January 4, 2006

The Business Of 2005, Pt 1

Every now and again, a handful of magic beans that you traded for your cow, which has been the source of milk and money for years, turns into a beanstalk which you climb and then steal the giant's gold and return home wealthy and happy.

And most of the times, you just have a handful of beans.

Welcome to the Year of The Magic Beans on the industry's business side.

After endless discussion about "The Slump," I suppose it is only reasonable to sum up 2006 and take a realistic look at the future. The pop media position, which is being held onto like a breast in a 16-year-old's back seat, is THE FUTURE IS COMING!!!!

Unfortunately, that future is a lot rockier and a lot less clear than a Bob Iger press release about television shows on iPods would suggest.

The truth is that Iger is grandstanding, glorying in being the first into the iPod water, all the while knowing that selling TV a la carte is never going to be more than a truly peripheral revenue stream for television. What he isn't doing is trying to negotiate for a meaningful experiment with a day and date film release with the exhibitors. Why not? Because he doesn't really want to go there any more than any other studio really does. And neither does Pixar.

A movie that had the success of The Incredibles, under their next distribution deal, would net Pixar about $200 million in theatrical alone. DVD would net the studio another $350 million or so. There is no indication that the DVD underperformed because of theatrical. So why throw away the $200 million… or any portion of it?

Of course, that is a winner. And all this Fake Futurism is about the failures, not the winners. This summer's Top Ten films were down from last year's. Guess by how much .. The answer: $22 million… an average of $2.2 million a film.

The issue of how to avoid losers is not new in Hollywood. The only thing new is the media's loyal attention to the downside of the business.

But I digress…

As is the norm, studios will likely continue an incremental shortening of the theatrical/DVD window, chasing the perfect balance of first run revenue and secondary market revenue… which will now forever out-gross and out-net first run.

What remains delusional in all of this conversation is the suggested notion that first run delivery is not a separate business, for all intents and purposes. To clarify:

1. First Run Delivery is a high-risk, potentially high-reward business in which a new product is launched into the marketplace with the intent of a creating a successful short-lived business window of somewhere between 4 weeks and 12 weeks. The benefits of this delivery system are not only felt in its own realm, but in the Secondary Market, with strong indicators that there is a direct correlation between successful launching - even if a film is perceived as coming up short in the first run window - and success in the Secondary Market.

2. Secondary Market is a low-risk, long muscle business, delivering significant revenue in a short period (8 weeks or so), but continuing to generate revenues for months, years, and decades.

The great irony of the go-go-go attitude, embraced mostly by the press, the most paranoid of studio execs, and true indies who understandably see the opportunity to expand their market in real way as a win, is that it argues to continue to chase, at an accelerated rate, every damaging principle that has left the corporations that own Hollywood questioning industry practices.

Why is the theatrical window becoming more treacherous? Because of a shortened window. Blame prices, DVDs, and the internet all you like. The real answer to the question is that in any business, if you start competing with your own product on price, you will draw the middle to the cheaper option. It's not real complicated.

I have many issues with the OTX study that was released and hyped to death in October. But one striking thing about it is that the most consistent issue with why people claim they are going to the movies less often is that the wait for DVD is so short and that DVD is comparably so inexpensive. Again, an obvious point.

But another interesting stat (which is not broken into age groups, which makes it a little dubious) is that according to OTX, "getting to see a movie when it is first released" has been cited as a primary influencer on going to the movies in just 37% of respondents, down from 53% in 2003. That is the biggest drop in any of the categories about what influences the choice to go to the movies.

And here is the punchline… every person I have spoken to about the idea of a shortened window or day-and-date release of DVD has based their economic hopes on an interest in opening weekend strong enough to support higher prices for opening weekend access, either via DVD or by VOD, than we are seeing in the current DVD and PPV/VOD market. In other words, in order to make the future bright - at least in the current "futurist" thinking - people have to be willing to pay movie theater prices or significantly more than the cost of an individual movie ticket to watch movies at home on opening weekend or the economics are not so good.

And then you have OTX surveying people and finding out that the opening weekend must-see is becoming less intense, not more intense.

It's funny. Because the people who are screaming that the theatrical sky is falling are right about something. There is a great deal of entertainment competition that never existed before. But this is what they forget… there are no more hours in the day than before.

Principle One of "the new thinking" must be that power is in differentiation, not in making all entertainment opportunities more alike.

