Insights > The Future of Movie Theaters

The Future of Movie Theaters

America is tentatively emerging from its year-long COVID-induced hiatus. For some businesses, 2020 will prove to be a mere speed bump as strong underlying fundamentals drive a quick recovery. Other industries, however, have been structurally disrupted by the pandemic and emerge from lockdown dealing not just with an uncertain economy, but also a drastically changed business model; commercial real estate and food delivery services are good examples.

Movie theaters fall into this latter category as well. The media industry has flirted with the idea of using direct-to-consumer (DTC) distribution to break the once sacrosanct theatrical exclusivity window for the better part of a decade. But those were always half-hearted efforts. For years, the upside was limited, and risks loomed large. Theater chains could (and in a few test cases, did) retaliate by shunting an unfaithful studio’s releases to smaller, less desirable auditoriums, or by cancelling showings altogether. And the home viewing experience could be upended by poor broadband quality, bugs in smart TVs and set-top boxes, and a myriad range of other issues out of the distributors’ control. So, while the major studios always had a wandering eye, they hardly wanted a divorce from their profitable relationship with the theaters.

The bad news for theaters is that the pandemic gave everyone a taste of life without movie theaters. The studios have spent years seeing Netflix and other upstarts prove that technology had matured enough to successfully execute over-the-top (OTT) streaming distribution. Of course, Netflix had no skin in the theater game; by contrast, the major studios stood on the sidelines, afraid of killing their golden theatrical goose (but to their credit, quietly building the technology platforms to prepare for the future). With their hand forced by the pandemic, three of the majors (Disney, Warner Bros., and Universal Pictures) have announced some variation of day-and-date streaming releases for at least some of their 2021 slate.

The silver lining of the rapid change roiling the industry is that exhibitors are free to experiment, and content owners can hardly feel aggrieved at theaters reacting to a disruption of their own making. Consumers have likewise been conditioned by the pandemic to adapt to altered business strategies.

As with any disrupted incumbent industry, the path forward for theaters looks to be a mixture of defensive and offensive measures: use their remaining leverage to buy time, while preparing the business for a new normal moving forward.

Movies, and TV shows, and T-shirts, Oh My!

DTC streaming platforms allow the theatrical distribution teams at studios to lessen their reliance on theater chains. But the streamers also present an expansion opportunity for theaters: to engage more closely with the other divisions of the studios.

Imagine the possibilities of exhibiting the season premieres and finales of prestige TV shows on the big screen. The economics did not work for broadcast television, because shifting viewers to theaters would kill ratings (and ad revenue) for the broadcast. But subscription-based over-the-top (OTT) streaming platforms have a different model that synergizes nicely with the idea of marketing certain episodes as big events worthy of a theatrical run.

Conveniently, the nature of episodic entertainment makes theatrical exhibition symbiotic with DTC distribution instead of competitive. To lean on economic verbiage, season premieres and finales are complementary goods to the rest of the series—  not substitute goods. That is, there is little risk of a consumer forgoing a Disney+ subscription to only watch the season finale of The Mandalorian in a theater, to spend sixty confused minutes wondering why wise old Yoda is now puttering around like a toddler. Ultimately, seeing the episode in the theater only resonates if the viewer has already watched the rest of the series at home. And viewers can only watch the rest of the series if they subscribe to the streaming service. Ergo, unlike with standalone movies, this presents no risk of cannibalization.

The integration opportunities extend to other divisions of the major entertainment conglomerates as well. The theme park divisions of Universal and Disney craftily place gift shops at the exits of rides to monetize peak emotional desire for toys in children (and possibly peak sensations of nausea and vertigo for parents so that their natural wallet defenses are weakened). Theater lobbies are similarly ideally situated to drive an impulse purchase of tie-in goods. Undoubtedly, questions of revenue sharing, exclusivity, and placement must be worked out. But given the current lack of utilization of theater lobbies (due to the shift to digital ticket sales), the real estate to execute the idea is already available at most theaters.

Interestingly, initiatives of these sorts may be worth investigating even if they are break-even or only marginally profitable for exhibitors. The point is to turn a bilateral relationship in which studios’ theatrical distribution teams are gaining leverage over exhibitors, into a multilateral relationship in which new value is being created for the episodic content and consumer products divisions at the corporate parents of the majors. Embracing the content owners more broadly may be key to staving off a slow shift into also-ran status for theaters.

To illustrate how long “brighter and louder” has been the dominant framework for theater competition, consider that the trend during the mid-2000s for 3D films was actually the second time Hollywood embraced the technology: over 50 3D films were shot and released by the major studios of the time in the early 1950s before the added cost and lackluster audience response put the technology back on the shelf for half a century.

The Future of Movie Theaters

One size fits all – good enough for all, perfect for none

More proactively, exhibitors must reimagine how to differentiate their experience from home viewing. For years, the assumption has been that an arms race for clearer (and more numerous) speakers, and sharper, more vivid images was the key to competing not only with other theater chains, but also with TV, VHS, LaserDisc, DVD, Blu-ray, and any other alternative distribution medium.

So, if not technology for technology’s sake, where might exhibitors turn to better address their customers’ desires? One option is to better-segment the existing experience to address audience sub-groups. For better or worse, the experience at the 6:15p showing in Theater 1 on a Tuesday is identical to the 7:45p in Theater 7 on Thursday. And yet, it is the rare industry that has profitably ignored customer segmentation and customization.

Suppose for example, the theaters provide an altered viewing environment to invert this most antisocial of social activities. After all, where else does one meet up with a group of friends and then pointedly avoid talking to them for over two hours? Certain showtimes could be ‘designated talking’ exhibitions, with house lights raised by 10% and soundtracks subject to dynamic compression so that quiet scenes are still audible while groups of movie-goers carry on conversations with their friends. If one advantage of home streaming is the ability for ‘talkers’ to ignore standard theater rules about talking and cell phone usage, theaters must meet that segment of the audience as they are, not as the industry would make them. Helpfully, this allows audiences to self-sort between those who are bothered by others’ talking and cell phone usage, and those who prefer not to watch in silence— improving the experience for both groups. Ambitiously, exhibitors might even stimulate repeat showings as consumers view a movie first in a ‘pure’ way, and then view it again with friends to debate plot points or share in crowd-pleasing scenes. The experience that once needed to wait for home video could now be had in the theater. Artistic purists may cry foul, but when the alternative is losing those theatergoers to in-home viewing on a TV smeared with fingerprints, one might choose the lesser of two evils.

A brave new world

Moviemakers often discuss the archetypal hero’s journey: an arc where the protagonist in a story is thrown into chaos and emerges in a better place after facing and overcoming a formidable challenge. The twin specters of COVID and aggressive supply chain partners certainly seem to fit the bill for a worthy adversary for today’s plucky theater chains. To meet the challenge and emerge, exhibitors will need to hold on to the best aspects of their old business model, while rapidly embracing new opportunities.

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