The Collapse of Theatrical Exhibition: Reforming Cinema & Media for Home Entertainment

2019 was a box-office success. It grossed $42,5 billion in ticket sales worldwide, $800 million more than the year before, and accomplished a record breaking total of 9 billion-dollar films, including a new all-time best.

Unfortunately, this high was expected to be a last victory lap for Hollywood. Theatrical cinema’s imminent decline was already precluded by a few key alarming signs, even before the COVID-19 pandemic. The underlying causes, however, were to be catalysed by the extraordinary circumstances, accelerating an years long trend.

An Empty Theatre Room (by Unsplash)

In this article, I’m going to discuss the state of the international theatrical exhibition business up to 2019, how it was affected by the pandemic and how it is beginning to move forward.

Prologue: Diminishing Returns

Even though the absolute revenue increased, the 2018-to-2019 growth represented only about a 2% increment. Considering previous year-on-year changes and that inflation alone would be 1,76%, this represents a marginal uptick.

Breaking it down and appreciating it through different lenses, we can recognise that even this slight improvement is not evenly distributed.

Blockbusters

Let’s begin with the bigger earners. These constitute a smaller number of all productions but represent a disproportionate slice of profit and revenue. For these, in just 3 years, there’s about a 10% decrease of the number of movies making $400, $300 and $200 million, even without adjusting for inflation.

As we can see, the number of big movies and therefore higher returns are not as much as they used to be. The sustained ticket sales are instead due to a few over-performers which skew the overall industry results.

Additionally, for the same amount of revenue, some studios are getting a smaller portion of the profits, due to a trend of over-investment in ultimately failed attempts to replicate record-shattering movies. More on that here.

Studios

The same concentration is visible at the studio level. 2019’s top 10 movies worldwide list featured Disney (and its subsidiaries) accounting for 7 releases and creative control for an 8th (produced by Sony Pictures) – presenting a fierce competitive environment.

This hegemony at the top results from continued efforts of market share domination. Not only there’s an aggravating corporate consolidation, but also an increased dependency on a few groups of films, sequels and respective spin-offs to sustain profitability.

Thereafter, on the top 20 movies of the year, only 4 were not based on pre-existing intellectual property (IP) – all mostly exclusively Chinese grossers.

All things considered, the competition in theatrical cinema is fostering a less prosperous business expectation, while painting a picture of an industry struggling to innovate.

Soon enough, these discrepancies and unevenly distributed results will directly influence the capacity to invest in alternative solutions – and the overall resilience – these companies would have in order to endure and overcome the upcoming scarcity of the following year.

Big Hits & Bigger Sequels: The Effects of the COVID-19 Pandemic

In the beginning of 2020, two threats were looming over the theatrical experience: one more rampant (COVID-19) and the other more insidious (media streaming services).

The first came to abruptly demand social distancing. As cinemas were ordered to close, the effects were widespread throughout the industry:

1. Theatre chains: with the responsibility of managing and operating many screening facilities, they had to shut down, lay off their employees and some filed for bankruptcy.
2. Movie studios: besides the exhibition limitations, many of their additional sources of revenue, like theme parks and resorts, had to halt their activities due to the same contagion containment directives.
3. Creatives: Physical productions (e.g., shooting and rehearsal) were also stopped, while some pre-production (e.g., screenwriting) and post-production (e.g., editing) efforts were safely resumed with additional precautions as soon as possible.

Despite the fact than on-going movie production was frozen, some features were ready for release. Among these were tentpole movies, with a lot of potential (and needed revenue) withheld. So, as never before seen, and with little understanding of what was to come, pipelines of dozens of movie dates changed to accommodate the sudden restrictions imposed, as the year was just getting started.

In Media Res: Course-Correcting

The responses were measured and cautious at first. The end of the pandemic was not in sight but most studios found it hard to justify changing the dates for movies beyond May. Their hope was that by Summer – the best ticket selling season – the situation would be improved enough to allow for a physical moviegoing experience. Perhaps the vaccine would come earlier than some had expected.

To better understand what changed and its importance, here is the basic set of rules upon which the cinema industry and film distribution used to operate:

- Studio executives hire creative partners to prepare, produce and edit a movie.

- The production is distributed to cinemas to be screened, with certain revenue sharing conditions and exclusive availability periods (varying accordingly to the studio-distributor agreement).

- After some time (usually 3 months), movies are now available for sale, renting or streaming through many different venues.

While trying to salvage ongoing business, different strategies were adopted. The favourite was to simply reschedule: picking a later date in hopes of a safer environment. However, the success of each individual movie required a critical mass of theatres and offerings to be available for people to show up in large enough numbers. So, after one delay, a couple more, and then everyone else would follow suit, landing on a new temporary safe haven.