The OTX survey indicates, in one of the few stats that really should hold up to scrutiny, that people who go to more than 6 movies a year ("moviegoers") report spending an average of $60 - $75 a weekend on entertainment. 80% of moviegoers report spending less than $100 each weekend. 60% report spending less than $75. Around 50% report spending less than $50. (I am rounding numbers, but the survey has error rates too.)

How much can that number expand? With more entertainment options being offered every day for, generally, less money - more than 30 premium movie channels for about $25 a month… DVD packages from NetFlix and others… broadband internet for $30 a month… etc, etc, etc - how much more money will people spend on the a la carte menu that the film industry wants to expand?

OTX does not speak to how willing people are to spend more than they are now, whatever the delivery medium. But another survey, which also offers some serious flaws in execution, by JP Morgan, does speak to the issue.

The study, which was based on surveys with a census-matching group of individuals, but not broken out by moviegoers, heavy moviegoers or their respective counterparts in Home Entertainment, found that the people reported they paid an average $8.19 to go to a movie in a theater and paid $15.11 for each DVD they buy. The survey asked people how much more they would spend for DVDs if they could get them day and date. People said, essentially, 35% or $5.32.

The survey also reports that people would increase their DVD purchases by 78% while cutting their movie theater going in half.

Increased price point + increased sales = more than enough extra cash to make up for the exhibition business being cut in half.

That said, the survey is not particularly specific about the industry's customer base versus "the average American." It also doesn't speak to direct home delivery at all, which is the future of digital delivery, with the DVD is likely to phase out as VHS has within a decade. The survey also warns that theatrical may be a key component in DVD sales, that there might be exhibitor backlash, which would threaten - even in this near-doomsday scenario - 15% of revenues, and that "consumer behavior chance is not certain."

The other major factor that is not analyzed is the notion that there will be an exhibition industry if ticket sales were cut in half. Half the revenues would assure that at least half of the movie theaters would shut down. With half the screens and presumably, a similar amount of product, the opportunity to accordion screen count for hopeful blockbusters would no longer be an option. And so the dream thinking about exhibition being driven by "the tentpoles" is also, at best, unlikely. Unless you believe that matinees will have significant increases because demand is so great. You might see significant increases in per screen average for some films, but no one actually cares about per screens… gross revenue is what matters.

As for the DVD/Home Entertainment price point issue. People in a survey might say, "If this opportunity existed at this price, I would buy X or Y amount of DVDs."

But what happens in the real world?

The DVD sell-thru business is about 5 years old and deep discounting has already taken hold and started devaluing libraries that were more heavily valued just a year or two ago. There are already year-old major studio DVDs being sold for less than $10.

One thing that is unique to the theatrical business is the lack of by-item price competition. Now there are those who think this kind of competition is good. And it is good for the consumer. But it is deadly for the studios because it always drives prices down… never ever up in mass sales.

And what if the industry gives up on the notion of Home Entertainment day-and-date going out at a significant price increase? Well, then the question remains, how much more elastic is the market? It's all so clever to count how many copies of a movie are sold or how many people watch it, but that stat means nothing to either the studio or the consumer. People choose movies to watch. Studios count up the receipts. If you triple the number of people who see Harry Potter 14 and the average household counts two people on the one purchase and you get the same amount for home screening as for a movie ticket, you have doubled opening weekend revenues to, say, $200 million. Impressive.

But what percentage of those 10 million home buyers will not attend a theater screening or buy DVD after that opening night, as opposed to spending more going to the movies or buying a DVD months later? How can WB tell a home-buyer that they cannot keep that movie on their Tivo/DVR to watch again that weekend? How can WB keep the consumer from not burning that film to DVD as it plays in a one-play-only format?

And how many people, less and less scheduled in how they enjoy their entertainment in a future of digital flexibility and 90% DVR emersion, will wait for that Home delivery of DVD price to come down a few weeks later, because how many movies do they really need to see NOW?

More importantly, does anyone need to see Stealth or Bewitched or Cinderella Man NOW?

There is an illusion that consumers are demanding all this immediacy. But the truth is, most consumers are already overwhelmed with the entertainment choices they have.

That said, I haven't even gotten to the details of 2005. So it will have to wait for Part II, tomorrow.

EMe.

December 28, 2004 - Movies You Should Have Seen, But Didn't
December 29, 2004 - The Ten Worst
December 30, 2004 - The Ten Best
January 3, 2006 - Reflections On A New Year