The TROLL Nine Yards - Film Distribution In The Time Of COVID-19

Hello BMD readers! I feel immense gratitude and excitement to get to write in the hallowed halls of BMD once again.

Things have gotten heated since we last spoke. With all the theaters shut down, theatrical distributors were faced with a hard choice – move their release to the fall, winter or even 2021, or forgo the theatrical release and do what’s barely been tried in the past: a premium VOD release.

Most movies moved. This year was already expected to be way down vs 2019 (which was the second-best revenue year on record) due to Disney loading their 2019 slate (I call 2019 the “Bob Iger retirement year”, as 2019 was initially the year he was going to quit, so he seemingly loaded the year with high-demand sequels to increase his bonus) and very few titles looked poised to break the $400m domestic mark while six did in 2019 (ENDGAME, THE LION KING, TOY STORY 4, FROZEN, THE RISE OF SKYWALKER and CAPTAIN MARVEL). $400m is the threshold I use to define clearly top-of-the-demand-scale movies and the 2020 forecast I built for the Alamo Drafthouse (which took four months and is worthless now) had projected just one 2020 title to break $400m: WONDER WOMAN: 1984. I was projecting around a 10% decline. Therefore, moving titles out of 2020 and into 2021 has a positive side effect that 2021 should be a tremendous revenue year (assuming things go back to normal before then).

But not every movie moved. Some small box office titles like THE LOVEBIRDS, which was going to be hard-pressed to even gross $20m, were sold to streaming. Universal felt they had no choice but to forgo the planned theatrical release on TROLLS WORLD TOUR and release it on VOD at a $20 price point for rentals. Universal felt this was the best decision because the expected box office was not looking like blockbuster levels. The first TROLLS topped out at $153m in 2016 and this one was expected to make less. They also knew the willingness for families who would be trapped at home with bored kids to spring $20 for the movie would be high. They had also already spent a significant amount of marketing dollars that could give the VOD heightened awareness and, more importantly, they would have to re-spend those dollars in the future if they were to push the release to fall or 2021. Finally, TROLLS is a Dreamworks Animation production – not a Universal production – so there was less “emotional” connection with the film, making it ripe for an unproven revenue model.

TROLLS WORLD TOUR is working on VOD. It has generated $100m to date with only 20% or less going to the digital and cable platforms where theaters would be getting around 40% if there was a theatrical release. Universal was happy about the results. Very, very happy. Premium VOD releases were already breaking the long held “handshake” deal between NATO and theaters stating studio movies would be given a ninety-day window before any non-theatrical exploitation. However, theaters would most likely let these movies take a pass as their theaters were closed and there was some sensitivity for Universal's above-mentioned predicament. They weren’t happy about these movies skipping a theatrical release, but they were looking the other way due to circumstances. These are unprecedented times; what's easily predictable is the ego of the entertainment industry. When Universal CEO Jeff Shell went on a PR tour about the results, saying: “The results for TROLLS WORLD TOUR have exceeded our expectations and demonstrated the viability of PVOD. As soon as theaters reopen, we expect to release movies on both formats”, NATO and the major theaters company took offense. This is a very sensitive subject for them, and they weren’t going to stay silent.

We all know what happened next. AMC banned all Universal movies from all their theaters worldwide. Cineworld, who owns Regal Theaters, didn’t go that far, but they condemned Universal’s actions and reiterated that they would not play any film without the proper windowing. NATO sent emails to their members that were in ALL CAPS titled, “TROLLS WORLD TOUR VOD REVENUES DO NOT INDICATE A SHIFT IN CONSUMER MOVIE VIEWING PREFERENCES”. Things on the theater side may have stayed calm but Shell doing interviews about the VOD revenue clearly hit a nerve.

What does all of this mean for a post COVID-19 world? For starters, pulling a product is usually a negotiation tactic and AMC desperately wants to bring Universal to the table. Why? Largely because they are in financial trouble outside of the fact that their primary revenue source is on hiatus. AMC and Regal are loaded with debt and both companies are likely facing a pre-packaged bankruptcy to solidify their future and AMC has gone as far as engaging in talks with bankruptcy lawyers. Exhibition is no stranger to Chapter 11. Almost every major theater company declared Chapter 11 bankruptcy following huge investments in turning their theaters to stadium seating and opening huge 20+ screen complexes in the ’90s.

AMC, and honestly the big three theater chains, all want to re-organize because of a few things:

1. They want to close several underperforming theaters or theaters in markets where they are oversaturated with screens. We will get more into this in a bit.
2. They are being crushed by debt and want some of that debt forgiven.
3. The want to pay lower film rental. They currently pay between 50% and 65% for every dollar they earn on studio content.
4. They’ll have to prioritize which vendors they pay during bankruptcy and they want to reward the distributors that benefit them the most, i.e., distributors who abide by the ninety-day window.
5. Finally, they may want to get out of recent bad decisions, like Cineworld buying Canada’s Cineplex or Mexico’s CMX Cinema’s buying Star Cinema Grill which is a big reason why CMX declared bankruptcy a few days ago.

