Exhibitors Should Allow Digital Releases for Mid-Tier Films After 30-Day Window, Analyst Says

Courtesy of DreamWorks Animation
Universal's PVOD release of 'Trolls World Tour' caused much debate in Hollywood.

Universal and Warners have "greater financial incentives ... given their vertical integration with pay TV distributors, while Disney is "highly dependent on healthy theatrical distribution," says Credit Suisse.

Exhibition companies should consider allowing premium VOD releases of mid-tier films after a 30-day theatrical window, Credit Suisse analyst Meghan Durkin said in a Monday report entitled "Not Coming to a Theater Near You: Do Theater Companies Need to Entertain a PVOD Window?"

"After a decade of talk, premium VOD is becoming a reality," she wrote. "With the highly uncertain landscape created by the COVID-19 crisis, media and studio management teams — many of them new in their roles — face a range of unknowns as theaters get set to resume operations around the globe. Large tentpole films are tentatively scheduled for release beginning in mid-July, but with little visibility on consumer willingness to go out to theaters, even with social distancing protocols and seating capacity reduced to 50 percent or less."

She highlighted streaming usage spikes due to shelter-in-place orders "just as new studio heads are looking for ways to more aggressively innovate for the future, including building out and leveraging streaming platforms," adding, "These dynamics have caused a few studios to bypass theaters with some films and try direct to home video in the U.S. (with some success)."

The National Association of Theatre Owners responded to Universal expressing pleasure with the PVOD results of Trolls World Tour amid the novel coronavirus pandemic that such releases should not be interpreted as a sign of a "new normal" for Hollywood. And AMC Theatres said it would not screen Universal films due to the dispute.

Cinema owners "have resisted the PVOD pressure, but global theater closures have all parties rethinking business models," the analyst added. "Unless films can shift to PVOD 30 days post theatrical while consumer awareness is still high, in the current environment we believe studios are more likely to bypass theaters with mid-tier films, whether straight to PVOD or to streaming."

She concluded: "In the end, that would hurt both theaters and studios, as many become outsized success stories (Joker, The Greatest Showman, Deadpool) and can even spawn future franchises."

Durkin noted that consumers are spending less on home video overall, but spending in the earliest window — premium priced electronic sell through — has increased, which he argued is "potentially a good sign for PVOD."

The Credit Suisse analyst's report also highlighted that studio strategies vary at Hollywood conglomerates. "Disney is squarely in the blockbuster business, while the more diverse slates at Universal, and Warner Bros. allow for PVOD experimentation," she said. "We also found greater financial incentives for PVOD with Universal and Warner Bros. given their vertical integration with pay TV distributors (keeping 100 percent of PVOD revenue in those homes, versus 70 percent typically) and given their lower box office splits than Disney."

In terms of Hollywood stocks, Durkin said this means that he sees "studios with vertically integrated distribution like Universal (Comcast) and Warner Bros. (AT&T) as capturing outsized PVOD economics versus a Paramount (ViacomCBS) or a Sony (Sony Corp.), while Disney’s mega-blockbuster strategy is highly dependent on healthy theatrical distribution and might continue to eschew a PVOD window."

LightShed Partners analyst Richard Greenfield in a report on Monday similarly wrote that for "commercial films that do not have blockbuster potential, we continue to see a steady stream move to PVOD, particularly from Universal. … We have also seen studios look to sell off titles to third-party SVOD platforms, including Netflix, Amazon and Apple (Paramount’s Lovebirds to Netflix, Universal/Blumhouse’s Run Sweetheart Run to Amazon and Sony’s Greyhound to Apple)."

Referring to the July 17 theatrical release date for Warner Bros.' Christopher Nolan film Tenet and the July 24 release for Disney's Mulan, Greenfield also argued: "In reality, Christopher Nolan and Disney’s attempt to save theaters might just accelerate their demise. That said, with windows likely to emerge from COVID-19 far shorter than 90 days, early PVOD windows becoming more normalized and more films going direct-to-consumer via SVOD, the future of theatrical exhibition looks grim at best, even if studios hold off on releasing films into theaters. Movie theaters simply cannot survive on 15-20 superhero/animated/event pictures a year, they need a steady flow of films of all sizes and genres."