When The Walt Disney Company (DIS) gobbled up 20th Century FOX (FOXA), it removed one of the six major movie studios from the Hollywood hierarchy. With Fox plucked from the pecking order, Netflix (NFLX)—the most prolific film studio in the world—stepped in to fill the void. But Netflix, as proud couch potatoes and cineastes both know, operates in a completely different ecosystem than its theatrical compatriots, and the ravenous streamer’s direct-to-consumer model has only grown more valuable during the pandemic. How much more? From March 15, 2020 to Sept. 15, 2021, Netflix’s stock price jumped from $298.84 to $577.76 — up 93 percent. Thus nearly every major studio is racing to become the next Netflix, rather than the other way around, and the status quo has been forever altered.
According to The Hollywood Reporter, Paramount (PARA) Pictures is now said to be “scaling back on its theatrical tentpole productions to focus on titles that will service Paramount+.” While Paramount parent company ViacomCBS has made no such official statement, it did recently depose Paramount chairman and CEO Jim Gianopulos, one of the last remaining studio heads with actual film experience, for the more streaming friendly Brian Robbins. Even without confirmation of a new strategy, the mere idea of a storied 109-year-old studio responsible for some of the most influential cinema of the last century stepping back from the medium is a red flag for the industry. Couple that with the deluge of sell-offs and streaming/theatrical same-day hybrid releases the pandemic has brought on, and it’s clear that Hollywood finds itself in the midst of a metamorphosis.
What led Hollywood to this point, what does it mean for the major players involved, and how can the growing void be filled? Let’s explore.
Why movie theaters are going out of fashion
Paramount is reportedly retreating from the 12-month grind of building out a versatile theatrical release slate. This comes just a few short years after the Murdoch family surveyed the landscape and waved the white flag on Fox. Why? Over the last 15 years, we’ve seen the box office move into three separate tiers:
- Big-budget tentpole franchises: Marvel, Star Wars, DC and other IP-driven, $100 million-plus blockbusters
- Low-budget rolls of the dice: movies that are low risk but high reward when they connect, like the horror franchises (Paranormal Activity, Insidious, The Purge) that made Blumhouse Productions a player
- Mid-budget comedies and awards-seeking dramas and passion projects: typically in the $50 million to $100 million range, these sorts of films are gradually disappearing from the theatrical slate as they move to streaming.
With shifting audience behaviors putting pressure on profits for both movie theaters and studios, Wall Street has begun valuing the long-term upside of streaming. As a result, nearly every major entertainment media conglomerate has restructured in order to prioritize subscription business, which has the dual benefit of making income more predictable and lowering costs.
“For Paramount, or Disney, or any of the major studios, there are two big costs to consider with theatrical moviemaking: production and distribution,” David Offenberg, Associate Professor of Entertainment Finance in LMU’s College of Business Administration, told Observer. “You have to spend money to make a movie and you have to spend money to get it in front of consumers. Both are risky because if audiences don’t like the film, it’s incredibly difficult to recoup that money.”
Offenberg notes that navigating the film industry has become even more challenging at a time when streaming services are losing money. Netflix just reached the black this year and major players such as Disney+ and HBO Max aren’t expected to be profitable until at least 2024. Studios must make careful bets on what to produce and distribute as a result.
The easiest way to reduce distribution costs is to send a film straight to streaming, which sets up the entire dilemma for Paramount. Each major studio outside of Sony (which does not have a premium in-house SVOD service) has the choice of whether or not to put a film into theaters, or save between $50 million and $150 million in marketing by rerouting it to streaming. You can take a guess which route anxious executives who aren’t in love with the final product will choose. So it’s only natural that the theatrical market will contract further.
We’re still in the embryonic stages of SVOD cinema and it’s difficult to gauge how well a direct-to-streaming film performs in terms of matching the revenue generation of traditional release (the early returns are, uhh, not great). Without box office and all the subsequent windows a studio has to resell a film, streamers must measure a movie’s ability to acquire new customers and how significantly that movie helps to retain customers and reduce churn.
What is Hollywood’s new normal?
