When it rains it pours and the movie theatre industry has been stuck in a thunderstorm for years with conditions ramping up to tropical storm levels over the past 11 months. All across the world, movie theaters have been closed, film festivals have been canceled, and film release strategies have been altered to reflect socially-distanced consumption trends. 

Although the downturn prior to the COVID-19 pandemic had been slow — with some years in key markets looking stable versus the prior year — the cinematic window has actually been in structural decline for years now.

In the past, theaters have maintained relative stability on a nominal revenue basis, driven by their ability to make up for lost volume via higher average revenues per user. They got smarter at selling concessions, expanding food and beverage offerings, increasing average ticket prices, and exploiting their relative demand elasticity with things like 3D and 4D — but are these improvements enough?

For the longest time, the exhibitors (theaters) have held a certain power over content producers, which has slowed down the ubiquity of digitally released feature films. A forceful driver of this has been the long-held studio belief that the cinematic window serves as a critical marketing tool for debuting feature films. While social distancing and lockdowns quickly smothered this tradition, the threat to the existence of movie houses loomed far larger.

The pandemic and forced closure of indoor leisure activities accelerated the plans of content producers, studios, and digital entertainment companies to make the switch from theatrical to streaming releases.

The trend that started with Netflix has now expanded exponentially to include players from across the spectrum from legacy entertainment brands such as Disney (Disney+), to conglomerates like Amazon (Prime), and digitally native platforms (Hulu). The defining commonality amongst these is their commitment to remaining OTT (over-the-top) — a streaming media service offered directly to viewers via the Internet. OTT bypasses cable, broadcast, satellite television platforms, and yes, even the beloved movie theatre.

However, there remains a lifeline for the filmhouse industry, albeit one of questionable length.

We have not seen the radical shift to studios releasing tentpole films via OTT, unless they are vertically integrated with the OTT platform itself. For example, after releasing Christopher Nolan's "Tenet" into the theatrical window, Warner Bros made an about-face and announced that all 2021 films, including blockbusters like "Matrix 4," will be concurrently released theatrically and via HBO Max. This radical move is bolstered by the success of competitor OTT platforms, Disney+ and Netflix, but also by the current mismatch between the distribution power of HBO Max (at 29 million subscribers, of which a whopping 25 million come via wholesale agreements) versus Warner Bros' global, franchise-defining historical hits such as "Harry Potter."

Antithetical to "Tenet," however, is what Disney did with "Mulan" — releasing the film on Disney+ for a premium transactional video on demand (TVOD) model to the platform’s 60 million subscribers.

Why are we not seeing a wholesale shift to digital releases of formerly theatrical titles? One explanation might be that too many content producers are not vertically integrated with scaled OTT platforms. If the content producers are not gaining the equity upside created at the OTT platform by releasing content hits, why degrade the value of one's content by releasing it OTT? The economics of OTT platforms have not yet caught up with what the theatrical window offers.

A player like Disney looks at content monetization as: increased equity value at their OTT platform + revenues from other, 3rd-party controlled windows, if the content is not exclusively distributed via OTT. In a concrete example, Netflix's share price jumped over 9 times in the 18 months following the release of House of Cards, its first foray into original content.

Not all content producers currently have this type of equation to look to because they don't own an OTT platform, thus still relying on traditional windowing — leaving a singular lifeline for cinemas hoping to stay alive.

There are two factors that will determine how quickly the cinematic window will shrink in the near-mid-term future. The first is the already steady structural decline and the second is an extended COVID-19 scenario in which the vaccine roll-out is slow or we struggle to regain the public trust necessary to sit in a room with strangers.

Unfortunately for silver screen fans and theater companies, while the pandemic will pass, the distribution landscape will continue to shift with more entrants looking to vertically integrate their content production capabilities with a distribution capability.

However, deep industry knowledge and decades in the game could give theater chains the edge to reinvent themselves through a complete overhaul along the vein of Netflix’s transition from red boxes outside the supermarket to occupying screen space on over 73 million devices today. So what can be done?

One route theaters can take is to enhance the development and growth of ancillary revenues, not only with better quality food and beverage offerings, but also with merchandise, sold both in-store and across e-commerce platforms. Alternatively, cinema chains can work to better utilize their real estate footprints. 

Movie theaters are generally large format spaces that occupy some of the most highly trafficked areas in cities and towns around the country. With existing name recognition and a proven track record of bringing a consistently stellar experience to the consumer in a widely known venue, movie theaters would be well served by utilizing their vast physical infrastructure to bring alternative forms of content to the big screen. With minimal incremental investment, theaters could morph into the premier forums for:

  • Live gaming: which has filled stadiums hundreds of times the size of an average cinema all around the globe
  • Virtual concerts: megastars such as BTS showed great commercial success with virtual concerts during the COVID-19 lockdown
  • Theme-driven viewing events: by working with existing owners of library content, theaters can utilize capacity during non-busy hours with thematic events, such as "Saved by the Bell" marathons and midday "Frozen" sing-along hours
  • Educational content: through partnering with players such as MasterClass, virtual learning and networking can be brought to cinemas

Movie theaters have been staples of American life for over a century, delighting and entertaining families for generations. While times are trying right now, with the right cocktail of reinvention, investment, and creativity, these pillars of leisure could be able to weather the storm.  

Meri Khananashvili is the Principal at Atwater Capital. Prior to joining Atwater, Meri was a Business Affairs Executive in the Media Finance Group at Creative Artists Agency (CAA). In her role with the CAA Media Finance Group, Meri consulted on deal structuring and negotiated all aspects of independent film financing and distribution. Meri is a graduate of the University of California, San Diego, with a J.D. from Loyola Law School, Los Angeles, and is fluent in Russian and English, with conversational proficiency in French and Spanish.

Published on Feb 25, 2021