The problem with this cycle was that it particularly held back the bigger sources of revenue. In special cases, like “007: No Time To Die”, product placements, brand synergies and back-end actor compensations, not only require tickets to be sold, but also expect them to do so in quite big numbers – something even very generous direct-to-streaming deals couldn’t match.

However, smaller projects or experimental aspirations allowed for trying out different outcomes. Some went straight to streaming, either for free on a given platform (“Borat Subsequent Moviefilm”) or accessible via an add-on purchase/rental (“Mulan (2020)”).

Breaking the Mould

Some studios, more bullish, wanted to try something more disrupting. Without notice, movies were now being made available simultaneously through traditional venues (and drive-ins!) and digital platforms, breaking the pre-established industry standard of the exclusive theatrical window and with it the stability upon which it operated. It most notably began with Universal Studios’s “Trolls World Tour”.

This decision led many theatre chains to express their vehement discontentment with the violation of distribution contracts and fear for their overall sustainability, culminating in an ultimate.

It is disappointing to us, but [NBCUniversal CEO Jeff Shell]’s comments as to Universal’s unilateral actions and intentions have left us with no choice (…) effectively immediately AMC will no longer play any Universal movies in any of our theaters in the United States, Europe or the Middle East.” – AMC’s comments; AMC is a theatres chain in North America

Although some adjustments would be made leaning towards exhibitor’s demands, it was clear that they were no longer essential, just (temporarily) beneficial. And these altercations, as alarming as they were, were to be lessened in comparison to Warner Bros.’ (WB) much more abrasive decisions.

During the height of the summer season, they experimented with “Tenet” a long release strategy – mimicking what happened decades ago when a movie would stay available in theatres for months. Their assumption was that people would want to get out to the movies, even if at a reduced rate. Being the only major release for what was traditionally the best box-office season, brought the expectation that the cumulative gross, even if slower to collect, was to be at least palatable. The numbers, unfortunately, were disappointing.

After this failed attempt, to the dismay of many distributors, they decided to try an hybrid release: 1 month for its streaming service (HBO Max) and cinemas at the same time, followed by a longer period exclusive to theatres. On one hand, theatres now had new films to screen, but, on the other, they had to compete for the most lucrative month of the exhibition run against the option of watching the same movie at home.

In the end of 2020, “Wonder Woman 1984", got arguably good results for the streaming service, but poor box office draws. So, it led WB to unilaterally decide to double down on this bet, without sufficient modifications, to the entirety of 2021’s pipeline. The move was so self-centred that co-financiers, actors and directors were all unpleasantly surprised at the same time, when the press release was published.

Some of our industry’s biggest filmmakers and most important movie stars went to bed the night before thinking they were working for the greatest movie studio and woke up to find out they were working for the worst streaming service” – Cristopher Nolan, long time director at WB

So, just as I have both a fiduciary and creative responsibility to fulfill as the filmmaker, I call on AT&T [WB’s parent company] to act swiftly with the same responsibility, respect and regard to protect this vital cultural medium. Economic impact to stakeholders is only one aspect of corporate social responsibility” – Denis Villeneuve, director of the upcoming “Dune”, schedule for a 2021 release

Despite the backlash, other studios seemed encouraged to follow the lead to enable a shorter theatrical window and monetise their emerging subscription platforms.

Change On Demand: The Rise of Streaming

If a rising tide lifts all boats, the pandemic was the tsunami to catapult the upsurge of almost every streaming service and create many new ones along the way.

There’s nothing better than an obvious, attractive, easy and satisfying alternative to ensure long lasting behaviour changes – and on-demand media platforms were poised to entice all the lockdown, bored eyeballs.

Like many old and stably profitable industries, changes to the core business strategies for the studios only happen after a certain break-even point (either short- or long-term), and usually occur in tandem, with most companies making the shift in a relatively brisk, predictable and uniform fashion.

In some companies, the grotesque investment on subscription acquisition, licensing and *cough* original *cough* content was already in place before the end of 2019. For those already ahead, with little need the re-invent the business model or planning, it was just upping the ante and increasing the pace at which they were already operating. Some forecast streaming related spending go as high as $41 billion – almost as much as the theatrical revenue in 2019.

Particular Set Of Films

Unlike new digital distribution infrastructures, one thing these corporations have in common – to varying degrees – is a long and diverse content library from which they can revive or capitalise interest in order to incentivise new (or continued) subscriptions.

This vault and their ability to expand upon it was set to be the driving force behind each value proposition, becoming both a tool to boost their efforts and a weapon against the competition.

