There is a tendency in business to, once you’ve found a model that works, stay the course and not become distracted chasing trends. FedEx founder and CEO Fred Smith once said: “In business, the big thing is making sure the big thing stays the big thing.”
I think that is a generally good idea, but sometimes the market truly is shifting in a way that forces a dramatic change in the business model. I think that time is upon us for the film and television industry, whose distribution rights focused model is fading away in the internet age.
I’m going to say some stuff here that, I imagine, will ruffle a few folks’ feathers. No one likes criticism, or to hear that their company might not be around in five years. But I think it’s important to make the call now because after examining the market I think some accurate predictions about it can be made.
So here are some predictions for what I expect the world to be like in 2020:
Independent theatrical and home video market distributors = gone.
Paying for exclusive foreign distribution rights made sense in a world where those rights could actually be exclusive. That is not today’s world where movies are getting leaked to Bittorrent before they are even officially released in theaters.
Film distributors are going out of business. The general population isn’t aware of these bankruptcies because they rarely make news. Here are a few notable examples:
Morgan Creek turned off the lights in 2011. They owned rights for popular hits like Ace Venture, Robin Hood: Prince of Thieves, and Young Guns.
As a big fan of Japanese animation, I saw this change coming years ago when nearly all the major North American anime distributors closed shop. Now it’s finally starting to impact the domestic market, too.
In a world where all your films are uploaded online to be watched for free, the value of owning a library of films isn’t what it once was.
Even the investment firms who fund movies are finding themselves in bankruptcy court, partly due to difficulty to collect royalties in the struggling market, but also due to business practices intended to rub out co-investors on movie deals. Aramid Entertainment is an example, who got into it with Relativity Media, who funds half of Sony Pictures’ movies. Relativity settled for $44M to Aramid, but the company is still in bankruptcy. When the folks who invest into the movies decide there isn’t enough of the pie to go around for everyone, you know things are getting perilous.
Feel like looking deeper into the matter? Variety has a whole post category devoted to covering bankruptcies in the movie biz, http://variety.com/t/bankruptcy/
Furthermore, with the declining theater attendances, foreign distributors are finding they do better with films produced in their own countries than ones produced in the U.S.
Besides, the distribution business was built upon a crazy business model anyway. Films are routinely purchased at a price that has nothing to do with the market value of the film, but rather according to the size of a film’s budget.
Yet films of similar budget are not equal;
Sin City was made for $40 million and earned $140 million at the box office.
Assault on Precinct 13 was made for $30 million and generated $35 million.
Both were released the same year. Both were action films in an urban setting. Both had rock-star actors and directors. Both were based on a prior work. Both had similar budgets.
But Sin City was a better made film, largely because Sin City had a better script to work off, and Robert Rodriguez used a heavy VFX production methodology that made a $40 million film look like it’d been made for $200 million.
A film’s budget has absolutely no correlation to a film’s market value, and yet film distributors routinely purchase territorial rights for a % based on the film’s budget. It’s madness.
(If you aren’t familiar with the economics behind how movie theaters operate, read this article for the basics so you can appreciate the points I make next.)
The Theater market
The different values of films is all the more important for the theatrical market, where screen space is a precious commodity. Deciding to show one film or another can result in tens of millions of lost revenue for major chains, and declining attendance is making them a lot pickier than they used to be. Worse, the independent theaters are being picked off by the business practices of the majors, who are blocking distribution of new films to theater startups.
Never-mind that these deals are probably anti-competitive, and although one complaint against Regal was tossed out of a California court, there are certain to be more to come. The lawsuits will drain indies and majors alike.
The sad thing about it all? Killing these startups will have the effect of ruining the opportunity for many new theater business models to be explored in the market, and will hasten its decline. The majors — as risk averse as they are — are not as willing to experiment and there will be no big innovations from them; the bistros, bars and even the comeback of 3D are all ideas first employed by independent theaters who tested the waters and proved them in the market.
