Are Movie Theaters Actually Fueling Piracy?

Marc Hustvedt

First day of 2016. Yesterday closed out another record year for film box office in the US—an all-time high of $11 billion and change. Rah rah rah. The film business is booming, so what gives?

Beneath the headlines, and fawning over Star Wars: The Force Awakens as it leaps up the all time charts to challenge Avatar’s $2.77 billion global take, is an exhibitor business (the movie theaters) that is deeply entrenched in an old model and terrified to adapt.

Exhibitors are dug in, resisting change and fighting off innovative distributors from Netflix to Amazon who are adapting to consumer demand while still actually working to preserve the experience of watching a movie in a theater.

It’s a cold war that in 2016 might be turning into a hot one.

First a quick refresher on how a typical theatrical film release works. A studio or distributor convinces theater owners—largely dominated in the US by four major chains: AMC, Cinemark, Regal and Carmike—to carry its film in as many screens as possible. The exhibitor will demand a holdout period where the film cannot be released anywhere else, an exclusive “window” of no less than 90 days.

This means all of the often very sizable marketing and advertising spend will be focused on driving audience to their nearest movie theaters to watch the film. That’s great for theater owners who keep roughly 50% of all ticket sales.

But consumers want more options than this. And they are willing to pay.

New Revenue Models

Paramount extended the olive branch to theater chains back in October with a window-shrinking experiment with its $10-million Paranormal Activity: The Ghost Dimension. It was the sixth and final installment of the studio’s breakout low-budget horror franchise. Paramount came to the table with a deal that actually cut theater owners into the VOD revenue in exchange for agreeing to the shorter 17-day exclusive window in theaters.

Still, the bulk of the big chains like Cinemark, Carmike, Marcus, Harkin and Regal flat out said no to Paramount’s offer, and refused to screen the film at all. Regal CEO Amy Miles cited “the potential risks to the long term health of our business.”

The result of the experiment? Inconclusive. Some called it failure, and actually blamed VOD for it being the lowest grosser in the franchise’s history. While others cited the far fewer screens (1,656) showing the film than any of the previous installments as the real reason for the lowest performance of the franchise: $18 million in US box office and another $59.8 million in foreign. The VOD sales numbers are yet to come in, but given the film actually hit VOD 53 days after theaters (Dec 15) instead of the 17 days it had first targeted, they aren’t likely to be game changing here for anyone’s bottom line. A film with a 13% rating on Rotten Tomatoes probably wasn’t the film to start a revolution.

Here it was 104 year-old Paramount acting as the innovator, while Regal is stuck in an innovator’s dilemma as digital distribution (VOD + streaming) rises up. Wall Street, for what it’s worth is starting to pay attention to its stalled earnings, and Regal’s stock price is down 22% from its high of 24.28 last February.

Netflix got into a public spat with the majors over its first original feature, war drama Beasts of No Nation in March when all four US theater chains announced they would boycott the film due to Netflix making it available on its streaming platform the same day.

Theatrical ad for Amazon’s Chi-Raq

And Amazon is taking a gentler approach to shrinking windows with a 60-day holdout for its Spike Lee film Chi-Raq before hitting its Prime streaming service.

No film to date has had a wide theatrical release while also being available on digital platforms. Most of the other experiments around day-and-date and Ultra VOD have been met with wicked backlash from theater chains. Universal for example hasn’t tried to spar with theaters since its 2011 experiment with Tower Heist, where it ultimately backed down from its 3-week-later VOD release after theaters blocked it.

Smaller releases like 2011's Margin Call ($5.4 million box office, $8 million VOD), 2012’s Arbitrage ($8 million box office, $14 million VOD), 2014’s Snowpiercer ($4.5 million box office, $8 million VOD), and 2012’s Bachelorette (which hit #1 on iTunes — $5 million in VOD before hitting theaters), all have shown promise in multi-platform releasing.

