Warner Bros., Sony, Universal, and Fox’s plan to carve a new video-on-demand window from what had been the theatrical window is an opportunity for the movie studios. But it also might well destroy the exhibition system that created Hollywood—and the movie experience that goes with it.
With the Home Premiere service, which costs $30 per film, couch potatoes can get a new movie beamed into their homes from cable or DirecTV just eight weeks after it opens in the multiplexes. Now home audiences can see a movie in high definition, in the comfort of their home, at least three months before it is available on Netflix, the vending machines of Redbox, or at video stores.
The math for the movie studios, at first glance, looks appealing. The average ticket price in 2010 was $7.89. The studio’s share is between 40 percent and 50 percent, depending on its deal with the theaters. (Under some contracts, the studio’s cut decreases after two weeks.) So at best, studios wind up with $3.95 per ticket sold. But for every Home Premiere viewing, they get $21, after giving DirecTV or the participating cable companies their cut. Even if people watch a Home Premiere movie in groups, studios can afford to kill off five ticket sales at the box office per home viewing and still make money. According to estimate of a Warner Bros. executive familiar with the research, the studios expect this service to skim off no more than 5 percent of the theater audience. As the Warner Bros. executive calculated it, “We cannot help but make money.”
No doubt the studios will harvest money from this new service, and even draw away part of the Netflix audience, but what is conspicuously absent from the equation is what the theaters might lose. Virtually every modern theater is in a leased premise, with fixed overhead and a payroll to meet. The theater makes most of its money not from the proceeds of movie tickets but from popcorn sales and ads to the herds of moviegoers. The concessions have an 80 percent profit margin; advertising, 90 percent. Together, these two operations, which studios do not get a penny from, provide 75 percent of the multiplexes’ operating income. If they lose only a small fraction of their audience, this income diminishes accordingly. So how seriously would a 5 percent drop in attendance hurt them? A former senior studio executive who was also responsible for that studio's movie theater investments pointed out that in 2000-02 just a 3 percent to 5 percent drop in tickets sold pushed almost half of all the theaters in the U.S. to file for bankruptcy. “A 10 percent drop in ticket sales, and the attendant decline in concessions income and advertising income, will close over two-thirds of the American movie theaters—and they will never re-open,” the former executive added.
The studios’ assumption that Home Premiere will not hurt theaters is nothing more than “I-can-have-my-popcorn-and-eat-it-too” wishful thinking.
If so, the studios, which now are run mainly by former TV executives, are undertaking a highly risky business. They are offering the public the possibility of watching new movies at home without the hassle and expense of hiring a babysitter, driving to a megaplex, and buying food at the concessions stand. True, such an offer may appeal to only a small part of the moviegoing audience, but the studios’ assumption that it will not hurt theaters is nothing more than “I-can-have-my-popcorn-and-eat-it-too” wishful thinking. At this stage, no one can predict whether such defections will reach the critical 5 percent to 10 percent level. If it does, Home Service could kill the exhibition system responsible for Hollywood—and the traditional American movie experience.
Edward Jay Epstein is the author of The Hollywood Economist: The Hidden Financial Reality Behind the Movies, which is also available as an iPad app.
