Studios, Theatres and Premium VOD Contents

The relationship between the movie studios and the channels for the distribution of their contents has been a leitmotif of the film business from the inception of movies as a commercial activity. There was a time, a half of a century ago, when the matter was primarily framed (at least in the US) as a question of antitrust law. Thus, in the seminal Supreme Court case of United States v Paramount Pictures, Inc., 334 US 131 (1948), the Court required the studios the divest themselves both of ownership of theatres and of maintaining exclusivity rights regarding which theatres would be allowed to show their films to the consuming public. In so doing, the decision hastened the demise of the old studio system as well as giving rise to new arrangements for the production, distribution and exhibition of movies.

Much of the antitrust doctrine underlying this decision has been either called into question or outright overturned by later Supreme Court jurisprudence. What remains is the continuing love/hate relationship between the providers of celluloid content and the various platforms by which these contents are made available to the public. An excellent summary of the current state of this tension appeared in the Los Angeles Times article of 23 December, under the byline of Richard Verrire and Chaudia Eller and entitled "Theatre Operators Fight Studios' Plan to Release Movies in Homes Earlier", here.

The gist of the revenue share between studios and theatres is that threatres keep about 50% of revenue from ticket sales, while the studios keep the remaining portion. With each development in distribution technology, the studios seek to leverage their contents to earn additional revenues, following a multiple distribution trajectory from theatre to DVD sales, to video on demand (VOD), to cable broadcasts.

The genesis of the current tensions between studios and theatres derives from the declining sales of DVDs for home viewing. For studios, DVDs have been the main driver of non-threatre exhibition income, but DVD sales are declining. The challenge is how to maintain a home viewing market as the consumer slows his purchasing of DVDs, especially when the size and quality of home screens continue to develop. One strategy, and the immediate bone of contention, is for the studios to shorten dramatically the period of time in which a theatre enjoys a monopoly in the exhibition of a movie before it is made available for home viewing (the so-called "theatrical window"). In the DVD world, the theatrical window has been 130 days from the time that the movie is exhibited in the theatre to the time that the movie is first available in DVD form.

The suggestion is reduce the theatrical window to 30-60 days for premium priced VOD, with the price ranging from $30-$60, depending on how soon the movie is made available. The pros and cons of such a move are not unexpected. Movie theatre groups see such a step as a direct threat to their revenue potential by shortening the waiting period for home viewing and thus giving consumers less of an incentive to rush to their local movie house. Even a producer or two shares this view, most notably James Cameron of Avatar fame: "We don't make movies for the small screen, we make movies for the big screen. Television is a great art form, but it's an oxymoron to say that we're giving you a premium experience on TV."

In response, the studios point to the challenge of the changing economic climate. Notable in this regard are the words of the Chairman of Universal Pictures, Adam Fogelson, who observed that '[w]e are exploring every conceivable additional revenue stream there. The facts are irrefutable that our business models are under an extraordinary amount of pressure. In order for the studios to remain healthy, we need to find ways to recapture that revenue." Some analysts see the issue from another angle, namely that risk is overstated. It is observed that fewer than one-half of US consumers view movies via VOD and only a small proportion of those consumers can be expected to fork over $30-$60 to watch a movie at home, no matter how fancy the screen.

The long-term future of movie theatres has been the focus of media eulogies more than once in the past, with this or that claim that technological developments for content delivery and display will render theatres decreasingly important for the distribution of movies. While there has been a small decline in movie attendance this year, revenues have held up due to increased ticket prices. More importantly, only a commercial manichean would see theatre owners and the studios as being engaged in a zero-sum game. As the article itself points out, there is and has always been a symbiotic relationship between the two. The mix may change at the margin, but the demise of the theatre seems premature.

Premium VOD--Have Studios Found the Answer?

I am about to show my age. When I was a child, the movie business was a simple matter. Studios made movies and people like my brother and I went every weekend afternoon to one of the three movie theaters in the smallish industrial town in the U.S. in which we grew up. There were no other distribution platforms for the studios to screen their products (my son tells me there is at least one movie theater in Kolkata that still fits this bill.) Indeed, I suppose that the special Saturday matinee fare was the closest to thing there was to out-in-front marketing (get the kids into the habit of periodic movie-watching and you then own them for life when they are able to pay full fare).

