The Hot Blog: The Day The Movies Died

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March 30, 2009

The Day The Movies Died

Wow... that's called burying the lead!

Dawn C. Chmielewski at the LA Times did a story today that is, perhaps, the most important story to the film industry in the last two years. Stop obsessing on frickin' 3D and the overhyped box office boom and take a look at this.

Let me step backwards for a second to let you know why I see this as a huge landmark (which I am embarrassed to say I didn't know about for 6 years and 12,900 kiosks that this company has been in operation).

The economics of a movie are;
Theatrical = the most dollars per pair of eyeballs
DVD sales = a stable price per sale, with unknown # of eyeballs per sale
DVD rental = a stable price per sale with maximized numbers of eyeballs per sale, but in some cases, revenues returned to studios on a formula that approximates a per-rental basis.
Pay-Per-View = a strong number for each sale, but very, very limited number of buyers
Internet Free Stream = no revenue except for savings from unions & ad sales
Internet Paid Stream/download = smaller than PPV revenue per unit and even more limited sales
Other Ancillaries = getting smaller every year

What percentage of the pie each area has made up has changed year to year. There was a period during which DVD sales were significantly higher than theatrical revenues... and then added more dollars from the rentals. But as DVD sales have dropped for theatrical movies - and please, keep in mind that this is not this year’s issue, but a 3 year trend for theatrical films while TV series kept overall DVD numbers looking strong – rentals have gone up a touch, but theatrical revenues have once again become the top single revenue source for most individual studio movies.

Some people will want to argue about which delivery system is now delivering the most revenue per film… and it could still be DVD by some single-digit percentage, just as theatrical would only lead now by a single-digit percentage… but that’s really not the argument that matters right now.

Regardless of which are is on top, as when people were pooh-poohing theatrical as a marketing tool for DVD, the “other” revenue stream is still terribly important. One big advantage for theatrical revenues is that the ticket price and returns to studios on that gross revenue is stable on a per-unit basis. It may creep up 15 cents on average a year, but that $10 (or $12 or $8.50) is not a flexible number. This is not true of DVD and, to me, this is the greatest threat to the film industry right now.

The market for DVD and following in its wake, all other post-theatrical delivery systems, is much more of a problem because of reduced price point than because of shrinking numbers of purchases. All businesses mature. And DVD has, uncomfortably, matured in a coincidental timing with a worldwide recession. But the maturation should not be a surprise. What should be a surprise, however, is that studios have sold their libraries quite short by allowing a constant trend toward lowering of the DVD price point.

Given the proliferation of DVD players in America and the world, all post-theatrical pricing follows the DVD price point. If you can purchase and own a movie used at Blockbuster for $6 within 6 weeks of release, how many people would actually rent it for $5 with the real threat of late fees once in a while? If you can get all of the latest titles from Netflix for $20 a month and keep them in your possession for as long as you like, why would you ever buy a $15 for a newly released DVD? Etc…

But this is becoming an even bigger issue as more delivery systems are added to the mix and built up over time. What will be the workable price point for each of those systems? How can it be higher than DVD sell-thru or DVD rental?

$1 a day rentals is great for the consumer… and death to the studios as we now know them. And if it continues as it has – and who the hell was at sleep at the wheel as this company grew to be ubiquitous outside of NY and LA? – it will infiltrate all post-theatrical pricing. Deals that the studios made with Blockbuster and Netflix for returns on wholesaled DVDs will be broken and flipped in both company’s favors, not matter who the studio pays off in highest level of those companies. PPV will be decimated and forced to reduce its pricing down by half or more. And revenues will shrink drastically.

The thing is, revenues are already shrinking and will continue to shrink, no matter how much the media hypes theatrical grosses and misses the bigger picture. Studios are not firing people because they are evil, greedy corporations. They are firing people because their parent companies are not satisfied with the return on investment that is low for an industry where there is real risk involved. Many people – often led by media misreporting that is generated by studios hyping their goods and futures – think that money falls out of the sky for studios with a few big grossing movies a year. But it is not that simple. And even the huge amounts of money that go to movie stars and others, while enormous for any one person or family, are nothing to multi-billion dollar corporation.

None of this is to say that I am up at night weeping for this industry. Greed got us to this moment and absolute necessity will be the only thing that shrinks most of the excesses. I am, sadly, estimating that industry expenditures will shrink by at least 30% in the next three to five years. That means that $150 million movies and the marketing and overhead behind them will become $105 million movies… and that no small part of that reduction will come out of the pocket of people you and I might consider working stiffs… professionals who either lose their jobs or see their $80,000 a year jobs become $50,000 a year jobs… non-professionals whose jobs simply disappear. No one will be crying for a big movie star working for $10 million instead of $20 million… or for 25% of net against $5 million instead of 6% of gross against $18 million. But those are the stats you see… the casualties are not public faces.