In exchange, they’ll likely allow (I use the word “allow” here very loosely) studios to release some movies direct to VOD, and/or lower the ninety-day window to sixty as they were talking about doing with Netflix and THE IRISHMAN.

Studios are highly motivated to do this, even more so than in the past, because almost all the studios (except Sony who is just praying for someone to buy them) are building or have launched streaming platforms. Whether NATO or the theaters want to admit this or not (and they don’t), Netflix and streaming have significantly changed consumer behavior as folks are more comfortable than ever watching content at home. Outside of theaters, it has also shifted behavior way from transactional purchases to subscription. In 2019, digital rentals were down 6.19% while subscription revenue is up 23.73%

Five years ago, distributors were invested in shrinking the windows to generate significant rental dollars. Now they are invested (and perhaps more so) in shrinking the windows to gain subscription subscribers. They want to move theatrical product to the streaming platforms faster so they can give their subscribers high demand, exclusive content. I think they will trade film rental terms and the loss of thousands of screens in exchange for a shorter window.

Shrinking the window is not something NATO or theaters will concede in negotiations lightly. They believe that the risk of more consumers waiting for a cheaper method of watching a movie in theatrical release will grow and that will destroy their business. They could be right, but there’s an ironic layer to closing theaters that could actually reinforce the ninety-day window. Allow me to explain.

I earlier mentioned that most theater circuits declared bankruptcy after overspending to build new theaters and retrofit their existing ones to stadium seating. They also built these massive complexes with 20+ screens so they could maximize seat count (and revenue) for the biggest studio titles. Studios saw this as an opportunity to start leveraging their content to get as many screens as they could for as many of their releases as they could. Opening weekend records started falling several times a year. Studios started focusing their marketing to pushing as much of the audience as possible to the first three days of the release so they could have the entertainment business and the local news talking about how big opening weekend revenue was on the latest blockbuster.

This resulted in more than 80% of the revenue of most movies occurring in the first three or four weeks of release. Movies could play out on 4000+ theaters but be mostly done in a month, leaving studios with two months of little exploitation until the home entertainment window kicked in. The expensive expansion that bankrupted them turned out to be harmful to the full release. Look at the week by week cumulative revenue over the last three years:

This expansion and push to move revenue into the opening weekend has also tiered theaters where most of the revenue is only being generated by about 1,500 theaters. Let us look at the top 1,500 in 2019’s biggest releases:

You can see my point – around one-third of the theaters are making around three-fourths of the revenue. Almost three thousand theaters are low performing theaters. Circuit can afford to close a chunk of those theaters without having an adverse effect on the total revenue as we are talking about 10% or less. To be clear, I am not advocating for ‘arthouse’ theaters to close. I specifically talking about the underperforming theaters at AMC, Regal and Cinemark.

Here is where the irony comes in. That 10% ‘loss’ revenue will probably be sucked up by the still opened theaters over time. This will flatten the decay curve so instead of 86% of total box office occurring in the first four weeks, we are likely looking at 80%. Still a significant number, but anything the theaters can do to have movies play longer will help them defend the ninety-day window. Now, let us add in some likely safety measures that will be in place when theaters come back this July: 50% or less capacity, fewer hours of operation and more staggered start times to allow more cleaning. Even if you double the number of screens playing TENET, we are still not going to return to the point where almost 50% of revenue is done in the first week, at least not until the vaccine is ready a year from now (if ever). Revenue will be more spread out, which allows circuits to argue for a longer window. In this case, bankruptcy actually could not just help these circuits by reducing their debt and getting them out of bad deals, but by lowering their theater footprint and reinforcing the need for longer windows to allow the theatrical release to maximize the film with the best theaters.

While we continue to march towards things returning to normal, which thankfully means open theaters and highly anticipated movies (and hopefully my favorite movie I have seen in 2020, PROMISING YOUNG WOMAN still gets a theatrical release), that doesn’t mean all things will return to normal. Despite the rhetoric, there are three truths in my mind:

1. AMC needs to play Universal movies to stay competitive
2. Universal needs a theatrical release to fully maximize the revenue on their biggest titles
3. AMC needs Universal more than Universal needs AMC (although the producers of NO TIME TO DIE will probably disagree with me)

These truths can exist despite the words being tossed around right now. We’re in a world no one ever imagined or planned for and even with movies returning to theaters, we will continue to see this fight play out in public while the two hammer out a post-COVID-19 agreement. They have a lot of time. I can see Universal sending the newest PURGE movie to PVOD along with this summer’s Focus titles, and they don’t have another big blockbuster until their international release of the new Bond film this Thanksgiving. Along the way, I do still anticipate more bankruptcies and more theater closures but I do think that makes this industry stronger. Until then, stay safe.