Tag: Netflix

The direct-to-consumer (DTC) era has yet to influence how we consume big budget, blockbuster films. To watch the latest Marvel Studios production, consumers still have to endure the trip to the movie theater, eat the expensive popcorn, and pay the exorbitant prices for soft drinks. In a recent conversation with the co-founder of AfterMarq and Executive Member Vincenzo Landino, I learned why the DTC era was coming to big budget film.

A day-and-date release combines theatrical release with a video-on-demand (VOD) offering while the film is screening in the theaters. The length of this window is typically 60 days, and there is a notable disparity in the price by venue. According to an Indiewire article from 2015, traditional VOD rental costs a consumer around 50% of the price of the theatrical showing. Traditional studios make more money on theatrical releases than VOD releases. Non-traditional studios (Amazon, Netflix) do the same, except their economics are reversed. Streaming is more profitable for them than theatrical release (though brick and mortar releases unlock awards season potential). We will see on occasion. Some recent examples include Amazon’s award-winning Manchester by the Sea or Netflix’s Roma.

Both Manchester and Roma are films produced by a streaming service. The films were provided a day-and-date release to improve their chances in award season. But we’ve yet to see a traditional film studio (Paramount Pictures, Twentieth Century-Fox, Sony, Universal Pictures, United Artists, Warner Brothers Pictures, or MGM) lean into a day-and-date release for a mainstream film. There is a significant reason for this. None of the major studios of the time controlled the exhibition side between 1948 and today. Only Walt Disney’s Studios is in position to benefit from end-to-end control.

The market power of the studios is less than it was [in the 1940s]. Per se offenses like price fixing and market allocation are still illegal. But other horizontal arrangements between competitors or vertical arrangements between companies and their partners are more likely to be upheld today.

Michael Carrier, an antitrust expert at Rutgers Law School

Long before the modern DTC era, movie studios did control the product from production to the theater house. This changed in 1948. The Paramount case, and its resulting decrees, changed the motion picture industry for decades. Between 1945 and 1948, the Supreme Court mandated a separation between film distribution and exhibition by requiring that the major studios divest distribution or their theaters. It was a near-unanimous decision to divest in the theaters and not divest their distribution businesses.

Understanding the 1948 Paramount Decrees

When Netflix announced to shareholders that players like Fortnite gave executives more anxiety than rivals like Hulu, YouTube or HBO, they explained with this:

Our growth is based on how good our experience is, compared to all the other screen time experiences from which consumers choose.

This is an echo of a sentiment Reed Hastings, CEO of Netflix, told Fast Company in 2017 in an article titled Sleep Is Our Competition:

It’s 8:00 in the evening, you’re next to your TV–which remote control do you pick up: PlayStation remote? TV remote? Or do you turn Netflix on?

It makes sense that Netflix views Fortnite as a primary competitor. For younger people, two years ago, the answer to Hastings’ 2017 question would have been Netflix. Now, that’s being challenged by gaming platforms or by subscription services like MoviePass or AMC Stubs A-List. While MoviePass remains on the decline, thanks to poor unit economics, AMC’s native service boasts a reported 600,000+ subscribers paying at least $19.95 per month. Services like AMC’s are bridging streaming media prices and the in-theater premiere experience.

Of course, Netflix has its own premieres like the acclaimed Bird Box or Bandersnatch or Outlaw King. Each featured a Hollywood-esque budget and at least one A-lister.

Netflix finished up 2018 with 139 subscriptions worldwide, up by 29 million from the beginning of the year. The incredible subscription growth clearly justifies hiking membership prices in the US. Netflix reported $4.19 billion in revenue, just under international forecasts of $4.21 billion. 

Netflix is experiencing a renaissance in audience growth and fanfare. What is stopping Netflix from implementing a direct to consumer approach to in-home blockbuster films? The The Paramount Decree, a 1948 antitrust law, prevents it.

