IPG Media Lab
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IPG Media Lab

The Shifting Business Models of Hollywood

How the film industry can pivot away from its hit-driven business model with the rise of super bundles

Photo by Myke Simon on Unsplash

The film industry is a hit-driven business. Every year, studios release a finite number of movies. Most of them barely break even. Some even become massive flops that cost studios hundreds of millions of dollars. Yet, as long as there are two or three movies each year that manage to become hits, the massive profits they generate offset all the losses.

For decades, Hollywood has operated under this precarious high-risk, high-reward business model. For every mega hit like Frozen, there will be an epic flop like The Lone Ranger to cover. The kind of low-cost, dark horse hits like Get Out or My Big Fat Greek Wedding that every studio dreams of are incredibly rare to come by. The highs are high and the lows are low, but hopefully the highs are, in total, higher than the lows.

Yet, as content distribution and consumption continue to evolve, emerging trends in the media business, in particular led by the strategic shift of Disney, indicate that the film industry may finally have a shot at moving away from the unreliable hit-driven model and into something far more stable and sustainable. In fact, the key to the future of movies may have nothing to do with movies themselves at all.

The Disney Effect

There is no denying that Disney is dominating the movie business today. Following its acquisition of 21 Century Fox assets, the House of Mouse now accounts for an estimated 40% of total U.S. box office. So far this year, Disney has already amassed over $2.5 billion in domestic box office revenue (including the $230 million box office that Fox and Fox Searchlight brought in), accounting for over a third of the total box office, and that’s not counting some of the potential heavy hitters that Disney has lined up for the holiday season.

As Tom Rothman, Chairman of Sony Pictures, puts it in a recent New York Times piece on the future of the movie industry, the kind of movies that can drive people to theaters have to carry a sense of “theatrical urgency,” whether it’s a small-budget horror film or a gigantic blockbuster. In a world where people can stream countless movies from the comfort of their living rooms, Disney still manages to consistently churn out movies that can drive people to see them in theaters. Part of that success can be attributed to the fact that Disney’s long-standing brand for making family-friendly, four-quadrant movies that are perceived to be a guarantee of a good time for family outings, which is especially important in an era of rising ticket prices and concession costs. Its latest string of live-action remakes of classic 90s Disney cartoons also capitalizes on a cross-generational nostalgia that works well with families and young adults.

Equally important are the various successful movie franchises that Disney owns. The franchise is the engine on which Hollywood runs, accounting for the vast majority of both the US and global box office market share. Through savvy acquisitions, most of the top entertainment franchises worldwide today, from Star Wars to the Marvel Cinematic Universe (MCU), already belongs to Disney, and the company is aiming to build more with the IP it acquired from Fox. Disney is getting pretty good at franchise-building with serialized storytelling that resembles TV narratives more than movies.

Blending both strategies seamlessly is how Disney manages to make their outputs “theatrical events” and compete for audience’s entertainment budgets. And theaters are playing along, often organizing special events and promotions to reinforce the notion that Disney releases are can’t-miss events. For example, during the opening weekend of “The Lion King,” B&B Theatres, a family-owned chain, partnered with the Kansas City Zoo in bringing lions, warthogs, lemurs, baboons and other animals that can be seen in the savanna.

Ultimately, making movies theatrical events does not change the hit-driven business model that Hollywood has always operated under. While franchised sequels and remakes are certainly a lot safer than taking a gamble on a completely new story with no built-in audience at all, Disney’s franchise- and remake-heavy mode today is no guarantee for a 100% hit rate — just ask the Han Solo spin-off. As long as movie tickets are sold on a one-off basis, Disney is in no way immune to franchise fatigue and potential flops. And that is why Disney+, the direct-to-consumer streaming service that Disney is launching later this year, offers an intriguing alternative by the nature of being a subscription service.

Making movies theatrical events does not change the hit-driven business model that Hollywood has always operated under.

The Disney+ Model

Strategically, Disney+ presents a vital direct consumer touchpoint that will help Disney further consolidate its serialized franchises and increase consumer mindshare year-round. Not only will it become the exclusive home to all the Disney classics, it will also host new content that will drive its bottom line across the various Disney divisions.

