Movie Studios Should Buy Movie Theaters to Keep Control of the Movie Business

Zach Evans
Sep 12, 2018 · 5 min read

It’s no secret that Silicon Valley is invading Hollywood. Led by Netflix, along with Amazon, YouTube, and soon, the rest of FAANG, these companies have cash to spend and global, direct-to-consumer distribution. Yet as the landscape shifts and the battle for human attention rages on, Hollywood studios are still in the driver’s seat when it comes to the movie business. Streaming has not yet had the disruptive success with their films as they have had with television, but cracking this code is only a matter of time. Netflix released its first film only three years ago and they continue to experiment and spend ambitiously. This year, they are on track to double last year’s output with over 80 original films.

Unlike their tech rivals, traditional media companies do not own the platform in which their content is primarily viewed; this includes movie theaters for their movies. This creates competitive disadvantages, financial and otherwise that are becoming more problematic as the competition grows. In an ultimate display of irony, both Netflix and Amazon recently considered purchasing a movie theater chain to bolster their own film businesses. For the same reason, but with entirely different implications, Hollywood studios should purchase theaters of their own. But not just one chain; rather, the majority that comprise the domestic box-office. In doing so, the moviegoing experience, moviegoing data, and moviegoing profits become entirely their own. And that’s just the beginning.

Why Now?

It may seem counterintuitive for studios to buy what many consider a dying business, though most certainly not a high-growth business. But they are not dead yet and owning them unlocks opportunities in the short-term and protects their interests in the long-term. You may already know that studios used to own the majority of attended cinemas and it was not until 1948 when the Supreme Court forced them to divest due to anti-competitive practices. Seventy years later, it’s never been a better time to act. Last month, the Justice Department announced it’s opening a review of that Supreme Court decision. Their reasoning is common sense: the landscape in 2018 is completely different than it was in 1948. It is different in several ways, but perhaps most notably is the number of platforms that are available now to distribute/watch content. Done the right way, any negative impact of studio-owned cinemas that formed the Supreme Court’s decision back in 1948 will be more or less irrelevant today.

Crunching the Numbers

Based on recent acquisition prices and estimated valuations, studios can control 90% of domestic box-office revenue for around $14B–18B. Buying every single cinema-house in the country is not necessary. In fact, keeping some theaters independent and even offsetting the acquisition with theaters in smaller cities will mitigate potential backlash. Still, $14–18B is not a small price tag, but it is plenty affordable if split among the now five major studios, plus Lionsgate. Cost is one of the reasons why it makes sense to purchase and operate movie theaters as a consortium. A consortium model also reduces potential anti-competitive behavior and ensures diversity of content. These are the same reasons why the major studios should welcome independent studios into their group of buyers. If a group of smaller film companies participate collectively as an additional member, the price comes to $2-$2.5B per buyer.

The studio consortium should operate cinemas in the same way they operate now– to maximize theater ticket revenue. That is, based on demand. Relying primarily on algorithms to determine film availability, run length, and screen volume will not only eliminate bias, but maximize profitability. Under studio-owned cinemas, the 45% of ticket revenue that theaters currently earn will go directly to the studios’ bottom line, in addition to profits from concessions and advertising. If all studios agreed to own theaters equally and split theater revenue evenly, each studio buyer receives over $1.5B in annual incremental revenue. This does not include new opportunities exploiting their newfound cinema real estate. For example, now studios can sell branded merchandise to customers when they are at their most engaged. As audiences are walking in and out to see Incredibles 2, imagine an Incredibles 2 booth placed right in the theater lobby. Theaters would also be a great testing, deployment, and destination/retail ground for new innovations such as virtual and augmented reality. Part of the future of VR could very well be an out-of-home, event experience and that’s where this real estate becomes even more valuable.

Removing Barriers

AT&T (new owner of Warner Bros) Chairman Randall Stephenson recently said to investors that “the modern media company must develop extensive direct-to-consumer relationships.” At this moment, every major media company is trying to get to a direct-to-consumer model as quickly as possible. Cinema ownership is perhaps the most immediate and cost-effective way to do so at scale. Consequently, not only will they control the moviegoing experience itself, but also the valuable “front-of-the-house” data from their audience. Netflix famously utilizes their trove of consumer data for everything from viewing recommendations to production decision; creating an important growth advantage. Moreover, owning cinemas is a hedge to the investments media companies are currently making in other direct-to-consumer strategies that are both unproven and risky in their own right. As we’ve already seen in streaming, just because you build it does not necessarily mean they will come. Cinemas are a relatively inexpensive way for media companies to own a proven and profitable direct-to-consumer channel, while they find their footing in the world of streaming.

In the end, the studios ability to act in their own best interests is perhaps the most important factor in an industry that is constantly evolving. Exhibitors have been great partners to movie studios for decades now. But exhibitors are interested in what’s best for themselves first and foremost, as they should be. A case in point: their opposition to premium video-on-demand. PVOD allows consumers to watch films on their own device at some point within the first several weeks of its theatrical release date. Is PVOD the best course of action for the studios? Maybe. Should studios have the ability to freely experiment with PVOD and window shortening? Yes. Do exhibitors prevent this from happening? Yes. Getting all the studios to agree on terms is a substantial enough challenge. They shouldn’t need to engage in additional lengthy and continually stalled negotiations with exhibitors. Furthermore, they won’t have to give away any percentage of what could ultimately be a vital source of revenue. That additional cinema profit will also alleviate potential losses during and subsequent to a transition to PVOD.

Getting studios on the same page is the most difficult part of this initiative, requiring them to pull their resources and work together. It should be apparent that the other traditional studios are not their biggest enemies right now. Collaboration will make everyone and their efforts more potent against the Silicon Valley giants that want to crush them. Plus, they’ve proven they can work together through other consortiums before — Hulu was a valuable lesson itself.

Though it goes without saying, studios acquiring cinemas will not increase theater attendance. What it will do is allow them to squeeze the most out of this still vital channel, while providing themselves more leverage and adaptability to compete moving forward.

Zach Evans

Now @ Fooda, was @ MoviesNow

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