The numbers behind the industry.
Are movie theaters facing extinction?
$64 billion question in Hollywood these days is what to
do about collapsing the boundary between a movie's theatrical
and video release—the so-called video window. Gradually,
this window has shrunk from six months to four months—and,
in the case of many children's movies—to three months.
Even worse, DVD releases are often announced while a movie
is still playing in the multiplexes. As a result, more moviegoers
now wait to buy or rent a movie on DVD, which leads to shorter
theatrical runs and a fall in worldwide theater attendance,
which in turn puts more pressure on the studios to shorten
the window even further.
death spiral was set in motion by the studios themselves
about four years ago. The decision to shorten the video
window did not proceed from a new technological development—such
as TV in the 1940s or the video cassette in the 1970s—or
a change in popular taste. As a top studio executive explained
to me, "It was a voluntary decision made for purely
financial reasons by the major players. It was done to satisfy
quarterly profit goals, nothing more, nothing less."
In short, the studios changed their business model so that
they could opportunistically sell DVDs, which, after all,
are a conventional retail product like soap or toys.
continuing pressure to further shorten the video window
comes, not surprisingly, from the Young Turks in the lucrative
home-entertainment divisions of the studios. In the first
quarter of 2005, these divisions were producing more than
two-thirds of the revenues for the six studios. Their main
battleground is the shelf space of Wal-Mart and other giant
retailers, and, to prevail—and further increase quarterly
earnings—the home-entertainment divisions need to
release DVDs during the hottest sales periods, such as Christmas
and Thanksgiving, instead of waiting for an artificial window
main resistance to this change comes from the old-guard
studio executives who fear that undercutting the movie-theater
business will—even if it improves DVD sales—unravel
the very foundations of Hollywood. They argue that the theatrical
platform, to which the PR hoopla, magazine covers, TV talk
shows, and the rest of the celebrity-worshiping culture
is geared, transforms movies into media events that generate
worldwide DVD sales. For them, the issue is how to keep
the theatrical platform alive.
most radical proposal is to eliminate the windowing system
entirely. In this scenario, the studios would simultaneously
release a title in theaters, video stores, and on pay-per-view
and the title would require only a single marketing campaign.
The audience could then choose which format best fits its
wallet and clock. Proponents of this plan envision that
it will shift some part of the theater audience to either
DVD (which has higher profit margins than theatrical distribution)
or pay-per-view (which has higher profit margins than DVD).
Even so, they hold that movie theaters will retain a core
audience, since there will always be people who prefer the
theater experience or who just want to get out of the house.
hitch here is that the popcorn economies of the multiplexes
are extremely fragile. "We are in the people-moving
business," a multiplex owner explains, "We make
our real money moving customers to the popcorn stand."
Since movie theaters have fixed costs, such as leases and
interest payments, a relatively small dip in the traffic
to the popcorn counters could make it impossible for them
to remain open. Just a 6 percent drop in attendance in 2000-2001,
for example, put most of the theater chains into bankruptcy.
A second proposed solution is the "Godfather"
scenario. Studios would offer the multiplexes a deal they
can't refuse: In return for keeping the video window intact,
multiplexes would "incentivize" studios by forking
over an additional share of the box-office earnings. Presently,
theaters keep about 50 percent of the box office. In this
scenario, the multiplex chains would keep only 45 percent
and get a guaranteed five-month video window (or 40 percent
and get six months). Theaters would have a stabilized attendance
and a steady line at the popcorn counter, and the studios
would get more money to compensate them for the lost DVD
sales. In 2004, for example, the five-month window charge
would have yielded studios three-quarters of a billion dollars.
obvious problem with this ingenious offer is that the studios
are not the Godfather. They cannot act in concert because
of the antitrust laws, and there are severe penalties for
price fixing. An individual studio would have to make an
offer to the huge national chains—such as Regal Entertainment
and AMC/Loews—that own most of the screens in America.
These chains would be loath to transfer a large part of
their profits to the studio since, even with the video window
intact, attendance may continue to fall. Instead, they might
deliver a counter-ultimatum: Unless the studio preserves
the video window, the chain will not book any of its films.
No studio could afford to lose the screens at these chains,
making the Godfather scenario a non-starter.
third possible solution is a compromise: a split-window
scenario in which different movies would have different
paths to DVD. This strategy involves a triage via test-screenings,
polls, and focus groups to distinguish between the movies
that will find traction with audiences and those that are
less promising. The movies with "playability"
would retain a minimum five-month window. These movies would
presumably have a favorable word-of-mouth that would draw
audiences and help keep the movie theaters in business.
Meanwhile, the triaged movies would be quickly released
on DVD after token theatrical engagements or go directly
to DVD. The fast-tracking of these DVDs would provide a
slew of titles for retailers' shelves at opportune times.
Window-splitting may sound like an appealing compromise,
but, in the view of old-guard executives, it would turn
out to be nothing more than a way station en route to collapsing
the window entirely. Once some titles are released early
on DVD, the pressure from Wal-Mart to release others would
more likely strategy—if it rightly can be called a
strategy—is a wait-and-see inertia. "I don't
think any of the studios are going to go all-out to change
the entire model," one studio executive, who was deeply
involved in the decision-making, noted in an e-mail. "They
will likely continue their self-serving wishful thinking
that movies will still be movies, and revenues will grow
overall" until "theaters shut down." Whatever
Hollywood does—or does not do—the moviegoing
audience cannot be taken for granted. Back in the 1940s,
when studios owned the movie houses and television was not
yet available, more than 60 percent of the population went
to the movies every week. Today, about 9 percent of the
population goes. Just as the movie houses replaced vaudeville
houses, home theaters with high-definition television could
replace the multiplexes if the death spiral continues
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