NATO Not Shutting Up About The Thoughtless Destruction Of The Theatrical Window

I am not one for conspiracy theories.

But there are conspiracies of stupidity.

The media tends to lead the way down these ugly roads, so anxious to encapsulate every single thing that they/we overreach and then, too arrogant to admit being wrong, keep pushing false ideas. In the movie business, there has been no worse example of this in the last decade-plus – which just happens to be my lifetime on this beat – than the coverage of distribution models. Why? Perhaps because there is no area of the business in which there is less experience on the beat and a demand for perspective than there.

The thing is, all the technological changes combined with all the models that have been developed out of those changes, do not require – as many love to argue – the removal of all history about past models. Quite the opposite. History can help tell us what the future will bring.

Think about the Iraq War. There are three entirely separate conversations. First, there is the issue of the military power to take over a large country in weeks. Second, there is the military and political issue of what to do after destroying that nations military. Third, there is the political issue about whether we should really be considering the first two questions.

Technology, in the movie business and most others, is about the first question only. New tech enables the industry with the power to act. And people get giddy with that excitement of unleashing that power. But even more so than in the political world, the long-term consequences are a lower priority than potential short-term gains, as there is no threat of the ballot box… only the bottom line… and that bottom line arrives quarterly, which ramps up the urge to push forward with anything is perceived as being of a financial benefit.

Ironically, if it weren’t for the willful participation of the distributors in the mythology that the media holds so dear that the theatrical market is in serious decline, I would probably give the distributors more credit. Media was too ignorant to report on the serious decline in DVD for theatrical released movies for the first couple of years it was happening, accepting the overall numbers, which were driven by television product being put on the market in massive numbers. Talk to some Home Entertainment execs and they will tell you that the bosses at the studios didn’t understand this clearly either, not really sounding the warning bell until it was too late. They saw the gross number on Home Entertainment and thought things would be okay.

Since then, Netflix (and then, Redbox) became the poster children for The DVD Problem, when in obvious fact, they were just businesses doing a good job of working with the model that existed, not constrained by the inertia of giant corporations. There was nothing that Netflix was doing that the industry could not have done itself… while getting control of the price point. And indeed, there is nothing Netflix is doing now that the studios cannot do… and I think, will do… but the price point is long gone and never coming back.

In any case…

This all speaks to the public statements of Jeff Bewkes and Les Moonves (who really isn’t in the movie business) claiming that exhibitors were overreacting to Premium VOD and should just adjust to whatever the studios shove down their throats come up with as a plan. National Association of Theater Owners’ John Fithian took an aggressive stance in his response…

“Forgive us if we decline to take business lessons from the end of the industry that enabled the erosion of value in the home market,” said National Association of Theatre Owners (NATO) president and CEO John Fithian. “The creation of $1.99 kiosk rentals and $7.99 monthly subscriptions have undercut the sell-through model in the home—not theatrical release windows.”

I actually disagree a little. I would say the success of $1 rentals and $7.99 – $18.99 a month Netflix came out of “the end of the industry” that didn’t anticipate the maturation of the sell-thru DVD business and start to make adjustments earlier, instead of greedily sucking up every dollar they felt was there for the taking and then panicking and cutting retail pricing to single digits, reducing the value of the format and the content. Instead, they took the buy-off from Netflix in the form of stock in exchange for disc pricing deals and then sold the stock before Netflix matured, so arrogant and unconscious of the potential of the subscription model as DVD sell-thru was thriving.

“Your problem is in the home window: fix it there. You will not create extra revenue by introducing in the theatrical window the same self-cannibalizing channel confusion that has decimated the home market.”

Dead on.

There is a lot of confusion when it comes to the current push. There is this notion out there that if the public wants something, they should get it. This is absurd. And it has never been the way studios sold movies. The average studio release is an investment of over $100 million with marketing included. And the average major release (eliminating the dumps each studio throws away with lower marketing $s each year) is over $150 million. And “tentpoles” (which are not tentpoles at all anymore) start at $250 million and go as high as $500 million per title.