Take the Marvel content for example. The biggest news that came out of ComicCon over the weekend was the announcement of the phase 4 of the MCU planned over the next two years, and the most striking thing about it is how it blurs the boundaries between theatrical releases and exclusive series made for Disney+. The movies slated for theatrical runs will feature a lot of new faces while the DIsney+ series tend to feature supporting characters from previous MCU movies, but that doesn’t mean they are “demoted” to TV. Sharing the same cinematic universe that Disney now fully controls means that there will be far more narrative overlap between the Marvel movies and TV shows than previous efforts, such as the Marvel shows developed for Netflix. For instance, Elizabeth Olsen, who plays Scarlet Witch, will helm her own TV show called WandaVision in Spring 2021 but she will also co-lead a new Doctor Strange sequel slated to debut in May 2021. This unprecedented synergy between films and TV content will no doubt propel Disney to continue expanding the MCU and grow its fanbase.

In addition to supercharging its franchise-building with additional content outside theatrical releases, Disney+ also encapsulate the company’s shifting strategy to capture a bigger pie of the entertainment budget worldwide. It is important to remember that, at the end of the day, Disney’s studio-entertainment division accounts for less than 20% of revenue and profit for the company. But since movies still serve as the main engine that powers its theme parks and consumer products businesses, in the long run, Disney as a whole is still exposed to the inherent risks of a hit-driven business model.

From a purely business standpoint, it is fair to say Disney doesn’t make movies — they make feature-length advertisement for their merchandise and theme parks. While this may be a rather cynical take that undersells the artistic value of Disney movies, it also further speaks to the importance of Disney+ for the future of the company.

Similar to how the new crop of direct-to-consumer brands are leveraging online channels to cut out the middlemen in retail distribution and build a relationship with customers directly, Disney+ will allow Disney to reach millions of households without having to share the profits with the theaters. Make no mistake, Disney will still release event movies in theaters for the foreseeable future to maintain a windowing strategy that helps it maximize the monetization of new content, but cinema is no longer the main distribution channel that Disney relies on to market their theme parks and other consumer products. Instead, Disney+ will become Disney’s main marketing channel, and it will be so much more reliable, for it is a subscription service that is not dependent on convincing consumers to see a new release every time. Instead, the subscribing households, which is projected to hit 130 million in 5 years, will develop a direct relationship with Disney and provide Disney with a clear way out of the hit-driven business model.

Cinema will no longer be the main content distribution channel that Disney relies on to market their IPs. Instead, Disney+ will become Disney’s main marketing channel.

The Subscription Model

Of course, Disney is the exception, not the rule. No other entertainment company in the world has built an ecosystem as enviable — give or take a NBCUniversal, who also generate a healthy portion of revenues from its theme parks and consumer products but owns fewer hero IPs and franchises. For those non-Disney media companies, just launching an OTT subscription service won’t change the fact they are still at the mercy of a hit-driven business model. As easily as consumers can sign up for a hit new show, they can easily cancel once there is no other content they want to watch.

Netflix’s most recent quarterly earnings report serves as a reminder that subscription-based SVOD services still ultimately fall into a hit-driven business model. During 2019 Q2, Netflix added 2.7 million new subscribers worldwide, which fell way short of the 5 million estimates, making it the worst miss in its company history. Worse still, the company actually lost subscribers in the U.S. market for the first time, which sent its stock plummeting. The management blamed the disappointing performance on the recent price increases and the lack of hits during the past quarter, in particular, a delayed season 3 launch of its hit show Stranger Things, which implies that Netflix’s existing content portfolio is unable to prevent churn as subscription prices rise.

As the company reiterates that it will not monetize its content via advertising, it will have to manage a delicate balance between growing its user base and raising its price. Its recent low-cost, mobile-only subscription tier launched in India indicates that the company is willing to tailor its product to different regions in pursuit of continued growth. Of course, Netflix still has a massive global subscription base that continues to find great value in its service, and that helps Netflix to spread the rising cost of content production and acquisition around to offset some of the risk. But in the long run, its continued growth has become very hit-driven, just like the movie business.

