The Future of Movie-Going
How the theatrical experience is evolving in response to digital disruption
The new Avenger movie is coming out this Friday, and hundreds of millions around the world will no doubt be heading to theaters to catch the latest superhero spectacle. But can you recall the last movie you saw in a theater? For most people, the answer would probably be either Black Panther or The Last Jedi. In general, outside of the major blockbusters, many people nowadays would understandably have trouble recalling their last cinema experience. How did this happen?And what does it say about the current state of the movie business?
The Challenges Movie Theaters Face
Movie attendance in the U.S. has been trending down for the past decade, with last year being a particular low. Suffering from a weak summer season, the number of tickets sold in 2017 dropped 6% from 2016, leading to a 2% year-over-year decrease in total U.S./Canada box office, according to a new report by the Motion Picture Association of America (MPAA).
In response, theaters mostly decided to increase the ticket price in order to prop up revenue. According to data from the National Association of Theatre Owners (NATO), the average ticket price hit a new high of $8.97 in 2017, up 3.7% from 2016. The rise in ticket price, however, is also making movie-goers more selective about the movies they pay to see, which, in turn, further contributes to the decline in movie attendance.
Update 01/02/2019: the movie industry saw a slight uptick in terms of y-0-y total box office revenue. Looking at the long term trend reveals that, however, he box office hasn’t had real growth in more than 20 years on either a revenue or tickets sold basis, despite almost a doubling in ticket prices.
Of course, another important contributing factor is the change of Hollywood’s release strategies in recent years. Responding to an increasingly global market and the higher risks that carries, many film studios have concentrated on big-budget superhero movies and sequels of established franchises, leading to fewer releases in total and a decreased number of mid-budget studio releases. With few mid-grade flicks to draw in movie-goers on a regular basis, audiences are to looking elsewhere for entertainment, leaving smaller theaters struggling to stay afloat. In the past few months alone, two beloved arthouse theaters in New York City — the Landmark Sunshine Cinema and Lincoln Plaza Cinema — both closed their doors for good.
In contrast, at-home viewing has become more and more popular over the past two decades thanks to the advances in home theater devices and increasing access to content. The rise of Netflix, first as a home DVD rental company and now as the leading force in over-the-top streaming services, is a clear illustration of this overarching trend. And now, with industry heavyweights like Viacom and Disney aiming to launch their own streaming services, the trend of consumers choosing the comfort of their own couches over heading to theaters will only accelerate.
That being said, the theater experiences still command a captive audience that is becoming increasingly rare and more valuable in an age of multitasking and ad avoidance. Movie-going still holds a special place in our culture and arts. So, what can the movie theaters do to maintain their audience In face of these challenges?
Two Paths Forward for Movie Theaters
In the age of abundance, there is far more value in controlling demand over controlling supply. As distributors, the business model of movie theaters hinges on controlling supply, as they decide which movies to show and how many screens it will be on. Content streaming platforms, on the other hand, are all about controlling demand by going directly to the customers and owning that customer relationship with a superior user experience. In order to battle this structural disadvantage, movie theaters need to up their game and start improving the customer experience they offer.
Similar to the two key strategies that we laid out in our Outlook 2018 for brick-and-mortar retail to stay competitive, the movie industry is also responding to the downward trend by polarizing the viewing experience — focusing on cost and convenience on one side, and zooming in on differentiation by crafting a high-end experience on the other.
On the cost and convenience side, MoviePass, a theater subscription service that allows users to see one regular 2D movie every day for about $10 per month, is taking the industry by storm as it grows from 20K subscribers to over 2 million subscribers in the past 6 months. It is certainly debatable whether MoviePass can find a sustainable business model soon enough before it burns through all the VC funding. Last Wednesday, Helios and Matheson Analytics, which owns 92% of MoviePass, sees shares fall more than 30% after the company announced the pricing of a public share offering. The company revealed that an independent auditor had raised substantial doubt about MoviePass’ future.
Some theater owners may see MoviePass as a threat to their business, as it hijacks the customer relationship between theaters and movie-goers as an audience aggregator. But for now, services like MoviePass are a lifesaver for many independent theaters. And for what it is worth, the company is more than willing to become marketing partners for theaters and movie studio, judging by its new partnership with Landmark Cinema and the new banner ads that recently started appearing in its app.
That being said, it is clear that movie-goers, especially those who go to theaters regularly, have embraced the service and altered the consumer expectation on the cost of seeing films. Once they see that moviegoing could be done with a subscription model similar to what Spotify has done for music, the consumer expectation has been altered for good.
There are also a number of other things that theaters can do to make the movie-going experience a more convenient one. For example, the long lines for the concession stand is a major pain point for many moviegoers, and implementing a mobile ordering system for that could help reduce lines and even encourage sales if it is tied to a theater reward program. Moreover, in urban centers where on-demand ride-hailing services are becoming more popular than car ownership, a theater chain can make it easier for people to choose their locations over competitors if they were to strike a partnership with Uber or Lyft for discounted rides redeemable with online ticket purchase.