And what I am saying is that this reduction is coming no matter what happens next. It is inevitable. It is the busting of the DVD bubble and it is a ferocious reality.

But… if DVD rentals for $1 start to become the level expected by a public that cares a lot less about bells and whistles (in all but a small percentage of cases) than the Home Entertainment divisions convinced themselves was the case, you are looking at another 10% - 25%, roughly, that is going to come out of the pot. And that is when you see 1969 all over again.

Now, some would argue that the end of the old studio system was good for movies. I would argue that the Vietnam War and the deaths of Kennedy/King/Kennedy were more responsible for the quality of the work in the early 70s than studios dying. But regardless of where you stand on this, how do you feel about another death of the studios taking place forty years later in 2009 (or 2010 or 2011)?

I keep hoping that the sky isn’t actually falling… that it will not all be television… that there is an answer in technologies that I think are overhyped (though sometimes excellent), like 3D or IMAX… but this $1 rental kiosk and the industry’s failure to stop it is exactly the kind of thing that makes me despair.

I look to Europe and filmmaking countries around the globe that are not as excessive as “Hollywood” and make what critics think of as better and more challenging films… and I don’t see any of them finding an economic solution that works any better.

Maybe the future cannot be stopped. Maybe hoping for some stability in what is now set up, anticipating a natural correction to come that will be painful for many, is being a Luddite. No doubt, movies will survive this – whatever this becomes – as it did the end of the studios… as it did television and sound and color…

But do we want to go through The Depression to get to whatever is next? Do we want to see an empire fall to get to whatever comes after?

It didn’t start with $1 rentals… and it won’t end with $1 rentals. But the suction.. oh, how the suctions grows stronger… dollar by dollar… injury following insult… onwards…

Posted by dpoland at March 30, 2009 12:27 PM

Comments

Great. Another way to encourage people to watch the same twenty movies over and over again and to discourage browsing and checking out unusual/offbeat titles.

Posted by: jeffmcm at March 30, 2009 01:49 PM

Putting aside the studios' concerns for a moment-- I smile when I think about how this affects Blockbuster. In Redbox we have a company that figured out how to drastically underprice the competition-- all they had to do was eliminate sniveling teenager behind the counter. Instead of paying five people to staff a store all day, Redbox pays one person to service dozens of kiosks. That's innovation, and that's how a marketplace is supposed to work. Good for them.

And I say this as somebody who has never rented from Redbox (I love my Netflix), and who once was one of those sniveling teenagers behind the counter at Hollywood Video.

Posted by: Eric at March 30, 2009 02:26 PM

While only about a third of the titles are theatrical releases, the red box thats across the street does carry new releases by Miramax and SPC, so it is not solely mouthbreathing titles (though I would love to see who was fooled into renting "The Day the Earth Stopped").

As the article said, Universal has blocked the release of their films through these sites so I would think it would be just as easy other companies to do the same. Though they do seem to stand to lose out on the sale of 75,000 discs per title (Figuring around 5 or six discs of a new title per kiosk) . I don't think any fail safe line has been crossed yet.

On a semi-related note, you brought up ancillaries such as pay and commercial cable which generally pay based on the theatrical take. Do you or does anyone know what this percentage is? And I would assume these mean unlimited showings across a window of time because non-premium cable channels now seem to repeat their movies more often than HBO or Showtime does.

Posted by: hcat at March 30, 2009 02:27 PM

I love my Netflix as well, but Redbox is a good supplement if you miss the one day window for new releases on Netflix.

Posted by: hcat at March 30, 2009 02:30 PM

Sort of related - Netflix just announced they will be raising the fee for Blu-Ray access next month. The pricing depends on what level of plan you have - I'm on an unlimited 2 at a time plan and my fee will be raised from to $3 extra each month (on top of $13.99). People with higher-level plans will pay even more.

Posted by: Maskatron at March 30, 2009 02:46 PM

Meant to say "raised from $1 extra to $3 extra".

Posted by: Maskatron at March 30, 2009 02:48 PM

Geez, you guys are pretty slow to latch on to what happens here in flyover country. I literally can't remember how long I've seen these kiosks at grocery stores, Wal-Marts and McDonald's restaurants throughout Houston.

Posted by: Joe Leydon at March 30, 2009 02:51 PM

There are very few Wal-Marts in Los Angeles county, and speaking for myself, the last time I saw the inside of a McDonald's was while watching Super Size Me.

Posted by: jeffmcm at March 30, 2009 02:55 PM

Wait, who honestly didn't know about these things? There's one in a Ralph's up the friggin' street. GLENDALE. Forget "flyover country."

This is the only way one of my best friends sees movies now. Seriously, putting more than a buck into it is asking too much of some lately.

Posted by: Kristopher Tapley at March 30, 2009 02:59 PM

Probably a different company. Redbox all seem to be in Jons and Albertsons.

