Written by Aayush Gupta – – –

The irony of life is unmistakable: There are more films to watch than ever, yet the movie theatre business is under threat as new consumer preferences and distribution channels shake the industry. As a college student, going to the movies provides a cheap, fun getaway from campus. Seeing a film on the big screen is an immersive experience; it transports you to a different world, taking your mind off the stress of assignments and exams. Thus, this controversy is deeply personal. It’s saddening to think that movie theatres might be finished — unless they radically switch their strategy.

What happened?

Although Hollywood’s revenues have been increasing annually, ticket sales have been falling. Then, the pandemic hit. Movie theatres went empty, as people stayed at home. Studios scrambled to make plans for the redistribution of films, while theatre chains like AMC hovered on the edge of bankruptcy, with mass layoffs already handed out. With billions of dollars invested in big, summer blockbusters, most studios sought to postpone their releases in hopes that the pandemic will soon be over.

With marketing for “Trolls: World Tour” already underway, Universal Studios, one of the biggest players in Hollywood, decided to release the film on streaming instead to save millions of dollars in re-promotion. They made the movie available on-demand for a fee of $20. The move proved to be a huge success, as the film made more money in three weeks than its predecessor did in its entire 5-month theatrical run.

This unexpected success led Universal to declare that it will continue to simultaneously release its films on-demand with theatrical releases, even after the pandemic ends. This caused ire amongst theater companies, resulting in a bold declaration by AMC: “effectively immediately AMC will no longer play any Universal movies in any of our theatres.”

Why was AMC so antagonized?

In AMC’s own words, the “exclusivity of the theatrical release has been fundamental” in maintaining its business model. There are numerous reasons why this holds true, and we can analyze them through two common strategy frameworks: 

Porter’s Five Forces framework. Suppliers (movie studios) have enormous leverage. Also, the number of substitute products/services continues to expand (Amazon, Disney, Qibi). 

Resource Based View (RBV).  Do theatres have strategic valuable resources that are 1) hard to imitate 2) depreciate slowly 3) controlled by the theatres 4) hard to substitute 5) better than the competition? Looking below, looks like they only have 2/5 attributes. 

We can clearly see movie theatres currently do not possess any strategically valuable resources. Anyone with an internet connection can access the same service for a lower price, at greater convenience. There are low switching costs, if any, to watch a film online instead of at the theatre. Thus, the need for cinema halls is gradually being eliminated.

Audience’s Willingness-to-Pay?

Are people willing to pay to go to the movie theatre?  Currently, streaming services seem to provide greater value. Thus, when studios make the option of allowing users to stream new movies at their own convenience, there is no incentive for people to go to theatres.

Even before the lock-down, there has been a consumer trend towards convenience. Streaming movies gives them the flexibility of pausing and resuming at will. The average American watches movies in theatres 4 weeks in a year — the remaining 48 are ceded to streaming services, which indicates huge untapped potential.

Research also suggests that despite preferring a movie-going experience, consumers are way more likely to stay back home and stream something online due to the convenience it provides.  

“Show me the money!”

Studios only capture 50% of the profits on each ticket sold, they can capture almost 80% of the revenue from each rental on a streaming service. Thus, on-demand releases are much more attractive from their perspective as well:

• The average movie ticket price in the US was $9.16 in 2019.
• A 50% margin to studio = $4.58 per ticket going to them.
• On the other hand, rental prices for new films (the main example being “Trolls: World Tour”) is $20. Of this, there is an 80% margin going to the studio = $16 per rental.
• Even if three people watch the film on average per rental, the total profit per rental comes down to $5.33 per person, which is significantly higher than a physical ticket.

Theatre Side Perspective

Currently, the theatres’ exclusivity of new releases is the reason they are able to maintain profits. Movie theatres mostly generate profits through concessions sales and ad revenues. With fewer people purchasing tickets, this additional revenue dries up.

AMC’s confrontational stance, thus, seems justified. 

Movie theatres can also look to other revenue generation options, such as renting out spaces for personal uses, or by broadcasting other events such as weekly sports games.  It provides a more communal experience for fans who are unable to see it live in the stadium.

However, this would only be a minor influence. For movie chains, there is an urgent need for strategic repositioning — they may be able to make deals with streaming services to create and broadcast exclusive content for new films or shows.

This might already be manifesting itself as Amazon looks to acquire AMC. This can provide streaming giants with more credibility, especially on award shows, as they strive to break into the mainstream. The Oscars have a restriction on movies created by streaming services that require them to be theatrically released to get consideration for any awards.  

On the other side, there might be a fundamental change in industry structure, reverting back to the studio-owned theatre system, where production houses control the distribution of their films by owning their own venues. This vertical integration, however, might not necessarily be desirable:

• For studios, it will result in heavy expenditures on acquisitions and fixed costs. It would also require an enormous logistical capacity.
• For audiences, this would be an inconvenience; they would have to search for specific theatres to watch films, rather than just driving to the nearest one and having their pick. 

Studio Side Perspective

Perhaps the biggest question is whether “Trolls: World Tour” was an isolated case of an animated film doing well, or whether it was a signal for the things to come. This might well be a one-off incident due to the current social climate, as everyone is forced to keep kids indoors because of a global pandemic. 

Studios must also consider their supplier’s and audience’s wishes before committing to any strategy. A large number of famous filmmakers design movies for the big screen. Furthermore, most film buffs also tend to prefer watching movies in the theatre for a better experience rather than on the restrictions of being at home on TV, thus making it a community experience (generational experiences such as “Star Wars” and “Avengers: Endgame”).

Big, blockbuster flicks that tend to constitute most revenues for studios rely on huge set pieces and action that is better viewed on the big screen. For most, going to the movies is a huge family bonding activity or a way to spend time with one’s significant other, holding immense symbolic, cultural value. The downfall of movie theatres could prove to be disastrous for indie films and the TV industry, as well as create uncertainty surrounding merchandising and marketing deals 

So what does this mean?

This is not an issue within the U.S. Two of India’s biggest chains, PVR and INOX Cinemas, have echoed similar sentiments towards studios that chose to make their upcoming films available on over-the-top media services. This can have radical long-term implications for both studios and theatres alike, forcing a  major strategic repositioning for everyone involved.