Streaming, COVID-19, and the Changing Theatrical Window

Hi friends,

One of the interesting trends in the media industry recently has been experimentation with different approaches to distributing blockbuster films.

Forced by COVID-19 which led to theaters being shut down, Disney and other studios had to temporarily push back the releases of blockbuster films and/or skip theaters and make them available for an additional fee or free on streaming services. Now, as theaters reopen, Studios are faced with the question of whether to go back to their old ways or lean into these new approaches.

This week, I’ll go deeper into some of these changes and the economics factoring into the decisions.

Dune will be made available on HBO Max simultaneously with the theater release

The typical windowing strategy

Before COVID-19, most studios, at least for their blockbuster films, took an approach as follows:

1. An Exclusive theatrical release for 1-4 months

2. DVD sales and Digital PPV/PVOD¹ rentals for the next 2-3 months

3. Licensing to streaming services / Releasing on own subscription streaming service at no additional cost (i.e., bundled into subscription fee) for the next 18-24 months

4. Licensing to cable and broadcast television networks

The goal of this in some sense was basic price discrimination and value maximization. Capture the people with the highest willingness to pay and the most avid fans early (theaters), and then over time reduce the price to capture the others who have a lower willingness to pay as the content ages.

Source: Project Disco

COVID-19 and the forced re-think

COVID-19 forced a re-think and some experimentation when it came to this approach.

With theaters shut down, the options available to studios were:

1. Push back releases to wait for COVID-19 to subside / theaters to re-open

2. Release movies straight for PPV / digital rental (i.e., separate fee)

3. Include movies as part of their streaming/subscription services for no fee

Most studios employed some combination of the above.

Disney, for example, tried to push back films such as Mulan to make a theatrical release. However, as COVID-19 continued, they eventually made it available for pay-per-view for an additional fee of $30 on Disney Plus. At the same time, it made films such as Soul and Luca available for free directly on their streaming service Disney Plus (at no additional cost).

Similarly, Universal pushed the PPV/PVOD approach and released films such as Trolls World Tour directly on PPV. It also looked to make theatrical releases available on PVOD earlier.

The Current Approach

Now, as theaters in various parts of the world have started to re-open, the studios have one another option at their disposal: simultaneously release the film in theaters and at home (either paid or free as part of a streaming subscription).

Again, we’ve seen studios experiment with a whole range of things:

• Warner Bros in what was quite a shocking move at the time, announced last year that their entire 2021 film slate, including Dune and In The Heights, would be simultaneously made available on HBO Max on the same day as the theatrical release. For 2022, their revised policy dictates that films will be exclusively in theaters for 45 days, before making their way to HBO Max.

• Disney has been taking a bespoke approach depending on the content. With theaters now beginning to open, some titles such as Black Widow and Jungle Cruise were released simultaneously in theaters and on Disney+ for a ~$30 fee. Meanwhile, some titles such as Shang-Chi and the Legend of the Ten Rings will start in theaters only.

• Universal has generally been pushing for reduced theatrical windows, negotiating with AMC for a 17-31 day theatrical window. They have also released some films such as Boss Baby at the same time as in theatres on their parent company NBC’s streaming platform Peacock.

While a lot is still in flux with COVID-19 affecting parts of the world differently and re-opening and closures commonplace, the studios have been taking this time to experiment with different approaches.

Understanding the Economics

No one approach is necessarily the right approach, but to get a sense of the decision-making process, it’s important to understand the economics of the content based on various channels to studios to understand the economics driving their decision-making.

1/ Theaters and Box Office Receipts

Typically, the success of a film in the box office is measured in terms of what it grosses in the box office.

Now, from a studio’s perspective, while the exact distributions with theaters vary, the typical studio receives ~50% of the box office receipts, with the rest going to the theater. The typical average ticket price in the US is approximately in the $9-$9.5 range, meaning that roughly $4.75 each goes to the theater and the studio.

Depending on the bargaining power of the theater chain / the studio, this can vary based on specific content. For example, Disney reportedly receives 60-65% for some of its marquee content and is typically on the higher end from indie theaters.

Skipping theaters completely or simultaneous releases to PVOD / Streaming obviously means lower box office receipts, but it’s important to note that studios only got 50-60% of those box office receipts.

2/ Premium Video On Demand

The pricing for video-on-demand has varied from $20 to $6 based on how premium the content is and how long ago it was released. Disney seems to be even pushing for higher pricing of $30 and requiring a Disney+ subscription.

Typically, these movies are made available through (or at least payments are processed via) Amazon, Apple, Google, and Roku, which take a 20%-30% cut.

