated facilities still existing on owned property.

The lack of knowledge of the economics of the theaters is stunning – but it pales in comparison to the lack of interest in hearing any point of view other than their own.

What is true is that the studios f—ed up the video business deliberately and with full knowledge. They were told by every video store chain that $1/day Coke machines dispensing videos would kill the bricks and mortar video stores. Their response was the typical studio response: "F— off and get out of my office!"  

When Hollywood and Blockbuster shut their stores studio revenue dropped immediately by $ billions.  The public’s demand didn't drop by that amount and in fact the volume of video rentals was increasing when this took place, but with increasing volume at 40 percent of the price the stores could not be profitable. The exigencies of a retail business dictate that when revenue drops below the break-even point the entire store closes, not 10 percent of it. 

Studio executives are desperate and have invented this accelerated video/internet window mainly as a means to keep their jobs — see how clever we are, how progressive and forward thinking? The utter denial that this will affect the movie theater is stunning to behold and laughable to listen to if they weren't so serious. 

I'm going to say it again — a 10 percent drop in attendance, with the attendant loss of box office revenue, concessions income and advertising income will CLOSE the theaters.   Most theaters have only 15-20 percent operating margins. Amazingly, studios executives are simultaneously haranguing (and alternately ridiculing) the theater owners by demanding they increase their spending on new technology, even as they plan to undermine the theatrical release. 

The contempt the studio executives have for the theater owner/operators reminds of the Silicon Valley contempt for what they laughingly refer to as "authored product" — you know, like books, music, movies and TV shows, stuff people have to think of, write and create and pay for. 

Don’t believe me? There are many theater companies which are public. Run the numbers yourself.

What are the options? Theaters could raise their prices — like Broadway theaters are a viable model for the movies, or maybe Grand Opera is the new model? Go twice a year for $150 a person. The main advantage movie theaters have in the marketplace is that movie-going remains the single cheapest thing a family or couple can do on a night out of the house. Despite complaints over ticket prices and parking fees, by any comparison to restaurants, sports events, concerts, theme parks etc. movies are far and away the cheapest entertainment alternative out of the home. 

You could cut the theater in on the income, but: (a) that wouldn’t make up for the lost concessions and advertising income which together are 70 percent of a theater’s operating profit, and (b) wouldn’t that be contrary to the reason for creating the window to begin with making it moot?

Raising prices will simply drive more people to the home alternative. What about cutting costs?  Rent for theaters is fixed — pay it or file Chapter 11 and a drop in attendance doesn’t reduce the mall owner’s need to turn a profit on their development. Over 80 percent of the labor costs are at the minimum wage and people are already complaining that staffs are too small. Utility rates are unaffected by theater attendance. Sugar prices won't go down and neither will the cost of candy. Popcorn notoriously costs only pennies to begin with and the soda companies actually subsidize soda sales. 

There are literally NO costs the theater can reduce except two:  They can stop cleaning the theaters … OR … they can stop paying film rental. Hard to see how either helps things.

On top of all this, a decision to cut off the theatrical window is what strategic planners (something studios seem to have a lot of these days, most with the world "digital" in their title) call a "point” decision. Once you make it, it becomes irreversible and dictates everything that comes after. The famous business school case involves the Navy deciding on the length of the runway for an aircraft carrier. If you put in this window and it cripples attendance as I believe it will and as most studies suggest it will, the theaters will close and they won't reopen.  

But you sure look smart for being the one to suggest it, don’t you?

Gotta go now, there's a new Blockbuster opening down the street … What?  Where? 

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