But let’s face facts; the summer box office has been at a 17 year low. Movies might theoretically be doing better at the box office, but not when you adjust the receipts for inflation. Even with the increase in ticket prices, in 2014 overall theatrical ticket sales were so low that the industry made 5% less revenue than it did the previous year.
The market isn’t tanking yet but it is shifting; audiences are watching more content online. Netflix is getting a lot of the credit due to its 50 million subscribers but let’s not forget 30 million folks use Bittorrent every day. Combine that with YouTube serving over 4B video views per day and it’s not hard to figure out where the audiences are going.
I believe that in 2020 theaters offering unique, personalized watch experiences like Alamo Drafthouse and IMAX will still be around. But the major theater chains that offer generic experiences will find themselves struggling with reduced attendances that cause many of their theaters to shutter, as the tactics they employed to combat declining attendances (primarily, raising ticket prices and food prices while reducing the quality of the food and watch experience) will only drive general audiences to embrace digital content distribution. The majors are starting to imitate the offerings of brands like Alamo Drafthouse by offering a dine-in experience and bar, but they are not adopting the unique brand image that so endears these smaller theater chains to their patrons. The major chains that survive will need to offer a higher class of service and totally re-brand themselves to appeal to the communities the individual theaters operate in. That is challenging to do with a national brand, and I doubt they will succeed at such a task.
There is a ceiling to how much people will pay to watch movies, and we’re already at the point the true cost for a family to go to the movies is breaching $100 (tickets, food, parking, gas, babysitter for the baby, etc). If you really think about it, a family that wishes to watch the latest movies would be better served to purchase a $1,000 home theater system, hook the big screen TV / projector to a $100 Chromebook with a $35 Google Chromecast and stream movies from pirate websites. Forget Torrent sites; every movie available in the box office can be watched on YouTube-like websites operated by Chinese pirates who support themselves off AdWords revenue.
The costs for a family to have a “movie night” every week are astronomical if they select a theatrical experience; there are 52 weeks in the year. If a family goes out to the movies once a week and it costs them $100 to go, that is $5,200 they would have to pay annually. Making a modest investment to watch the movies at home will save them thousands of dollars that can be spent on other family activities.
Sure, people are willing to pay for a quality watch experience, but by choosing to pirate movies instead of going to a theater, with the savings the family could watch all the latest movies and go on a trip to Disneyland. I think theaters will become the domain of the single, childless couples on a date, and the elderly. Taking a family of four will become economically unwise for the majority of Americans.
Today the three major theater chains are Regal Entertainment Group, AMC Entertainment Holdings and Cinemark Holdings. In 2020 I believe only one of these companies will still be considered a major, if around at all.
I expect that at least two of the majors will merge in order to survive in the dwindling market (the groundwork is already in place as AMC considers purchasing Regal) but I predict at least one of them is going get hanged out to dry. The market just won’t be big enough.
In 2020, I expect the theatrical experience will become a luxury;
New films will be viewed in 3D or IMAX; the price of tickets will double or triple what they are today to compensate for the smaller market.
You will be served good, restaurant-quality food brought to you by attendants after ordering the meal at your seat. You will be able to order beers, wines and cock-tails.
The seats will be comfortable and recline back.
There will be a merchandise shop inside the theater.
Babies and young children will not be allowed admittance, as they ruin the experience for other patrons.
Drive-in theaters might make a return due to a combination of nostalgia marketing and new spins on the business model, such as the combination fast food chain / movie theater Johnny Rockets is investing into. If it works I expect to see McDonalds follow up with their own version.
Most theaters won’t be able to adapt, because the size of the market will be smaller than it historically has been. General consumers will watch movies online because it is cheaper. The only folks who will be willing to pay for theater tickets are those looking for a theatrical experience of the highest quality, and I don’t think even half of the towns the majors operate in have enough of these consumers in their populations.
If the town isn’t home to a college, it probably won’t have a theater anymore.