What “the public wants” is cheaper and more accessible. But “the public” is only really a sliver of the overall population that turns out for all but a few $150m+ domestic hits every year. And in that sliver is the revenue base for most movies. We know, over the years, that people who have already seen a film in a theater make up a significant percentage of the people buying DVDs and paying for other a la carte deliveries of a film. It’s as though studios take this so for granted that creating new ways for these same people to pay only once for product, instead of multiple times, isn’t really considered.

And as for expanding the reach of already ubiquitous product, there is no evidence to suggest or reason to believe that audiences not driven to theaters are not going because of price point or availability. (This is another popular media myth.) If they aren’t going to the theaters, how do you drive people to spend theatrical prices (and more) just to consume the same product that will be available to them at 10% of the cost or in a subscription model they are already paying for a couple of months later?

And if the price point is more competitive with theatrical and post-theatrical, then it is, in fact, competing with theatrical and post-theatrical. It is not another bit of the apple, it is – logically -an apple replacement.

Time after time, marketing execs – including in the movie business – experience the fact that too many choices equal no choice at all. But we all seem to forget this – or choose to forget it – when it doesn’t fit into our personal feelings about an argument. Right now, including Premium VOD, there are six windows in the first year of a movie’s commercial life, not counting international as a seventh. Theatrical, Premium VOD, Traditional VOD, DVD sell-thru, Netflix/Redbox (for those with a 28 day delay), and pay-TV. $10/$30/$5/$20(blu)/$8mo-$1/$10mo

Insanity.

“Combat piracy by charging $30 for a rental? Really? You can’t compete with free. Early VOD release will only exacerbate theft by giving the pirates a pristine digital copy of the movie much earlier than they have with DVDs.”

The piracy argument is a false argument. And the studios know it. It cannot be combated by shorter theatrical windows and there is ZERO reason to believe it can. The only possible defense against piracy is full on day-n-date… and there are a lot of reasons why that is bad business. Moreover, piracy is driven by price point and unavailability. Unless you’re going day-n-date with $5 DVDs, much of piracy will remain in place, except with better copies of the films.

60 Day VOD as a dodge on piracy is just a lie.

The history of DVD is a near-perfect example of how this industry starts down a hill and then can’t stop rolling, even as it loses control and becomes a projectile rather than a runner.

The myths that “people don’t go to the movies anymore” or that “everyone wants to watch everything on their TV at home” or “you can better control piracy by releasing things outside of theatrical more quickly” must stop being perpetuated. That is, unless you want to see the end of theatrical distribution and high budget movies.

What is true for independent cinema – that day-n-date VOD expands the market significantly – is the opposite for wide-release distribution. Theatrical is a strong, consistent segment of revenues for wide-release distribution. Home Entertainment is significantly bigger, in terms of revenues and eyeballs. But they are symbiotic markets, not interchangeable markets. And the margins in the movie business are not strong enough to sustain shrinkage in theatrical.

When Les Moonves says that theater owners, “are going to have to change a bit to prevent a crisis,” he has it exactly wrong. The crisis comes – and has come before – from corporations trying to fix what’s broken by taking too much advantage of what is working. Fantasies of economies of scale are what brought us AOL/Time-Warner and packaged mortgages. Time-Warner wasn’t broken. The housing market wasn’t broken. So what do they do? Try to find a way to suck them dry, aka break them.

So back to the 3 arguments. 1. The technology is pretty much here. Not going away. Okay. Done.

3. Should we go there? This is the big one here. Do you care if theatrical dies? Do you care if the industry shrinks by another 40%? If not, you should be happy to go with the current wave of thought. If you do care about these things, you should not.

2. What happens once we get there? I think it’s very clear. The best we can hope for is a bubble. But when that bubble bursts, it will be much worse than the DVD bubble, because revenues will shrink much faster than they did as the air came out of the DVD bubble. It is likely to leave much of the industry as rubble.

Some people are good with that. Some people anticipate a freer, more creative industry as a result. Burn the village to save the village.

Sigh.