As for differentiation, some “business class” theaters such as iPic and Alamo Drafthouse are redefining what movie-going experiences are supposed to be. Beyond the cushy recliners, state-of-the-art projectors and sound systems, and full food and drink services at seat, they are also championing the notion of movie-going as a premium out-of-home entertainment option similar to going to Broadway shows or the opera. If the theatrical experience is truly as differentiated and special as these theaters aspire to be, staying home will not be a viable substitute for the upscale audience seeking a more refined experience.
Furthermore, we’re also seeing an ongoing diversification of business models, as theaters look for new sources of revenue: live streaming of arts, culture, and sports — including eSports — as well as hosting private events. Some AMC theaters hosted an IMAX screening for Game of Thrones episodes for fans who wish to see the epic show on a big screen, while others hosted special sing-along showings for The Greatest Showman so that fans of the hit musical can turn the movie into a group karaoke session. Predicated on limited distribution, these new theater experiences usually carry a significant price premium to regular showings, allowing theaters to make some extra revenue while offering fans a special experience to get out of home for.
Going one step further, movie theaters can also consider building out the affiliated recreation services to give movie-goers a good reason to linger in theaters a bit longer once they get there. Bundling ticket sales with services such as kids’ playground or arcade gaming may just be what some theaters need to establish themselves as a leisure destination and increase revenue per customer.
Atom Tickets, an app that combines online movie ticket booking with social features, recently announced that it has raised a $60 million Series C led by Fidelity Investments, with participation from returning investors Lionsgate, Disney and Twentieth Century Fox Film. The idea is that the customer data that Atom captures would be fed back to the studios so they can learn about consumer’s movie-going habits and finetune their release strategies accordingly.
In a word, the decline in theater attendance will accelerate the polarization of movie theaters, as budget-conscious consumers move to MoviePass (or similar services) while luxury theaters create unique, differentiated movie-going experiences and services to cater to the higher-end market. As content consumption continues to move online, two major symptoms — a shortening theatrical window and a decreasing influences of film critics — will only escalate such a polarization of the movie-going experience.
The Shortening Window
Windowing refers to the strategy of releasing a media product (movie; TV shows, etc.) through various distribution channels with certain intervals to ensure maximum profit. For example, traditionally, movies start with a theatrical window where it only plays in cinemas before they move down the funnel, one by one, to other ad-supported channels, such as in-flight viewing, SVOD, premium cable, DVDs, and basic cable.
With an explosion of content competing for viewer’s attention, at-home viewing at a high level of quality and availability, and TV experiencing a golden age, it’s becoming increasingly difficult for studios to monetize in theaters beyond opening weekend. Therefore, it is not hard to see why the window between theatrical debut and DVD release is getting shorter year after year, as studios race to maximize their profits by making their content readily available for home viewing. And since 2015, on-demand streaming has handily taken over DVDs as the primary distribution channel for at-home viewing.
Besides that, windowing can also refer to how content gets gradually released by geographic region, which is becoming an increasingly outdated model in the age of online piracy and Netflix’s instant global roll-out. In fact, the rise of subscription-based streaming services like Netflix and Amazon Prime (to a lesser degree by comparison) have permanently altered the consumer expectation when it comes to entertainment content. The kind of ad-free binge-watching of easy access from anywhere they enable is rewiring the way customers evaluate their viewing experience. So far, this has had a more pronounced effect in TV series, but a spill-over effect seems inevitable as both services double down on their movie content.
The last two Star Wars movies already have a global release strategy where pretty much every country outside China got to show the two films within the same week. Compare that to the first Avengers movie released in 2012, where the global roll-out stretched over three weeks for most markets and Japan not getting it until over 3 months later. Now, imagine if Disney get enough audience worldwide to subscribe to its streaming service and can just get away with an instantaneous global release for all of its movies. That will sure save Disney a lot of troubles coordinating the release and help combat piracy.
For example, look no further than the recent stunt Netflix pulled off for The Cloverfield Paradox, when Netflix shelled out the big bucks for a 30-second Super Bowl ad spot announcing that the movie would be made globally available immediately following the game. In addition, Netflix also struck a deal with Paramount for the international distribution of sci-fi flick Annihilation outside the U.S., Canada, and China, with the plan to launch the movie globally just 17 days after the film premieres in the U.S. on February 23.
And it’s not all bad news for the movie studios. As The Hollywood Reporter pointed out:
“Mid-budget titles that would’ve been theatrical fare in years past (like ‘Cloverfield Paradox’) are going direct to streaming as studios seek to minimize risk… The Paradox deal marks the latest in a string of Netflix acquisitions of a major studio’s castoff.”
It’s an interesting win-win situation for both parties, as the studios offload the risk of a box office gamble while Netflix gets to acquire the titles that cater to its niche audiences and build out its original content offering.
In addition, the changing windowing strategy could also bring a new premium video-on-demand window where studios offer their latest movies for at-home viewing for a premium price (think $30 per view and up) a week or two after its theatrical debut. Sean Parker, one of the early founders of Facebook, has a streaming startup called Screening Room that aims to offer just that, and similar PVOD services are reportedly in the works at Apple, Amazon, and Comcast as well.