Posted by: jeffmcm at March 30, 2009 03:06 PM

Until Coinstar releases information regarding the rental habits of its customers (what titles are being rented? How long does the customer keep titles? Is it really one dollar per rental or do people tend to keep discs longer?) I don't think any conclusions can be drawn. As always, though, I think studios need to enbrace this new distribution technology instead of fighting it. Universal? Insead of gnashing your teeth and refusing to play, enter into a nice contractual agreement with Coinstar and start sharing revenue.

Posted by: Wrecktum at March 30, 2009 03:24 PM

Actually, I think it was Vons, not Ralph's.

Posted by: Kristopher Tapley at March 30, 2009 03:45 PM

I saw these at a Houston Randall's and a Houston McDonald's and was like, "Ha! Cool novelty" - and thought of it like getting your DVDs from one of those claw-wielding arcade machines at Chuck E. Cheese.

Obviously, I am the wrong canary to put in a coal mine.

Posted by: SJRubinstein at March 30, 2009 03:50 PM

Yeah, I was going to ask about pay cable, network and ad-supported cable numbers myself. Those are 3rd cycle sales, not necessarily chump change. They're also packaged so it makes it easier for a studio to re-coup off a poor theatrical release.

I've seen those machines for a few years. Never looked like there was ever anything I wanted to see. The few films I would've watched were sold out.

What I really want to know is how sure they can track erosion to those. Isn't it like the majority of grocery store convenience buys? Sure there's gotta be a percentage of DVD's not being purchased or rented full price because of those, but I'm sure there's gotta be a significant amount of rentals from people who would've otherwise left the dollar in their pocket.

What I kinda wonder is why a studio wouldn't have their own kiosk and have more of an integrated sales approach. Get some mileage out of a big library that's otherwise sitting unused.

Posted by: Triple Option at March 30, 2009 04:14 PM

It's interesting commentary, but keep these facts in mind:

Yes, its a $1 a day, but their customers keep things about for, on average, 2.5 days, so most unit transactions come out to be $2.50, so its pretty much in line with what Blockbuster rents their product out at. But $1 a day is different mentality than $5 for 2 days.

Studios HATE Redbox. They hate rental in general, but they HATE Redbox most of all. No one is revenue sharing with them, so they are paying $18 a pop (through distribution) which is three times higher than what Blockbuster, Hollywood, Movie Gallery, and Netflix all pay for their product.

Look, the studios screwed themselves when they shifted to a sell through mentality with DVDs (they should have stuck with the rental windows) and have screwed themselves even more by making sell through even cheaper (Lets put all four Lethal Weapons on one disc and sell it for $9!), but they will not change their framework now. They'll do everything they can do drive Redbox into the ground, and, considering the prices they have to pay for the product, I can see it happening.

Posted by: NV at March 30, 2009 04:25 PM

De-lurking for the first time to comment.

I'm not sure how Universal, or any of the studios for that matter, can prevent Redbox from renting their movies at the Redbox kiosks. Under the first-sale doctrine, the owner of a legally purchased DVD has the right to rent it. It might dig into Redbox's margins if it has to obtain its DVDs at Costco instead of through a wholesaler, but either way those new release DVDs will get into those machines and there is little the studio's lawyers can do to prevent it. The only way I see to stop this would be for the MPAA to lobby Congress to amend the Copyright Act of 1976.

Posted by: MaxwellPowers at March 30, 2009 04:33 PM

I think David is turning into a calculator.

Posted by: christian at March 30, 2009 06:02 PM

"The only way I see to stop this would be for the MPAA to lobby Congress to amend the Copyright Act of 1976."

Precisely. Which is why they shouldn't beat them. They should join them. Embrace the new distribution stream and jump on the chance to get some new revenue!

Posted by: Wrecktum at March 30, 2009 06:29 PM

Don't worry - once the studios figure out how to stop paying feature residuals, everything'll be fine.

In fact, there is at least one major television studio that figured out how to get around it - the fines they have to pay to stay signatories are actually lower than the amounts they'd have to pay in residuals, so they just keep paying the fines while the Guild lawyers tell their dues-paying members, "Don't worry - we plan to log another call this week AND write a letter!"

Posted by: SJRubinstein at March 30, 2009 06:44 PM

"Now, some would argue that the end of the old studio system was good for movies. I would argue that the Vietnam War and the deaths of Kennedy/King/Kennedy were more responsible for the quality of the work in the early 70s than studios dying."

I would argue that the end of the Production Code had a lot to do with it as well. Think this recession will hurt the MPAA in the same way?

Posted by: LYT at March 31, 2009 02:11 AM

Maxwell - The article states that Coinstar sued Universal for restraint of trade but they have successfully argued that they should have control of how their product is marketed and distributed.

Posted by: hcat at March 31, 2009 06:15 AM

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March 30, 2009

The Day The Movies Died

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