If THR‘s report is accurate, we can expect Paramount to leverage the IP it currently owns and develop films based on IP from its television library as well (which may explain the new Paw Patrol and SpongeBob movies). The advantage of a streaming service is that it provides parent companies with ample data about audience viewing habits, so it can tailor films to specific audiences and hyper-target those audiences with promotion. But that doesn’t mean Paramount, or any other major studio, is going to abandon movie theaters — especially not after keeping A Quiet Place II off Paramount+ for 45 days and seeing it earn $297 million at the box office worldwide, or more than seven times its $39 million budget.
“Studios can walk and chew gum at the same time,” Shawn Robbins, chief analyst at Box Office Pro, told Observer. “While the streaming wars are raging, there are different financial realities depending on the type of content being distributed. Paramount obviously has a high interest in beefing up their at-home content model, but they also have made it clear that theatrical windows remain important following the success of A Quiet Place Part II and the delays of Top Gun Maverick and the Mission: Impossible sequels to more favorable global corridors next year.”
Robbins sees an industry still committed to traditional releases. Take Sony, for example. The studio has sold a small crop of films to streaming that either had minimum box office potential to begin with or weren’t going to be in a position to draw the necessary audience at this current juncture. At the same time, it has maintained theatrical exclusivity for upcoming blockbusters such as Venom: Let There Be Carnage and Spider-Man: No Way Home.
“In the wake of Disney also re-committing to exclusive windows for the remainder of its 2021 releases, plus the established 2022 re-commitment by Warner Bros., it looks to me more like the balancing act we’ve anticipated is beginning to emerge across the industry,” Robbins argues. “Studios are certainly still open to experiment and adjust on the fly if needed but aggressive pandemic models and strategies are slowly fading as a middle-ground approach begins to take root and these companies aim to ensure both their theatrical and at-home goals are met.”
Recent box office numbers support the idea of a gradual theatrical recovery and barring any unforeseen bombshells 2022 is poised to be a true bounce back stabilizing year for cinema. A mutually beneficial middle-ground is possible and, as Robbins notes, likely taking shape before our eyes. But that also doesn’t mean the overarching priorities of major studios have changed as long as Wall Street continues to value streaming.
“On one hand, we are seeing a theatrical push from the industry. On the other hand, it’s a half-hearted push, isn’t it?” Offenberg asks. “Hollywood isn’t doing what France does, where prior to the pandemic Netflix waited 36 months after a film came out in French theaters to receive a movie. I would consider it a real theatrical push if a studio showed a real commitment to prioritizing theatrical revenue over streaming revenue. None of them are going to do that right now.”
Ripple effects and filling the void
We’ve gone from six major theatrical studios to three consistent theatrical biggies (Disney, WB, Universal), one prolific streamer (Netflix), two bit players (Paramount, Sony), and two tech-backed streamers with a foot in both streaming and theatrical (Amazon (AMZN), Apple (AAPL)). Reducing the number of buyers is never an ideal situation for talent, who are already fighting against a disparity in power with the studios. But even as some of the bigger studios disappear or shrink, there’s an increasing number of non-native Hollywood companies that want in on content, such as the yet-to-be-named company backed by Blackstone Group and overseen by former senior Disney executives Kevin Mayer and Tom Staggs that acquired Reese Witherspoon’s Hello Sunshine.
Some believe that boutique studios such as A24 and Neon could benefit from the winnowing of major players. But they make the types of films that aren’t doing well in theaters. Streamers would be more open to acquiring their content, most likely on a cost-plus model which means there’s very little upside for the film companies that are financing them. They’re somewhat capped by selling to streamers and slowly getting capped by box office performance.
“It’s bad news for A24 and Neon,” Offenberg said. “Fewer theaters to monetize their films and consumers now have the expectation that theaters are where you go to see superhero and horror films, not where you go to see thought-provoking cinema. I don’t think they’re going to fill in the gaps left by the majors, who have good economic reason for abandoning those spaces.”
The one company that stands a chance of benefiting is Lionsgate, home of the John Wick and Hunger Games franchises. They have a big enough distribution system in place and know-how in distribution. If they can find the right kind of films outside of horror and superhero-action (which requires a waterfall of luck) they could make those unique offerings shine with theatrical releases. But they’ll have to get creative. In this day and age, success goes beyond just content itself, especially for new IP. Mini-majors such as Lionsgate need to figure out how to monetize beyond just box office and licensing, whether that be through consumer products, creating digital environments for audiences similar to Fortnite, or something else entirely.
Movie Math is an armchair analysis of Hollywood’s strategies for big new releases.