Consequently the majors will shut down a lot of their screens, some of which may get taken over by indie startups who replicate the Alamo Drafthouse model, or other models catered to the specific community they operate in. In certain towns the “family owned theater” will return, which I think is a good thing. I grew up in Newberg, Oregon; a town whose theaters are family-owned. The downtown Cameo Theater is adults-only admittance, and the other theater has a drive-in screen. It works there because Newberg is home to George Fox University, and there are also several wineries based in the area that bring in older, wealthy wine tourists. There is still a market for high-quality theatrical experiences in such towns.
I know that as a consumer, I am done going to a theater to pay $20 for a bag of cold nacho chips and a dab of fake nacho cheese while drinking a $6 medium soda (half filled with ice) as I LISTEN to someone’s screaming infant in the next row over WHILE I’m watching a movie I’ve been waiting a year to see. I think most movie aficionados feel the same way — which is why even though it is more expensive for everything, Alamo Drafthouse does so well.
DVD Kiosk’s like Redbox Will Be Gone; Netflix will experience little new growth
I always felt that rental kiosks would be an interim technology until the cost of tablets, cellphones and Smart TVs dropped to lower prices, making them more accessible to general consumers. That kiosks did not save Blockbuster Video did not surprise me, nor does it that Redbox is suffering in the market despite now having no direct competitors. The market was only so big, and much smaller than many folks realized.
Sure, back in October 2013 Redbox was seeming like it would take on the world but flash-forward another year and the parent company Outerwall admits the profits are in decline. Net income was $17.9 million, a staggeringly lower amount than the $82.7 million it earned one year ago. Couple this with Redbox’s Netflix competitor on demand streaming service getting canned last October, and you can see the writing is on the wall. Sell the stock while you can.
I don’t know how I can say it any clearer: The market of folks willing to PAY MONEY to watch content in their homes is shrinking. This is demonstrated by Netflix’s growth difficulties this year; I believe they have reached the total market they can get. Now it will either stabilize based on whether Netflix is able to continue to provide added value, or if Netflix is unable to innovate it will shed subscribers like other services have. Either way, the market has matured.
The definition of ‘Television’ will Change
Let me broaden the definition of ‘television’ as well; as the satellite and cable market dwindles, what has been considered ‘web television’ will simply become called ‘television’. This includes the websites owned by TV networks (CWtv.com, ABC.com, etc) and platforms like Netflix, Hulu, YouTube, Vimeo, HBO GO, Amazon Prime, etc.
Hulu warrants special attention in this regard, as their current slogan is “For the love of TV“.
We already have witnessed the beginnings of this, as Netflix is distributing original films that wouldn’t normally receive a theatrical release (Camp Takota is a good example) while also picking up the distribution rights for films like the Crouching Tiger, Hidden Dragon sequel which will otherwise only receive an IMAX theatrical release. Vimeo has also secured a deal with Cinedigm, one of the largest independent distributors with a library of over 50,000 films; the deal makes some of their library exclusive to Vimeo.
By the way, I usually mock Vimeo (for years they marketed themselves as a paid portfolio site for film students — essentially a video version of DeviantArt), but I think they are finally getting with the program. If they can keep it up by 2020 they will likely be an important player (but they still have a long way to go – right now their front page is still focused on acting as a paid portfolio host for students too snobby to use YouTube.)
The older distribution technologies like TV satellite and cable will erode to the point they are probably gone in 2020. They have been losing hundreds of thousands of subscribers every year and this is a trend we’ve seen for years. Even the advertisers are leaving the space. The business model is wrong for a world where content owners can go direct to the market anywhere in the world. All the carriage disputes they get into with network owners will only serve to drive their customers to web TV platforms (or torrents), because the truth is nobody cares about Time Warner Cable, Comcast, Dish or Direct TV. The subscribers care about MTV, Fox News and Cartoon Network, and they will go wherever they can best watch that content. That “TV Anywhere” services are seeing huge growth is indicative of the future.
