Disney, Warner, Universal, Et Al To Own Theaters Again?

Trump’s Department of Justice is looking at reversing the 70-year-old anti-trust rules that have prevented the studios from owning theaters.

Image by Magicland9, used courtesy of Wikimedia Commons

Well this is somewhat of a surprise. Yesterday we learned that the Department of Justice is looking at the 1948 Supreme Court ruling that forced the major Hollywood studios to sell their ownership stakes in movie theaters. Assistant Attorney General Makan Delrahim said, “The rules need to be reviewed as the landscape of the exhibitor industry has changed from largely single-screen theaters in the 1940s to nationwide multiplex chains today.” He also hinted that the DOJ will reverse this decision when he said, “It is high time that these and other legacy judgments are examined to determine whether they still serve to protect competition.”

Where is this coming from? It’s fair to assume the DOJ didn’t just wake up yesterday and decide it would tackle this injustice now. It had to come from some stimuli. My guess, and this is speculation, is that it is coming from the studios who have lobbied the Trump administration to look at this ruling. Delrahim is right, the industry has changed dramatically since 1948. We’re now living in a world where theatrical money only makes up a portion of a film’s total revenue and the broadcast portion of a film’s revenue streams is growing far more important, maybe even becoming the most important as Netflix has shifted consumer behavior further and further away from exhibition and transactional viewing.

It seems almost a foregone conclusion that the reasons studios weren’t allowed to own theaters back in the 1940s just don’t apply anymore. In fact, these rules have been bent already as Sony owned Loews theaters from 1985 to 1998 and Paramount’s parent company Viacom is part of the ownership connected to the National Amusement theaters which still have about 30 theaters in the Northeast. Also, if you visit the tourist part of Hollywood Blvd, you’ll see Disney’s beautiful El Capitan one-screen theater, which is right across the street from the famous TCL Chinese theater and the mall in which houses the theater the Oscars are held each year.

Indies also have been allowed to own theaters as IFC owns the IFC Theater in NYC, Magnolia’s parent company owns the arthouse Landmark theater chain and Alamo Drafthouse owns the indie label Drafthouse Films, which yours truly still manages even if the label is dormant. Slightly different, but still relevant, AMC and Regal, prior to the recent acquisitions of both, jointly owned the distribution company Open Road, which won a best picture Oscar for Spotlight before being sold to a Chinese company and becoming Global Road. Clearly these rules don’t mean the same now as they did in 1948.

But why now? And what are the studios trying to achieve? This is a lot more speculation, but I think the studios are interested in helping to stabilize one revenue stream (exhibition) and boosting another (transactional VOD).

It's been a great year so far at the box office for the exhibition industry. Revenue is up 8% and ticket sales are likely going to go up for the first time since 2015 partially because April and May were significantly better in 2018 than they were in 2017 and also because Moviepass is driving (or maybe we should use the past tense as they could go away before this gets published) about 5% of ticket sales this year. However, ticket sales have been trending downward since they peaked in 2002, and the MPAA even referred to the domestic box office marketplace as “mature” in their 2017 study. Overall, without innovation or tangential revenue, it’s not a growth business.

I don’t think the studios are interested in buying Regal or AMC. Both were recently purchased, and those chains are both focused on international expansion. I do think they see value in owning some theaters like a smaller chain of several dozen theaters where they could control theatrical distribution for films that don’t need or warrant huge, saturated releases like Star Wars or Marvel films. Those need a large release because they are hugely popular theatrically. The US release guarantees an international release where the majority of the overall theatrical bucks could lay, and the theatrical release still drives all the other revenue streams. Coincidently, there’s a number of theatre chains that fit this bill including one – the aforementioned Landmark theaters – that are publicly for sale and there is at least one other chain this author knows about that is for sale but is not public.

From an exhibition standpoint, owning a few dozen theaters would allow the studios to cut down on distribution costs to release a movie theatrically and it would also afford them the ability to pocket 100% of the revenue as opposed to a split with the theater owner. I’m not thinking about tentpoles; I’m thinking about smaller, more adult-oriented content that they struggle to make work theatrically, a space Netflix has been interested in taking over. If you look at the typical Sony Pictures Classics release for example, these films play in a few hundred theaters and can roll up to a few million at the box office. By controlling significant theaters in significant markets, you can help drive the releases to films that you are struggling to financially make work. It doesn’t have to be arthouse content – that's just one theory. It could be more mainstream content that’s not a giant CGI spectacle. You want to have a backbone to the theatrical release in the heartland, and there are smaller theatrical companies that could fit the bill here.

I don't stress the effect Netflix has had on the studios lightly. It's driving a large part of their thinking these days. I’ve written a lot about this and am not going to rehash it here, but I want to emphasize that Netflix has changed consumer behavior so that the movie-going population now weighs whether it’s worth getting off the couch to see a movie in the theater or just wait until it's on streaming. Sometimes, it's even a conversation whether it's worth getting up off the couch at all because whatever is on Netflix is better than all the work and cost it takes just getting to that seat in the theater.

The studios are aware that the shift from packaged goods to digital has largely been affected by the subscription model – which cheapens the value of content – away from the transactional model. Maybe that genie can never be put back in the bottle. Maybe that couch will always win, but there’s real value in being able to monetize studio content through transactional VOD rather than subscription VOD. The gatekeepers to transactional VOD revenue – the cable and satellite companies, iTunes, Amazon – have insisted on a theatrical component so they can brand the content as “in theaters now” which allows them to give this content elevated pricing and placement on their platforms. While I am of the belief this component doesn’t need to exist – I mean, who cares if the latest Nic-Cage-tax-debt-direct-to-video-thriller plays in ten theaters or not – it exists and it’s a part of the ecosystem. It’s almost a customer service element that gives this content higher appeal to the layperson.

Here’s what I think is the key to the “Why now?” question. If the theatrical films – even films that just play in a handful of theaters – get elevated treatment on VOD, and the value of the content is much better with transactional VOD than subscription VOD, then it's no accident that two cable companies – Comcast and AT&T – now own studios and suddenly the DOJ is looking at studios owning theaters. Every distributor would love for transactional VOD to be a bigger piece of the pie than subscription VOD, but I really don’t know if you can get back to that. To be clear, yes Trump and the DOJ are working off the same page and Trump hates AT&T but this is in the best interest of all the studios, so the message to the government was likely in unison. They control high demand content, and they want to increase the importance of transactional VOD, so owning a handful of theaters could be a key component in trying to appeal to their customers. Those customers might not be willing to leave their couch, but these companies want consumers to watch a single movie on cable and pay $5.99 rather than watch a bunch of content on Netflix and pay $10.99 a month for all you can eat.