As for the present--au contraire! If anyone needed to be reminded of that fact, the article by Brooks Barnes, "In This War, Movie Studios are Siding with Your Couch that appeared in the September 25, 2010 edition of the New York Times here graphically demonstates this point. The focus of the article is the "explosion in the movie business" that is expected to take place in the next few months.

The catalyst was a ruling issued by the U.S. Federal Communications Commisison in May 2010 that movie studios are permitted to activate technology that has the effect of preventing the copying of films sold though video-on-demand (VOD) systems. As a result, it is expected that the studios will soon launch a so-called premium VOD service. The article describes this service as "the [movie] industry's best hope of restoring itself to health." What, pray tell, is going here?

The most pressing challenge to the studios is that the bottom has fallen out of DVD sales. It is reported that such sales have declined 30% since 2004 (although how much of the decline is due to structural factors and how much is due to the cyclical downturn is not clear.) The proposed remedy is to adopt the premium VOD service.

Under the current system, the movie theaters enjoy a 120-day exclusivity period within which to screen movies. Only after the expiry of that period are the movies made available on a VOD basis, at an approximate price of $4.99. The proposed premium VOD service will shorten the exclusivity period to 45 days. After that time, movies will be made available on a VOD basis at an approximate price of $24.99.

The studios apparently believe that there is a sufficient mass of couch potatoes prepared to shell out nearly $25 for a movie that they can watch at home reasonably soon after the initial release of the movie in the local theater. When one factors in the fact that the studios earn up to 80% of the revenues from DVD rentals, the attraction of a premium VOD is clear. On a subsidiary level, the shortened exclusivity period promises to reduce the amount of promotional and advertisement costs as well as to attract viewers more generally to the concept of VOD services.

So how do we see the various actors in the celluloid melodrama faring under an premium VOD regime? Here are some of my thoughts.

1. Studios--They see this opportunity as a way to exploit new platforms of content delivery with the hope that it will make up for the decline in the DVD market, which has been a major driver of profits in recent years.

2. Cable and satellite producers--Their interest is two-fold: (i) another revenue stream; and (ii) a potential differentiater of their services vis-à-vis content delivery competitors.

3. Retailers of DVDs--Behemoths such as Wal-Mart have owned the DVD market and they appear to be dead set against the premium DVD service, which they fear will further cut into their DVD sales.

4. Movie theaters--In a word, it is reported that they are prepared to declare "war" on the studios' plans to launch the premium DVD service. Their reasoning is simple: reducing the exclusivity period to 45 days will cut into sales of theater tickets without any compensation for these lost ticket sales. In addition, they warn that the so-called anti-copying technology will sooner or later be cracked, meaning unlawful distribution at an early stage of the movie screening time-line.

5. Symbiosis--That said, there is a form of symbiosis here beween the movie theaters and the studios because the most desired television networks--such as HBO--pay the studios in part on the basis of domestic box-office revenue. This means that, if there is less revenue at the box office, the studio will receive a lower fee from these television outlets. Moreover, it is doubtful that any other distribution channel has the (current) ability of the movie theater to provide the catalyst for viral buzz about a new movie release.

Let me venture two final comments.

First, the potential dispute over premium VOD highlights the continuing debate over the importance of the viewing experience. A good deal of the cost differential to watch a movie in a theater is connected to the total ambience of the viewer experience. Home viewing offers a totally different ambience and price structure. The studios seem to be betting that they can narrow the price differential between theater and home viewing, despite this stark difference in the two viewer experiences.

Second despite the intimation of the New York Times article, I have my doubts that premium VOD my itself will mark a strategic rebalancing within the movie industry. At the most, it will mark another tactical move that may both enhance the revenues of at least of the dramatis personae in the industry as well as create a nuanced (or not so nuanced) reshifting of relationships. At the end of the may, we may look back at this move as one more of the "thousand cuts" that the industry is experiencing as it seeks to find more appropriate business models in an era of changing content delivery platforms.