Consumers have spoken loud and clear; they want to watch TV programming on mobile devices, not television screens. Paid TV subscriptions have been declining since 2012 as online video viewing has increased. Dish Network even reports its profits are declining. I suppose it is possible that the satellite companies might still try to save themselves by investing into a digital app for content watching that is separate than their existing service, but I doubt it. Even if they did it would be challenging for them to get a foot in the door unless the product was very innovative and solved problems with the watch experience.
Unfortunately some companies like Sony are choosing to ignore the market realities, and instead investing into stupidly expensive operations like a brand new movie channel for cable. Sony started the channel four years ago but only now has acquired an actual cable operator to sign on board; it had only been carried by satellite providers.
The media conglomerates might feel like they can ignore the market trends and just employ legal tactics to restrain new technologies. They’ve certainly taken this approach already, as they were successful in driving Aereo out of business and into bankruptcy, but this was only because Aereo was committing copyright violations. It was a doomed idea from the start because the business model was wrong. Once the optimal business model for web television is figured out then the satellite, cable and over-the-air networks will continue to lose viewers until they are forced to embrace the new order. It’s just a matter of time, and the companies holding the old distribution systems will have no one to sell the now-worthless broadcasting assets to. They’ll have to eat the shutdowns and layoffs, and it won’t be pretty. The TV stations they operate might survive, if they embrace the new platforms right now, but otherwise they are likely to be replaced by the channels doing the exact same kinds of content on YouTube right now.
Popcorn Movies Will Move to Television
Films that have no franchise potential will no longer get theatrical releases. They will instead go to television, where the niche audience they appeal to can be more properly monetized via advertisers.
This also goes for films produced by folks like Wes Anderson and M. Night Shyamalan (high concept, quirky, zero franchise potential). Those kinds of movies also fall into this “made for TV” category. Don’t get me wrong; I like their movies. I think Moonrise Kingdom and Unbreakable are brilliant. The problem is that movies like these don’t adapt well to merchandising or sequels, and therefore will lose money in a market where people won’t pay to watch them. The true value of these films are the eyeballs of their audience, who may be otherwise difficult to reach with conventional marketing. That’s why TV is a better format for these movies. I am not alone in this opinion; a 2012 interview with Steven Spielberg and George Lucas discussed their struggles with getting Lincoln and Red Tails into theaters, and they both strongly believe these kinds of films will become made-for-TV in the future.
Think about it; there’s nothing inherently special about watching these kinds of films in a theater versus at home.
By contrast, films by folks like Michael Bay, J.J. Abrams, Robert Rodriguez and Paul W. S. Anderson will populate the theatrical lineup because their style of film-making is benefited by the theatrical experience (highly detailed special effects, exhaustive sound design, 3D compatibility). People will pay to watch these kind of movies in IMAX or 3D.
What happened with The Interview is indicative of the market in 2020; even with the movie the subject of daily national conversation in every media outlet, and despite being released on 912 screens (almost half of the 2,000 screens it was set to premiere on) the film has bombed; it’s theatrical release only grossed $3.9 million to date. Sony claimed that on digital platforms the film generated $15M in the first three days — but that is still a long way off from earning back its $44M production budget, or all the money spent on other things like marketing. Sony invested around $80M-$100M into the film in total.
The Interview is by no means a bad film; I think it’s remarkably funny. My brothers and I paid to watch it on YouTube the day it was released. But it’s not a film that benefits from the theatrical experience; the enjoyment of the film would not be better if viewed on a larger screen and with a better sound system. I have no desire to watch it in IMAX or 3D. The same goes for all the other films Sony released this holiday season, except Fury which at least pulled in $84.7M. Action films work in theaters; most other film types aren’t truly benefited by the experience.
Contrast this to a film like The Hobbit: Battle of Five Armies that has grossed over $700M internationally and continues to perform in the box office every week. This is a film that people want to have a theatrical experience with. Same deal with Into The Woods ; Disney musicals are always best on the big screen and audiences know that.
In 2020 films like The Interview will be TV movies. They will not be made for the theatrical market anymore, and their budgets will now reflect the different economics of the TV market.