And it’s not just coming from the tech companies. When speaking at a conference in February, Lionsgate Vice Chairman Michael Burns said he expects some type of direct-to-consumer PVOD service to be launched in the next 12 to 18 months, adding that the service will be a “home run” if both sides figure out a way to make the offering a “win-win.”
The New Tastemakers
The shortening theatrical window as viewers turn to online channels is also giving rise to an increasing disconnection between critics and viewer reception. For theatrical releases, bad reviews used to be able to doom their box office performances, as Justice League and Geostorm can testify. In fact, it is common practice that studios and distributors would shield certain movies from early reviews so as to not let the critics and word-of-mouth ruin the opening weekend. Studio executives complained when popular showtime and ticket-booking site Fandango integrated Rotten Tomatoes scores, worrying that bad scores would instantly dissuade movie-goers from taking a chance on a movie that they would have been otherwise interested in.
That rule, however, does not seem to apply for Netflix movies. While critics brutally panned Netflix movies like the Will Smith-starring Bright and the Adam Sandler flicks, they are reportedly among some of the most popular content on Netflix. Even the aforementioned The Cloverfield Paradox was met with abysmal reviews, yet it still managed to amass over 5 million viewers in the first week of release. When there is no price tag attached to the choice of a single movie, the cost of selecting a bad movie decreases significantly, which further suppresses the need to check the critical consensus.
A major contributing factor to such a disconnection and, in a larger sense, the diminishing influence of critics as the tastemaker of pop culture is the direct-to-consumer, data-driven nature of Netflix. Netflix famously segments its users into over 1,300 niche audience profiles and leverages those data to make sure the personalized recommendations always match with a viewer’s interests and tastes. For most users, movie reviews simply cease to be part of the consideration as they scroll through rows of personalized recommendations on the home screen, looking for something that catches their eyes. Rotten Tomatoes scores are absolutely irrelevant for Netflix while Amazon coyly displays the aggregated audience score from IMdB, a movie database site Amazon owns.
To be clear, this does not mean that content quality does not matter for the likes of Netflix. On the contrary, streaming services need high-quality, buzzy content that can attract new subscribers while retaining the existing ones. In fact, in recent years streaming services like Netflix have been waging a talent war with traditional Hollywood studios for exclusive quality content. After luring away star showrunner Shonda Rhimes from Disney’s ABC network last year, Netflix has also successfully signed with another high-profile showrunner Ryan Murphy, much to the chagrin of 21st Century Fox. As for movie talent, it was announced last week that Netflix has acquired worldwide rights to the next four films made by the Duplass Brothers.
Interestingly, it looks like Netflix is a little conflicted over how to gain award recognitions as well. Netflix has reportedly considered buying theaters in New York City and Los Angeles to give its original movies a proper theatrical run, primarily in order to gain eligibility for prestigious awards, but dropped the plan due to high price. The company also pulled out of this year’s Cannes film festival to protest what Netflix views as Cannes’ overly restrictive requirements for what defines a competition film (i.e., it must have a theatrical release in France).
Nevertheless, since they are very much in full control of the viewer experience, streaming services enjoy an advantage that theater owners don’t when it comes to content discovery — simply going directly to viewers and say “we know you liked this and that, and we are pretty sure you will enjoy this as well. No need to consult the critics. Just trust your own taste (and our algorithms).” Whether that suggested movie or show is actually good or not is almost irrelevant as long as the viewer is properly entertained at no additional cost.
Further Brand Implications
The changes in theater attendance could impact a wide range of industries. Fewer people going out to movies could logically result in fewer people dining out, therefore putting a damper on the business of adjacent restaurants and bars. Moreover, a decline in movie attendance could also lead to a decline in concession stand sales, therefore hurting the top line of beverage and confectionery brands.
Theater attendance is also closely tied to the ongoing trends of brick-and-mortar retail in the States, as both industries face fierce competition from their online counterparts. Given the typical adjacency of theaters and retail stores (with many theaters located in shopping malls) and the foot traffic they symbiotically draw in for each other, the trend in one would inevitably impact the other. Gradually, their collective appeal as out-of-home leisure destinations wanes, especially for the younger generations who have eagerly embraced ecommerce and streaming.
On the flip side, with more and more people choosing to stay in and watch Netflix over going out, there are also a number of opportunities emerging for brands that adopt a content-centric approach. For example, even though most subscription-based services like Netflix carry no commercials, some shows are still open to brand integrations and product placements, given that brands engage with the production early. In a way, this is like a 21st-century version of the soap opera model originated from the late 1920s, where the sponsor’s messages were seamlessly woven into the drama.
As the movie business continues to morph and evolve alongside shifting audience behavior, smart brands will consider employing a direct-to-consumer content strategy that piggybacks off new audience platforms to reach customers anytime, anywhere. There has been much talk about retailers needing to adopt an “omnichannel” strategy in order to better serve their customers on all sales channels, and now is the time for brand marketers to take a similar approach to prepare for the impending shake-up in the theatrical movie business.