Netflix’s continued growth has become very hit-driven, just like the movie business

Meanwhile. theaters themselves have also been turning to the subscription model in the hope of building a more stable business. While pioneers like MoviePass and Sinemia are effectively dead and gone, AMC’s Stub A-List subscription has been gaining momentum among movie-goers since its launch last summer. In May, AMC announced the program has hit 800,000 subscribers, and it will likely amass over 1 million subscribers by the time the holiday season rolls around. Following the success of A-List, Regal Cinema is also reportedly ready to launch its own subscription service to stay competitive.

Given that on average U.S. movie-goers see only 4 movies in theaters per year, and monthly moviegoers only comprise 12% of the entire U.S. population, there is a natural ceiling on movie theater’s subscription base, although there is still plenty of room for growth for now. With increasing competition from streaming services, movie theaters are eagerly improving the customer experience, and subscription services may just encourage more cost-conscious, casual movie-goers to visit theaters more often, thus helping it pivot away from the hit-driven model that movie studios are stuck in.

The Super Bundle Model

At the end of the day, the subscription model alone is not enough to help Hollywood to get out of the risky hit-driven business. Instead, the movie industry will need to learn from Disney and find a way to become part of a larger bundle that includes “stickier” subscriptions for things that consumers demand constant access to, be it music streaming, paid news content, or Amazon Prime’s ecommerce perks. Unlike entertainment content, which are mostly for one-off consumptions, those sticky subscriptions derive their primary value from being consistently accessible and constantly updated, with the quality of their products evaluated on a collective basis. Thus, such subscriptions are decidedly not beholden to a hit-driven model. After all, no one ever cancels their Spotify subscription simply because there hasn’t been any good new song they like for a while.

This is essentially what the super bundles are all about. By bundling multiple media subscription services across categories into one attractive combo deal, service providers can make a compelling case for long-term subscriptions. Sticky subscriptions will help reduce churn and help user retention. Video content, being the most differentiated media format, would then act as an anchor for each super bundle to drive customer acquisition, similar to the way that Disney uses its movie business to acquire customers for its other businesses. Such is the case for Amazon Prime, and it will likely be the case for Apple’s various new and existing subscription services as well. Even AT&T could potentially bundle its upcoming HBO Max service with its mobile carrier plans and satellite TV services, with additional live sporting events and news content that few of the SVOD services provide. Of course, not all media companies have the right set of assets necessary for building a super bundle, which means that they will have to seek partnerships or acquire the right assets, which partly explains the ongoing consolidation in media.

To an extent, Disney is simply playing by the current rules of the media-consolidation game. Even after the Fox merger, the company is still smaller, though not by much, than AT&T–WarnerMedia, and they’re both dwarfed by tech giants Amazon and Apple. Unlike Disney, none of those competitors need to rely on hits or even turn a profit on its content business, for they all have a larger ecosystem that extends way beyond the hit-driven realm of entertainment. For them, video content is simply one way to drive consumer engagement and bring them into their respective ecosystems.

For the bundle providers, video content is simply one way to drive consumer engagement and bring them into their respective ecosystems

That being said, Disney’s key strength against the competitors lies in its unrivaled competence in creating and exploiting movie franchises. The emerging format blending in the MCU heralds a future where the film and TV industry become increasingly intertwined to serve as content providers to video streaming services. Hulu and ESPN+ are both streaming services that Disney could potentially sell with Disney+ as a discounted bundle deal to further conquer its audience’s media time. And when it is ready to leverage their massive share of box office to alter the rules of theatrical release and make the theater experience part of the Disney+ subscription, it would no doubt cause another round of reconfiguration on the theater side to integrate into a larger entertainment value chain dictated by super bundles.

The same will be true for the supply side as well. Traditionally, movie studios and production companies don’t have direct access to the audience, leaving that instead to the distributors and theatrical exhibitors instead. In the new age of super bundles, they will likely remain free agents that seek the highest bidder for their content. But as the recent partnership between A24 and Apple indicate, differentiated premium content will always be in demand; the rise of the super bundle will simply help usher in a new business model that is less susceptible to the mercurial whims of the market.

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Richard Yao

Richard Yao

Manager of Strategy & Content, IPG Media Lab