The innovative distributors thinking goes that when consumer interest in a film is peaked—usually during the opening and first few weeks—that’s when you should be as widely available as possible on all platforms. Not everyone lives near a theater showing a film or wants to travel to watch it at a set time. Some people actually value the home entertainment experience more.

Piracy is an Externality

Consumer demand is a lot like water. It will find a way down the mountain.

In economics, an externality is a cost or benefit that affects a party who did not choose to incur that cost or benefit. And in the case of the film business, a major externality of restrictive windowing is piracy. There isn’t a day that goes by where the spread of piracy is not on the mind of the industry. Researchers commissioned by the MPAA put the cost to the US economy at $21.5 billion annually.

When you spend tens of millions of dollars to market a film, but then only allow for a single price and format of consumption, this is artificially restricting market demand. And when you hype it up, people will find a way to get it.

The EU published a study this year finding that in the music business, streaming services like Spotify actually reduce piracy. It’s just easier to stream a track legally than hunt down a sketchy download.

Now to be sure, there isn’t a whole lot of data to support a direct linkage between theatrical windowing and increased piracy, but to dismiss them as unrelated would be as good as putting your head in the sand.

We can learn a lot from the gaming business which has its own massive piracy problem on its hands. Gabe Newell, CEO and co-founder of Valve, famously calls piracy “a service problem and not a pricing problem.”

“We think there is a fundamental misconception about piracy. Piracy is almost always a service problem and not a pricing problem,” he said. “If a pirate offers a product anywhere in the world, 24 x 7, purchasable from the convenience of your personal computer, and the legal provider says the product is region-locked, will come to your country 3 months after the US release, and can only be purchased at a brick and mortar store, then the pirate’s service is more valuable.”

Take a look at the most pirated movies of 2015 by downloads (source: Excipio via Variety):

These are all massively marketed globally released studio films. Sure, millions of those downloads were from people around the world that probably weren’t going to pony up $10 or more to pay for a movie no matter where it is. But many would still pay something—either via their streaming services like Netflix, Amazon Prime, YouTube Red or one of the hundreds of new ones hitting the market, or through premium VOD and limited rentals.

As an industry we have to experiment more here. We can’t ignore what happened in music and assume the album sales will weather the digital storm.

‘The Interview’ Was a Watershed Moment

Last December’s The Interview was by all accounts a pretty extraordinary circumstance for a film release. Sony gets hacked by what we think is North Korea, threatening the studio not to release the film, theater owners panic, and the release is scuttled. But, cooler heads prevail, the President chimes in, and the studio quickly shuttles the film to digital with iTunes and YouTube / Google Play stepping up first.

The result? The film does over $40 million in VOD sales. This was a new record and Sony Entertainment CEO Michael Lynton called it “a significant milestone.” Not bad for a blustery comedy that was widely panned by critics.

But the biggest achievement here, the watershed moment, really was teaching millions of consumers how to watch first-run movies on VOD. They proved there is real business here.

What Next

The big question is whether digital distribution and the rise of streaming will shrink the overall revenue pie of the film business. I don’t think any of us know yet. Probably for some films, yes.

What it does mean is that consumers will be able to consume more filmed entertainment product than ever before, as vast libraries get digitized and smaller films that once were shut out of distributors are now globally available.

This year we’ll no doubt see more challenges to the old ways of doing business. We started Supergravity Pictures as a new kind of studio that sees digital distribution as a massive opportunity for all kinds of new stories to be told—and be financial successes.

Films that have an audience at their back are incredibly powerful. When you respect that audience and give them real choices the results will surprise you.

Marc Hustvedt (@MarcHustvedt) is a founder of Supergravity Pictures (@SUPERGRAVITYco), a digitally-inclined entertainment studio. He’s also a founder of Tubefilter and The Streamy Awards and a member of the Producer’s Guild of America.

Marc Hustvedt

Written by

Founder of SUPERGRAVITY Pictures // founder @Tubefilter + Streamy Awards (@streamys). Producer and online video junkie.

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