Hollywood’s content distribution business thrives off windows of exclusivity, phased out for different consumption outlets over license periods throughout a movie’s life cycle.

Hollywood Movie Distribution
The Business of Media Distribution: Monetizing Film, TV and Video Content in an Online World | Jeff Ulin

This phased out distribution system has been a reliable money minting machine for Hollywood and all the middlemen that build the infrastructure for content distribution at the different windows (movie theaters, DVD purchase and rental stores, pay TV operators etc).

The first window is typically an exclusive theatrical window (typically about 3–6 months long). This window has been shrinking over the years from the initial 6 months to about 3 months on average in recent times. When Disney announced in 2010 that it would make Alice in Wonderland available on DVD only 12 weeks after it’s debut in theaters, all major theater chains threatened to boycott the movie.

The argument from most theaters is that they need the full exclusivity window in order to maximize attainable profits on content. Disney on the other hand pointed out that 96% of all box office receipts for the average theatrical release occurred during the first 6 weeks, and leaving too many extra weeks on the table for the exclusive theatrical window would mean exposing themselves to hordes of online video piracy outlets such as 1channel.ch and The Pirate Bay who would willingly create supply for consumers with time sensitive demand for home video outlets and consequently eat into potential studio revenue.

Netflix is no stranger to pissing off established players in the content distribution business, it was founded on the premise that Hollywood’s age old content distribution workflow is broken. The first casualties were the traditional brick and mortar DVD stores. Then its over the top video streaming service went after Pay TV operators.

In all this, it appeared that Netflix was only going after the folks in the post 6 month distribution pipeline i.e. the theaters and their 6 month exclusivity window appeared to be safe. When Netflix announced its plan to do a ‘Day-and-date Release’ of The Weinstein Companies’s first major feature film, ‘Crouching Tiger, Hidden Dragon II’, it became clear that Netflix now viewed the exclusive theatrical window as a feasible target. Netflix had declared open season on the 6 month exclusive theatrical window, and the day after the big announcement, all major American theater chains struck back and boycotted the movie’s release.

With its new drama, Beast of No Nation, Netflix was not just reducing the exclusive theatrical window, its proposal to movie theaters was to do a ‘Day-and-date Release’, which essentially means making a movie available in both theaters and via home video consumption outlets at the same time i.e. no exclusive theatrical window. As expected, all major theater chains (AMC, Regal, Cinemark and Carmike) boycotted the movie’s release.

Consequently, the movie was only released in 31 arthouse and independent theaters and had opening receipts of only $50,699. If this outcome was the result of a standard exclusive theatrical distribution pipeline, this would be deemed a pathetic failure, as the opening receipts accounted for less than 1% of the modest $6 million sum that Cary Fukunaga spent producing the movie. But as this was no standard release, it could very well have been an absolute success for Netflix.

Remember that Netflix’s ultimate goal for its foray into original content was to create an compelling enough case for video consumers to become sources of recurring revenue on the platform, so its true measure of success would depend on how much of its new subscriber growth over the next couple of months can be attributed to the movie.

I personally recently converted into a permanent Netflix subscriber purely because if its original content. I cancelled my membership in late 2014 due to the abundance of stale content on the platform, reactivated my membership in February 2015 to binge watch ‘House of Card’, cancelled again that same month, reactivated in July to watch ‘Orange is the New Black’, cancelled again a month later, reactivated last month to binge watch ‘Narcos’. At that point I decided that Netflix had created a compelling enough case to convince me to commit to the platform on a more permanent basis.

Netflix’s hope is to create a compelling case for hundreds of millions of video consumers worldwide to commit to their platform on a long term basis (adding new subscribers + reducing platform churn). This is ultimately the revenue that they are interested in, not the revenue from box office receipts. The only major value of the box office in this scenario relates to outdated rules about Oscar eligibility, i.e. initial public launch of a movie must be in theaters in order to be Oscar eligible.
What the the theaters are doing with these boycotts is akin to what every other business that operates in protected territory tends to do when faced with a challenge from new players that threaten to usurp the existing models that protect them and allow them to thrive as laggards.

This is what we are seeing in the taxi industry with the taxi companies looking to legislators to keep the competition (Uber, Lyft etc) out of the game, instead of focusing on trying to build more compelling and competitive experiences that consumers would be willing to pay for.

Strong proponents of day and date releases believe that revenue from the theatrical window does not necessarily need to be harmed, the key for theaters would be to invest significant resources into creating a compelling and well differentiated experience for consumers. Little things like access to more comfortable reclining seats, better sound systems, access to extended versions of movies and engaging 3D and IMAX experiences for pulse racing thrillers could keep people going to theaters even with access to home video consumption options.

Essentially they would need to go back to the drawing board and redefine the use cases for theatrical video consumption in such a way that the scenarios that they define can thrive simultaneously with day and date home video releases.

If the movie theaters are able to provide clearly differentiated experiences that keep consumers who want premium consumption experiences going to theaters, they could in a sense gain some additional free marketing from the extra buzz that that the additional viewers on other platforms generate via the internet.

After all, most consumers today rely on their friends for content recommendations, gone are the days when weekend opening box office numbers served as the only major consumption driver, and the more people who have legal access to content on release date, the higher the buzz which could ultimately lead to a higher net number of individuals who are willing to consume a movie via any legal outlet.

Consider the following intentionally oversimplified scenarios:

1. Movie A is released with an exclusive 6 month theatrical window and 1,000,000 people see the movie in theaters during the exclusive window at $10 a head, leading to $10,000,000 in box office receipts.

2. Movie A has a day and date release. Movie theaters in this scenario have invested significant resources into building clearly differentiated premium experiences for consumers and charge $15 a head for tickets (to factor in the cost of their differentiated premium services). Millions of consumers who are ‘Theater Nevers’ (people who would generally never watch a movie in theaters regardless of its release schedule) now have legal access to the movie via home video outlets and generate a lot of buzz about the movie online and consequently increase the net number of people who are aware of and willing to watch the movie legally. While the theaters in this scenario will obviously lose a percentage of their traditional theater going crowds to the day and date home video outlets, the additional willingness to pay that is gained from new audiences both due to the additional social media buzz and the premium nature of the differentiated services that the theaters in this scenario offer, might help counter the loss and potentially keep the number of theater goers for Movie A in the second scenario on par with the number of theater goers for Movie A in the first scenario.

Until we see a movie as huge as the Avengers opt to go with a day and date release, it is going to be hard to tell what the future holds for movie theaters. It is also too early to tell whether large movie theater chains are going to figure out a strategy that works in a future without an exclusive theatrical window. One thing that is clear is that while the existing release windows might have made sense in 1980, they seem completely arbitrary to video consumers in 2015 who are generally used to accessing content on demand over the internet. And if the history of content distribution in the music industry is any indicator, supply tends to adapt to consumer demand over time.

Originally Published on Medium

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