Hollywood Studios Are Forcing Movie Theatres to Rethink Their Traditions

Hollywood Studios Are Forcing Movie Theatres to Rethink Their Traditions

A new video streaming service showing films still playing in theaters could shake up the movie industry’s entire distribution system.

Friday morning, Bloomberg reported that several Hollywood studios are planning to launch a premium video streaming service without asking movie theater chains for a thumbs-up first.

In an age of falling DVD sales and lower foot traffic at the box office, major studios including Time Warner (NYSE:TWX) division Warner Bros. and Comcast’s (NASDAQ:CMCSA) Universal Studios are discussing new streaming ideas with Apple (NASDAQ:AAPL) and the cable side of Comcast, according to the report.

What’s new?

The current system of distribution windows for new films typically gives theaters 90 days of exclusivity, followed by a couple of months where the movie is available on home video and pay-per-view rental services. After that, premium cable channels get their hands on the new content for a longer period, and rabbit-air TV syndication becomes an option roughly two years after the original silver-screen premiere.

The new idea here would be to offer a premium streaming option much sooner, maybe even cutting into the exclusive period for theater-viewing only.

Studios and theater chains have been talking about something like this for years, but with the streaming services sharing their revenue with theater owners for the first few years of this new model. However, the two sides couldn’t agree on what a reasonable business model might look like, so the premium video on demand, or PVOD, idea was effectively dead in the water.

And that’s where we come in today. The new PVOD service, which could be powered by Apple’s iTunes distribution platform and Comcast’s video on demand features, among other technology options, could put new films on our living room screens while still showing in theaters. It could happen as soon as early 2018, at a cost of roughly $40 per viewing or download. If that seems steep compared to visiting the big-screen emporium or waiting for the Blu-ray version, you have to assume that you’re making up for more than one lost movie ticket, and so it makes sense to charge extra for early home-viewing access.

And all of this would be done without the movie theater industry’s blessing or participation.

Cinema operators took this report on the chin. Leading movie theater chains AMC Entertainment (NYSE:AMC) and Regal Entertainment (NYSE:RGC) saw their share prices fall as much as 8% in Friday’s trading, and Cinemark (NYSE:CNK) stock dropped as far as 4%.

Theaters are fighting for their lives
I can’t blame the movie theater owners for fighting for their lives. Yearly attendance in American cinemas has fallen from 1.41 billion in 2006 to 1.32 billion in 2016, according to Box Office Mojo. Annual box office receipts rose 24% over the same period, stopping at $11.4 billion last year, but that’s only because of steadily rising average ticket prices.

Chart showing average movie ticket prices rising from $6.55 in 2006 to $8.89 today, including a steady rise in inflation-adjusted prices.

Movie studios and theaters have done their best to add value to the theatrical experience. That’s not an easy task.

Silver screen videos have typically displayed in a far higher resolution than the latest available TV screen technology, but modern 4K televisions and Ultra-HD Blu-ray players are catching up to that picture-detail advantage. 4K TV sets are hitting the mainstream right now and 8K versions are running a few years behind. Meanwhile, the very first feature film shot in the next-generation 8K resolution was reportedly Guardians of the Galaxy Vol. 2, which hit theaters just four months ago. So that technology gap is not terribly wide anymore.

Movies can also be made more immersive with the enormous screens and top-shelf surround sound you find in an IMAX (NYSE:IMAX) theater. Starting from 62 domestic screens in 2006, IMAX expanded to roughly 500 screens worldwide five years ago and more than 1,150 screens today. At the same time, many theater operators have developed their own IMAX-style solutions for immersive viewing, not included in these counts. This one’s hard and expensive to duplicate at home.

The industry took another swing at 3D movies in recent years, using more comfortable technologies than the old blue-and-red or polarized 3D glasses. Home theater systems supporting the new 3D formats were popular for a while, but have now disappeared from store shelves altogether. So I suppose that’s a win for the theaters — if you want the 3D experience, you need to get into a proper movie theater.

Many theaters have upgraded their seating with leaning chairs and plush padding. Some have moved up from popcorn and nachos to serving full-featured dinners and alcoholic drinks in your seat. Again, you can get the same thing right at home but then you’re missing out on the combination of big-screen entertainment and restaurant-like service. So this is another solid selling point.

It’s no longer enough just to put moving pictures in front of the audience and hope for the best. If you want to earn a premium ticket price, you have to earn that high-end fee. That’s especially true since the malls housing most movie theaters are running their own deadly gauntlet, under pressure from online retailers.

What’s your point, Poindexter?

I’m showing you all this because these challenges play a large part in this week’s streaming video news. It is becoming obvious that the old ways of doing business in the movie industry aren’t good enough anymore, so both studios and theater chains have to adjust to the new market conditions.

That’s what this rumored PVOD service would do. It’s one step closer to getting home entertainment “day-and-date” with the theatrical release. If convenience is king, this idea should be a winner in the long run.

Meanwhile, AMC and Regal might have wanted to take a less attractive version of the revenue sharing deal a little earlier, before push came to shove. If they’re lucky, this leak might just be a bargaining strategy to give the theater owners more motivation for a partnering deal. Otherwise, Hollywood will have to find a whole new balance between big-screen releases and direct-to-video in a whole new early release window.

The studios want to move forward, meeting the expectations of a new breed of consumer. As long as the movie theaters are determined to save their outdated business method, they are doomed to fail in the long run. Finding a healthy and lucrative middle ground is the way to go, but I’m not at all sure that it will happen.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and IMAX. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.

Anders Bylund is a Foolish Technology and Entertainment Specialist. Where the two markets intersect, you’ll find his wheelhouse. He has been an official Fool since 2006 but a jester all his life.

Hypoallergenic. Contains six flavors not found in nature. Believes in coyotes and time as an abstract.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Source: The Motley Fool

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