Don't Bother, We'll Just Sit in the Dark

04/18/2011 02:21 pm ET | Updated Jun 18, 2011
  • Jeffrey Korchek Vice President of Legal and Business Affairs and Assistant General Counsel, Mattel

The recent dust up between executives of some the country's major theater chains, Regal, AMC and Cinemark, and four studios planning to launch premium VOD soon does make you wonder how many theater owners it takes to screw in a light bulb. So they're not going to play or promote movies that will be part of a studio's premium VOD offering, because they don't want to "utilize their resources to provide a marketing platform" for the subsequent exhibition of those movies in which they don't share revenue. And instead, they will show what?

The economic relationship between studios and theaters in the marketing and exhibition of movies is pretty sweet for the exhibition side. The theaters can select the movies they want to show and they don't pay anything up front for that right, but instead split the revenue derived from ticket sales with studios on a negotiated percentage basis. The percentage is either fixed or varies over a picture's run, but it generally averages out to about 50%. And, the studio pays for all of the television, billboards, radio and other promotional expenses, and all the full page ads in newspapers for whoever is still influenced by those in their choice of movies, while the theater keeps all the money from selling $5 Cokes® and Junior Mints™.

So why are theater owners complaining? The studios are shouldering the majority of the cost, including the ridiculous amounts they spend on making the content. And with the high cost of marketing, primarily on television, very few theatrical runs are profitable for studios. It really needs to look like Avatar or Paranormal Activity to make a profit on theatrical exhibition alone. Part of the exhibitors' complaint is that there's not much else you can do with a movie theater besides show movies, and the exhibitors are totally dependent on the production decisions of the major studios and independents to make and market pictures that fill those seats. Theater owners have tried various alternatives for the off hours, but to limited success: matinees for moms, live broadcasts of events like the Indianapolis 500 and the Metropolitan Opera and even High Holy Day services (applying the upscale theater experience of purchasing reserved seats on-line, a bar and helpful theater ushers to ensure sound quality might just be a value-add here, not to mention the possibility of bonus points -- really, shouldn't God give me miles?).

Of course, the other part of the exhibitors' complaint was noted by Sony Pictures' Michael Lynton at the recent CinemaCon conference in Las Vegas in explaining this year's downturn in ticket sales: "so far there is just nothing terribly compelling about what [we're] delivering as an industry." So, bad pictures, and with a shortened theatrical window due to premium VOD, not enough of them.

Recently AMC and Regal established a joint venture to acquire movies for their theaters, but unless they're movies that people want to see, their mere presence in AMC's and Regal's theaters doesn't give them much leverage against major studios. Filing theater seats is not quite like filing seats on an airplane; in the latter case you can discount until the seat is filled and every dollar above the breakeven number of sold seats on a flight is incremental profit. Filing seats in a movie theater is sort of the same thing, because the overhead continues so you might as well fill as many seats as possible. However, the difference is that with air travel most airlines are the same, so from a consumer's perspective, lower prices can induce people to travel. Movies are not all the same, so for some -- this week it's Sucker Punch -- there probably isn't any price low enough to induce someone to see it in a theater.

However, exhibitors do have an economic weapon if they think premium VOD will cut in to their revenue: they can negotiate with studios for better terms and a higher share of the box office revenue. Since exhibition companies tend to dominate particular regions of the country, they do have a certain market power. Of course, studios could forsake theatrical distribution in the future and just release films directly to the iPad Nation -- losing the shared experience of seeing a movie with an audience, perhaps replaced by simultaneous Tweeting? Then, it all starts to look like the movie business of the future as imagined by Philip K. Dick. Somehow, especially given the current economics of studio motion picture production, that doesn't seem like the full credit answer. And how sad would it be if theaters started closing like so many Blockbuster stores? There really isn't a good alternative to the excitement of seeing those movies that you want to see on the big screen of a darkened theater -- because isn't that what you think when you see Johnny Depp on the billboard for Pirates 4 or see an ad for Daniel Craig as the Bond you've always wanted, and wanted to be? Especially if the movie is showing at the Cinerama Dome in Los Angeles or whatever your favorite best screen is.

It's not entirely certain, then, that premium VOD will be another nail in the coffin of the theatrical movie going experience, following behind $15 tickets (or more in 3D), parking and those $5 sodas and candy, or of any impact at all since 97% of a picture's theatrical revenue comes during the initial 60 days. The thought that people will wait and pay $30 merely to see a movie at home earlier than when they could buy it on DVD for half that amount seems unlikely. The $30 price also seems temporary, because at some point that price drops, just like BluRays have already and just like DVD's before them. But, if theater owners are right and theatrical business declines, and premium VOD can't hold its price .... well, for studios, as Patrick Goldstein recently noted in the Los Angeles Times, maybe "it's just a bad idea."

The relationship between studios and exhibitors is always love/hate. More so now as the decline in DVD sales with no corresponding increase in other revenue, and no decrease in production costs, has put added pressure on studios and their corporate overseers. The times require innovation. Perhaps it no longer makes sense to open pictures across the country on the same weekend. Surely the less than outstanding performance of Scream 4's opening weekend might be due to the fact that a good portion of the youth of Los Angeles -- 200,000 plus -- were in Coachella this past weekend. That might lead studios and theater owners to consider a more flexible approach to releasing (or going directly to where their audience is). Of course, studios' devotion to the opening weekend box-office numbers and their desire to claim Number One status (even if it is only to be the first of two Russell Brand movies), as well as the shortening of distribution windows due to the pressure to recoup their enormous investments, does make it difficult to consider alternative distribution strategies.

Maybe distribution will evolve into a tiered strategy -- a minimum theatrical window for the big pictures that demand the big screen, and something less for the lesser ones. The problem is that you never know in advance as each movie is an individual enterprise who's success or failure in a given media is affected by so many considerations in addition to the most basic of whether it simply is a good movie. It does seem that premium VOD will detract from the excitement of a new theatrical release and commoditize the product. Do that enough, and you're the record business. Or maybe it's the opposite and the primacy of movies released first in theaters is something that we're just holding on to that, economics aside, matters as much as landlines do now. I'm not saying, I'm just asking.

So back to where we started: is premium VOD where the exhibitors and studios finally draw the line? And who wins? Or maybe, as with the record companies, do we just get mad and change how we consume movies?

On TV, they would say, "move along, there's nothing to see here folks."

In real life, we might say, "send in the Cloud."