So post the cut, the studios can be making anywhere between $5 on the low end to $21 (in the case of Disney) on films.

Now, given the typical theater receipts of ~$4.5-5, this means that a single premium video on demand sale is typically worth anywhere from one to four ticket sales from the studio’s perspective.

3/ Subscription Economics

Given that the studios are being more aggressive with their distribution to grow their streaming service, it’s worth understanding the streaming economics as well.

For example, as touched on above, Disney+ charges $30 for films like Mulan covered above but also requires a Disney+ subscription. In addition, it made some content available for free for Disney+ subscribers. Meanwhile, Warner Bros has made all its film content available for free to HBO max subscribers.

This content plays two roles when it comes to subscriptions:

• Acquire new subscribers

• Retain existing subscribers

“We were absolutely thrilled in terms of what that brought to our business in terms of both acquisition and retention.” - Bob Chapek on Soul, which was made available for free on Disney+

Acquisition

One way to measure the value of this content is to determine how many new subscribers it brought in and the lifetime value of those subscribers. For example, based on some churn data below, the rough lifetimes of subscribers are:

• Disney+: ~23 months

• HBO Max: ~15 months

If you take Disney+ ARPU at $4/mo and HBO $11.5/mo and assume 60% gross margins², then the lifetime value of a Disney+ subscriber and an HBO Max subscriber respectively is ~$56 and ~$103 respectively.

One way to consider this is that any new subscriber that can be attributed to a film made available on the streaming service is worth 10-15X what you might get on them from a movie ticket.

Retention

On the retention side, one way to measure the value of the content is to consider the reduction in churn from users who viewed that content.

A 1% improvement in the aggregate churn rate roughly translates into a 1% increase in the lifetime value of those customers, so approximately 75 cents and $1.3 for Disney and HBO Max respectively (but across their entire subscriber base).

The Black Widow Example

Disney released The Black Widow simultaneously in theaters and on Disney+ for a $30 fee. The Atlantic argues that it didn’t work out, but I’m not sure we know enough to make that conclusion.

Here is what we know:

• In its opening weekend, the film made $80 million at the domestic box office and another $60 million in streaming. But in the second week, box office sales cratered 67% to $26M.

• The National Association of Theatre Owners argues that had the film been made available only in theaters, it would have grossed $92 to 100M on its opening weekend.

One way to think about it is that let’s assume that the film earns 30% less over its lifetime in theatres due to a simultaneous release, which corresponds to say ~$150M in box office receipts. Disney lost out on 60-65% of that so roughly ~$90M.

But if it can make that up from incremental subscribers and incremental fees through their Disney premier access program, they would be okay. Let’s say Disney receives 80% of their $30 fee per paid user. They’ve already made $60M * 80% = $48M on PPV streaming fees, and will likely make another ~$30-50M during the movie’s lifetime, which by itself may cover the lost box office receipts.

In addition, if due to the simultaneous release, Disney+ is more buzzworthy and attracts more subscribers or better retains subscribers, that could mean even more value. We know that 2M subscribers have already paid to watch Black Widow (just on opening weekend). If say one-quarter of them signed up to Disney+ because of Black Widow, then just those 500K subscribers at a lifetime value of $56 would mean that Disney got ~$27M worth of new subscribers from Black Widow. And we haven’t even factored in the benefit of retention.

Closing Thoughts

While things are still in flux, I think it’s safe to say that the traditional 90-day theatrical release window is on its way out.

Theaters still are critical from an ROI perspective on premium content - for example - Disney typically has 5-7 $150-200M budget films that gross over a billion dollars in the box office each year, a number which would be hard to match continuously just through subscriber growth alone. However, as these companies push their streaming services more, and because of the lower commission rates on digital channels and high lifetime values of new subscribers on these services, the studios now have more flexibility when it comes to their distribution.

I guess that while some premium content may be released simultaneously with theaters to help grow the streaming service, the majority arrives on streaming platforms 30-45 days after the theater release. On the lower-budget film side, more of them might even skip theaters completely and be made available for free for subscribers.

As Bob Chapek notes, over time most studios will likely take a more flexible approach on a content-by-content basis rather than sticking to the default.

I think we've got a model for distribution that's very flexible that can toggle either depending on consumer behavior or on the state of the recovery from COVID - Disney CEO, Bob Chapek

1. I use PPV = Pay per view and PVOD = Premium Video on Demand interchangeably in this piece

2. Note this gross margin is not including the content costs of this premium content, but just the rough gross margin of operating a streaming platform including fees charged by Apple/Google app stores.