• The Original “Disney Vault”

Previously, when not everyone had a streaming service to monetise and profit from, content was licensed, often to multiple companies, to allow for additional revenue, including TV and online services, physical formats like DVD and Blu-ray and merchandise. That’s how Netflix got their big break. But now the rule was to keep as much as possible (and take as make as much as possible).

Now that most household names had one platform of their own, more and more often, a given piece of content would only belong to a single service. So, forget the idea of “Finding Nemo” outside Disney+ or watching WB’s “Friends” on Netflix – even if $100 million in licensing fees are not to be collected.

AdVenture Capital

But lots of films and series weren’t enough. Companies needed a strong backbone to support and better take advantage of their precious library, so much so that the streaming challenge was, in fact, twofold. You need both content and technological expertise to distribute it, while maximising for long-term subscribers.

So, in this gold rush of sorts, where deep pockets and long-term growth expectations allowed for a disregard for quarterly profits and year-on-year growth, new competitors seemed very capable to join the game. Despite being low on original content, tech giants like Amazon and Apple already have huge and loyal customer bases and decades of building technological infrastructures.

Take, for instance, Amazon, as they:

• Have been selling movies and series for decades;
• Built Amazon Web Services, running many streaming services like Spotify and Netflix;
• Have been running their own on-demand service of licensed content for Prime customers;
• Purchased IMDb (a database for audiovisual entertainment content) and Box Office Mojo (a website that aggregates the revenues of different movies releases worldwide) to create a clear picture of what to invest their billions in;
• Already overtook the book industry – with online retail, the Kindle devices, Kindle Unlimited and Goodreads.

Adding it all up, they have mastered the art of figuring how to win the game before learning how to play it. More than just a promising opponent, they have already proven themselves as a fierce competitor.

Bundle of Joy

Even including these “unconventional” newcomers, and after a lot of business model reforming/soul searching from traditional media companies, the idea that consumers would be the ones to benefit is still far from consensual.

Despite each individual offering serving you an increasing number of options, both old and new, a lot of the benefits and accessibility promised in the beginning are disappearing – as there is no longer the quintessential one-stop-shop for you to watch everything.

So, what happens when there are a dozen services to choose from, with each promising more than you can watch? Sure, you could subscribe to only a couple and maybe even end your legacy TV subscription. But these platforms may be better understood as glorified private channels with a VCR on steroids.

It may be hard to imagine the early days of cable TV, when we didn’t have so many channels packed all together, available for a premium, but similarities abound. The companies fighting for your monthly payments now are pretty much the same ones developing new series and shows back then. Then as it is now, the original proposition was to subscribe to only one or a few options.

• “It’s not TV”. Does this sound familiar?

Then, mega companies, responsible for telecommunications and internet services, saw this growing trend as another opportunity for digital distribution. Soon, your monthly bill for TV became more and more expensive as the list of channels included expanded, under an highly profitable oligopoly structure.

Now, media studios see the internet as a way to opt out of the implicit dilution and subservience to traditional distributors. With more control and independence, came a stronger drive for differentiation.

But as bigger and bigger releases were allocated to this platforms, came the end of the free trials. Thus, customers are less able to make conscious and informed decisions. That would arguably be offset by relatively small monthly subscriptions compared to the cost of more traditional venues, i.e., buying an entire season of a favourite show or tickets in theatres.

It also worked as a way to enrol consumers into a new platform, in hopes of capturing just enough interest (or inertia) to keep them paying the fee. Chances are in a couple of years time that price will be raised just a couple of dollars – because of more content, more high definition options or just because they can.

Final Notes

In summary, how does this media consumption reform take place?

First, there’s an ongoing period of more than a year in which moviegoers are limited or all together forbidden to visit movie theatres. Such a straining test, so profound and long lasting, induced a response of “stop and change” rather than a “pause and resume”.

Thus, consumers were incentivised to experiment new alternatives with cheap content and, in some cases, the same offerings available in cinemas. Some of these options were already very familiar and becoming increasingly tempting.

Moreover, new competitive offerings from tech giants and the digital world, ushered in with different strategies of creating and distributing content, with better analytical tools and different consumer pools to exploit.

However, the abundance of streaming services created a contraption in which we have simultaneously more choices and more restrictions – with consumer benefits being inscribed within the limits of a multi-platform service.

Nevertheless, given enough bonuses for content creators (higher margins) and content seekers (lower prices, more accessibility, predictive algorithms), a new equilibrium may solidify its position as the de facto default choice. The traditional way becomes the novelty, the secondary niche option.

As modern cinema exists, it continues to be the same business it was before, although with a fresh new coat of paint, more operational efficiencies and less specialty options for the fans of the medium.

Maybe, an ambition to reach a bigger and more diverse audience will recreate a creative incentive to innovate – not only in how we see our media, but what we see in it. But that’s a big maybe.