The Assassination of Movie Theaters
David Marin
January 21, 2021
  |  

The Assassination of Movie Theaters

David Marin
January 21, 2021
  |  
Company Forensics - Learn from the mistakes of VC-funded startups | Product Hunt

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Movie theaters have faced the existential threat of streaming services for more than a decade now. When services like Netflix or Hulu started booming, it opened a debate about movie theaters' future.

Still, box office remained the most lucrative way of distributing movies, particularly blockbusters. But then 2020 changed everything, leaving movie theaters pretty much useless amid a global pandemic where people can't gather in public places.

Movie studios and exhibitors have had to make tough decisions, and Warner Bros. just took a step forward.

The studio recently shocked the movie industry when they announced that their 2021 movies would be released simultaneously in theaters and on HBO Max, their streaming service. It may sound simple, but it's a game-changer for the industry and a sign of the times.

A decision like this could be the final blow to that centennial rite of watching movies in a dark room with a giant screen, blasting sound, and a hundred other people. Let's talk about how the movie industry is changing for good.

Welcome to Company Forensics.

Sign of the times

Warner Bros. is not the first studio to try and break the classic windows of movie distribution. But they're the first ones doing it big time.

They started announcing that the movie Wonder Woman 1984 would premiere on Christmas, after several delays, and arrive on HBO Max on the same day. A few days later, they came out to say that all their 2021 movies will follow the same model.

Historically, movie theaters have had a significant edge in the movie exhibition business. For decades, theaters had an exclusivity window to show movies for about 90 days. After that, movies go to online rental and purchase, to finally arrive at streaming services and TV.

That exclusivity window is when theaters make money, as the ticket sales are regularly split 50/50 between the exhibitor and the studios. For blockbusters, it usually takes one or two weekends to make hundreds of millions in ticket sales.

But those days are coming to an end. Mainly thanks to the pandemic and because we live in a digital era where consumers want everything immediately.

The coronavirus outbreak has suffocated movie theaters, forcing them to close the business for most of 2020 and possibly for a few more months, at least. The promise of vaccination is closer, but not quite yet for everyone.

Meanwhile, younger generations are already more familiar with the experience of watching movies on streaming services, on a variety of devices, and not so much the adventure of movie-going.

Not only the pandemic has been lethal for movie theaters, but it has been excellent for streaming services. Netflix added 15 million new subscribers, only in the first quarter of this year, and Disney + has amassed around 80 million subscribers in a little over a year.

With movie premieres delayed throughout the year, studios have been selling low and mid-tier budget films to streaming services, rather than waiting for the uncertain return of theaters.

And now blockbusters will follow that path, essentially changing the way Hollywood does business.

Of course, this has already caused some clashes in the industry, like the one between Universal Studios and AMC, the world's largest movie chain. In April this year, the studio planned to release the animated sequel "Trolls World Tour" in classic fashion.

Then, theaters started closing due to the coronavirus, and Universal was quick to think of a solution. They released the movie for premium on-demand video platforms, renting it for $20, and it was a success.

But AMC didn't like the move and called it "categorically unacceptable." Adam Aron, AMC's CEO, went on to say that:

"With this proposed action to go to the home and theaters simultaneously, Universal is breaking the business model and dealings between our two companies."


AMC hit back, threatening not to book any Universal movies in their theaters. He even suggested they would boycott any other studio "contemplating a wholesale change to the status quo." By the status quo, he probably meant his movie chain business.

A few weeks later, the two companies announced a deal that restored their relationship and reached a sort of midpoint. The agreement gave Universal the right to make its movies available in homes through premium video-on-demand only after 17 days of playing in AMC theaters.

These negotiations and changes in the industry affect many other minor movie chains and contributors to the film industry. It seems like a lot of contracts and agreements may need to be rewritten, including those of big movie stars who got juicy checks from box office earnings.

But Warner Bros. seems to have skipped negotiations. They are dealing with the backlash now, instead of having risked it all by starting discussions with partners who want to stick to the old ways.

Rethinking Hollywood

If you made it to 2021, you'd be able to watch Warner blockbusters like Wonder Woman 1984, Godzilla vs. Kong, or Matrix 4, in the comfort of your home, without waiting for anything. All it will take is around $15 a month to be an HBO Max subscriber.

Sounds good. From a consumer standpoint, this should be good. People can now choose to go to the movies or watch at home. Jason Kilar, Warner Bros. chief executive, is holding onto the fans to defend his case.

The new CEO arrived in the company only in May this year, and he is already changing the game entirely. It seems like the board brought him to face these critical times with a fresh perspective and without fear of tearing apart old business models.

The guy was Hulu's CEO and a former Amazon executive, so he's both into tech and media, which explains a lot of this strategy.

But theaters fear that this move will undermine ticket sales if people can watch these movies at home as soon as they come out. And it's a fair concern, shared by talent agencies and other contributors of the industry, who typically earn a portion of ticket sales.

Reports are already out, suggesting that cinemas may be planning the backfire and could reduce ticket prices for Warner movies to as low as $3, or not even screen them.


Warner Bros. has said that this "hybrid exhibition model" is a temporary plan for 2021. However, a common reaction from experts and the media is that it can quickly become the movie exhibition future.

The reaction from one side of the industry hasn't been friendly. This new exhibition model comes with many questions, mainly about compensation plans and paychecks of the Hollywood gang involved.

How studios compensate stars and producers is not simple. Contracts tend to be negotiated film by film and person by person, but it comes down to two checks. The first one is a guaranteed upfront fee, and the second is a portion of the box office gains.

That's where big stars make their millions in successful blockbusters. And some are already suggesting that Warner Bros. has let them down by executing this plan without previous consultation or negotiation.

A significant Hollywood voice, Christopher Nolan, who is also an advocate of the movie theater experience, has made statements condemning Warner's move. After the studio made the announcement, Nolan said that:

"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,"

Ouch. Movie stars, and those who receive a portion of the box office sales, count on the studios to promote sales tickets, as it is in everyone's best interest. And they feel that this strategy goes against that, as it eliminates the urgency of going to the movies.


Box Office vs. MRR


Alright, movie theaters won't disappear. Die-hard enthusiasts, romantics, and probably the wealthy ones will keep the tradition alive. But it will likely become a niche, and more exclusive type of entertainment, not for the mainstream anymore.

Why? The short answer is because times change. As much as you can love going to the movies, the reality is that technology and consumer behavior change. The pandemic has accelerated these changes drastically, making our digital lives more relevant now than ever.

Then, what if the studios have longer-term interests, like, say, telecommunications, and monthly recurring revenue through subscriptions? Let's not forget that AT&T bought Warner Media for $80 billion in 2019.

That makes AT&T the owner of the Warner Bros. Studios, and maybe they are not so worried about movie theaters going belly up now or later.

Here is where the whole HBO Max comes into play, and the streaming service that hasn't had a great start since it came out in May this year. Some argue that it was a little too late and too expensive. Plus, it competes with heavyweights like Netflix, Disney +, or Hulu.

But AT&T, and therefore Warner, have plans for HBO Max. The New York Times writer, Edmund Lee, puts it this way:

"For AT&T, HBO Max isn't just a convenient way to get films and television shows to the public. Instead, the platform is a key part of its wireless business. HBO Max is included in packages for some high-end phone and internet subscribers, and it exists, in part, to create consumer loyalty to AT&T."

So, are AT&T's interests behind this transformation of the movie industry? Or is it just an inevitable change that was bound to happen sooner or later?