June 23, 2005

THE SLUMP ISN'T REAL, BUT CHANGE IS...
(Part 3)

This is the end, My only friend, the end …

I expect this to be the briefest of the three episodes since the concept and the numbers are pretty damned simple.

Domestic Theatrical
International Theatrical
DVD Sell-Thru
DVD Rental
PPV/VOD

Let's start backwards. The notion that PPV/VOD could supplement income is, in any serious discussion, over. Yes, electronic limiters can be put on these delivery formats to disallow holding onto them forever. But in the Tivo/DVR universe, there is no economic model in which this will be acceptable.

When Ed Epstein delivered one of his period pieces in Slate touting Rupert Murdoch's pledge to put a DVR in every home via DirecTV, it was factually inaccurate (a correction was run), but it was conceptually in touch with something much bigger than Murdoch. In five years, there will be a DVR in virtually every cable/satellite household. And it will not hold 40 ours of programming. It will hold at least 200 hours of programming… enough to hold more than the six hours a day that the average American watches.

(Sidenote: Though Epstein holds Murdoch up as a DVR progressive, the only kind of current Tivo box that does not allow the new Tivo-To-Go function, which sends Tivo'd programming wirelessly to your computer for you to do with as you wish, are Murdoch's DirecTV co-branded boxes.)

I expect that you will pay for your network programming before too much longer. Not as much as you pay for HBO… unless you want your programming commercial free, perhaps with single program sponsors.

And what do you pay for PPV or a DVD rental now? About $4. (Of course, by using NetFlix or other such options, the number can be lower… but let's allow this round figure for now.)

This is the future of home viewing. 4 lousy bucks… max.

So far, Pay Per View and Video On Demand have been relative failures. But DVRs offer the opportunity for these delivery formats to turn the corner.

When that happens, there will be no significant difference between any of the Home Entertainment delivery systems, except for those lagging behind technologically. The big difference between renting a movie on DVD or via cable/satellite and buying a DVD now is that in the first cases, you pay a third of the price, but you have to give it back. With the price of ownership less than $10 more than a rental, the balance tips to sell-thru. But in the world of DVR, you can hang onto your favorites for as long as you want. And the 200 DVR standard could easily be a 500-hour standard at the same price within another five years.

So, just raise the price.

Well, then you have another market force, which is the NetFlix model. Unlimited access for less than $20 a month.

The only Home Entertainment model that generates the big bucks is DVD sell-thru. Every other medium means a significant cut in costs.

So where is the money to make big movies going to come from?

Exhibition.

It was once 100% of the income. And now it's down to about 60%.

My belief is that the overall amount that can be earned per film is going to come back down. The digital revolution will deliver an expanded market, but the average dollars spent per person has to come down from where it is. (See: The Internet Bubble)

The price of a movie ticket is just about as high as I think the market will bear for the next decade. (This is the first summer without an increase in ticket prices in major markets in a long time.) Foreign markets will get more screens and anti-piracy efforts in many of the Far Eastern countries will create somewhat of a theatrical market in those countries.

Price Points
DVD Sell Thru - $15
Domestic Movie Ticket - $10
International Movie Ticket - $7
PPV/Rental - $4
NetFlix Model - $20 a month unlimited

The percentage of the pie for a movie that exhibition contributes on studio movies is almost certainly going to grow again in the near future. The DVD boom cannot continue (it's already fading) and all other delivery systems generate less cash.

The shortening of the DVD window and the increased frontloading of domestic box office in particular have certainly lessened the potential total theatrical grosses on films. The cash from DVD sales is such a powerful draw on the quarterly statements, they have become the tail that wags the dog. But as hastily as Time-Warner agreed to acquiesce to AOL's overtures, the media and some parts of the industry are ready to throw away the dog because the tail is so valuable right now.

In my opinion, the industry must unite to fight back in the opposite direction. If you are Mark Cuban and you are in search of wider distribution for niche product, God bless you, go out and offer your product in every format known to man as quickly as possible. But if you are Hollywood and you like making movies that cost more than $50 million, it is time to focus on getting every dime out of each of the marketplaces that you can.

Studios need to re-ignite second run theatrical not only for additional revenue, but to support and train people to have the theatrical experience, which they are willing to pay more for than sitting at home. If a movie that grosses $50 million could add another $10 million in second run, that has been considered not worth a delay in the DVD release. But since I don't believe you can get away with creating multiple price tiers for movies without creating a big problem in an arena with hundreds of marketing launches every year, I seek an answer to films that have audience interest, but not enough to draw full price.

The mythology that watching a movie on your home entertainment system is the same as going to the movies must be stopped, if it can be. There are advantages and disadvantages to both mediums, but they are different… very, very different.

Remember, the average American spends less than the cost of HBO in a theater each month. That is the size of the market. And that is what an amazing bargain HBO (and the other movie nets) is.

With a DVR and digital delivery (cable or satellite), the difference between recording a movie off of HBO and renting a DVD is negligible. But going to the movies is still something else entirely.

A $100 million grosser is an audience of roughly 16 million people. While that same 16 million all buying DVDs would represent a breathtaking $240 million (roughly). But if people are just renting or downloading on PPV or VOD with no limit on how long a film can be saved or how many times it can be watched, you're down to $64 million.

Right now, the paradigm is $100 million theatrical, $40 million in DVD and $10 million in Rental/PPV/VOD. If there were a way to make that $240 million in DVD sales work, believe me, exhibition would be abandoned in a minute. But technology (see iPod) suggests that it will go the other way, towards the $64 million, like it or not. And of you split the market on this non-existent film between digital delivery and exhibition, you're now down to $82 million, which is roughly $50 million returned to the studio.

You can't make and distribute The Dukes of Hazzard for that right now.

Star Wars: Episode Three - Revenge of the Sith will sell roughly 140 million tickets worldwide. It will generate roughly $1.3 billion total in the current marketplace, all in. In the paradigm of the digital future, that figure would be around $800 million.

I'm sure a lot of people are shaking their heads at my pessimism right now, but as wonderful as it is that art films will be able to double their incomes in a wide open digital delivery universe, I don't see how a $15 price point to own a DVD will hold up. Market forces and logic scream that change is coming… and not in the right direction.

So fight for theatrical, my friends. It's not just the best way to see a movie… it is the only way to fund the cost of expensive movies in the long run. Only Glenda The Good Witch can live in a bubble forever.

PART ONE: The Video
PART TWO: The DVD Era

E-ME.