In this landmark US Supreme Court case, it was determined that movie studios could not own their own theaters or grant exclusive rights to preferred theaters. At the time (1945), film studios like Paramount owned – either partially or outright – 17% of the theaters in the country. This accounted for 45% of American commercial film revenue in 1945. The 1948 decision caused a massive recession in movie studio revenues, lasting more than two-and-a-half decades. In 1972, the release of The Godfather became the first modern blockbuster and the first project to increase movie studio revenue to pre-Paramount Decree levels.

The ruling is also considered a bedrock of antitrust law and is often cited in cases where issues of vertical integration play a prominent role in redistricting fair trade. But in 2019, Netflix boasts 139 million subscribers worldwide and produces a handful of their own minor premieres, turning our living rooms into intimate cinemas. Fortunately for Netflix, the Department of Justice recently announced that it would review the 1948 decree that prohibited Hollywood studios from pursuing a DTC approach to owning and operating theaters.

The review of the 1948 antitrust ruling, and its potential reversal, would give major distributors, exhibitionists, and streaming service providers –  like Netflix or Disney – real power to run more like direct-to-consumer entertainment brands. The revision of the ruling would allow Netflix to seek partnerships with companies like AMC Theaters (or the aforementioned studios) to co-brand in-theater and in-app premieres.

It’s unlikely that Netflix and AMC Theaters will partner when the time comes, but the line in the sand is marked deeply. Once those antitrust laws expire, these two companies stand to gain a lot from cooperating with studios. But not the most.

The 100 year titan in waiting

Netflix is the dominant streaming service with over 139 million paying customers. AMC Theaters has the best prospects in all the cinema-side of the film industrial complex. The company has successfully navigated the Moviepass economy by instituting its own growing movie-watching program ($19.95 / month). While heavily dependent on revenue driven by concessions and alcohol, the membership program grew to over 600,000 users in its first year. Its dependence on external revenue (concessions) is the program’s flaw.

While it is fun to envision a world where Netflix offers an AMC Premiere package in which at-home consumers pay $50 for the rights to rent a big budget blockbuster on its opening day, AMC remains the middle man. According to Matthew Ball, an analyst and former Head of Strategy for Amazon Studios:

[AMC] owes 55-67% per ticket [to distributors], with floors. [Concessions] are a big priority because of confection economics. Like gym memberships, these subscriptions only work if predicted use is <x%.

According to CNBC: in the past year, Disney has lost nearly $1 billion in its streaming business between its investment in Hulu and its work with BAMtech, the technology behind ESPN+. But DOJ’s reversal of the 1948 decree could change everything for Walt Disney Studios, a company that began just 25 years before the 1948 decision. And was but a blip on the Hollywood radar, at the time.

Disney is hoping that, over time, millions of paying customers will subscribe to Disney+ for its new original content and library of Disney movies and TV shows. Pricing hasn’t been disclosed. Netflix, which announced its quarterly earnings on Thursday, has 139 million global subscribers and just informed them that it’s raising prices by 13 percent to 18 percent.

Alex Sherman for CNBC

Disney is best suited for the DTC era. There is organic demand, loyalty, and the mechanisms to deliver it to your doorsteps. When the company announced an end to its streaming deal with Netflix, the writing was on the wall. The Disney+ product is slated to be the exclusive home for Disney films, television projects, and other original programming. According to Bob Iger, Disney’s CEO, the streaming service is the company’s priority in 2019-2020. He’s also assured the press that major releases (Marvel Studios, Star Wars etc.) will not go straight to the streaming service – though with time, even that will change.

But through the lens of the Paramount Decrees being overturned, it’s smart to consider the implications of Iger’s words vs. Disney’s impending actions. When the US Department of Justice reviews and amends these decrees, Disney will have the power to upcharge for a blockbuster premiere streamed into your home. And they will. Disney will be able to command a fee that is more lucrative than traditional day-and-date releases and at margins far greater than their streaming competitors (Netflix), marketplace vendors (Apple’s iTunes), or cinema competitors (AMC Theaters). Before Walt Disney Studios’ 100th anniversary, you will be able to rent a blockbuster premiere through your Disney app. With respect to the overturning of the Paramount Decrees of 1948, this is Walt Disney’s end game.

Report by Web Smith and Tracey Wallace | About 2PM