Movies and TV shows will be funded differently
I believe we’re going to see a world where content is largely funded by the fanbase of the actors / directors, and advertisers who pick up the remaining gap. This is the patronage market that is emerging on a scope we’ve never seen before, and it is good.
We’re going to see a lot less individuals personally investing into movies as part of their portfolios, because the returns just suck. The fact is most movies lose money, and this will continue to ring true into the digital age as piracy kills the ability to recoup costs from audience purchases of digital content.
Instead, the true value of video content will be the eyeballs of the audience, not their wallets. Advertisers will pay for films that get watched, and they don’t particularly care if the people watching the movie are pirating the film. Furthermore, even though most people will pirate the movie, the hardcore fans of someone like Wes Anderson will contribute to a Kickstarter campaign to see a beloved director make another masterpiece for their enjoyment. They won’t just want to watch the movie though; they’ll want an autographed box copy of the DVD or a special commemorative doodad (e.g. a limited edition run Moonrise Kingdom Khaki Scout handbook that was printed-on demand) and will pay hundreds of dollars for these items.
So fear not, in 2020 your favorite directors and actors will still have jobs, if you and tens of thousands of other people are willing to crowd-fund their salaries and project budgets.
Some of the major studios are going to be hurting
Sony Pictures’ digital launch of The Interview doesn’t seem to have convinced market analysts that digital distribution is a worthwhile endeavor. I think it is also telling that Sony didn’t believe enough in digital distribution to list The Interview on its own PSN service until several days after it’d been on Google Play and Xbox Live.
Couple this with the many other horrible decisions Sony Pictures has been making.. for example, a Ghostbusters re-make? Seriously? This isn’t Star Trek; the Ghostbusters brand’s popularity is largely wrapped up in nostalgia surrounding its quirky 80’s oddness and very specific casting, and you seriously want to remake it?? Nobody wants to see a Ghostbusters movie that pretends the last two movies never existed. Educate yourselves here and here. All of the value of making a new Ghostbusters movie is predicated on the fact the brand would now be a trilogy. Every fan of the brand wants a true sequel, but a remake destroys existing continuity, making the original two films worthless for marketing purposes. Don’t remake Ghostbusters, because such a film will surely bomb.
I feel very confident in declaring this: Sony execs are completely out of touch with the market.
All the content mistakes NBC made in the early 2000s are being repeated at Sony; back then, NBC produced Titans and The Michael Richards Show when what the market wanted was Survivor. Likewise Sony has invested a lot of money into obvious blunders like The Interview, Annie , Monuments Men and Sex Tape; films that appear to have been made solely because they were pet projects of movie stars. The only hits they had were Spiderman 2 and 22 Jump Street. Sony should have been making another Bond movie, and adaptations of their popular video game franchises. Sony Pictures has every reason to be the #1 highest grossing movie studio in the world, but they won’t be if they don’t start leverage their IP library properly. They can turn things around, but they will need to fully embrace the future to do so.
Worse, a lot of industry folks are in total denial about how the market is working. In a recent article Michael Pachter, an analyst at Wedbush Securities claims it is tough to generate the same level of interest in a film released online as one released in theaters. This is a ridiculous statement, as what determines interest is marketing. Furthermore digital sales have less overhead than selling a physical object, as a digital good does not need to be produced from physical materials, stored in a warehouse, shipped or consume limited shelf space in a store. The margins for digital distribution can be much higher than theatrical or home market releases. Lastly, that The Interview has been pirated more than it has sold is quite telling, as it demonstrates there is a significant market for online watching of new films — but half of that audience doesn’t want to pay $5.99 to watch them. This is all the more reason that major films need to be aimed at building franchises that have licensing rights and are funded largely by advertisers, as the value of the audience no longer is in purchasing movies. The value of audiences is in convincing them to purchase products related to the films they love.
Yet I predict the major studios will continue to do business as usual, for two main reasons:
- Many Hollywood players are stubborn and refuse to embrace new models they are unfamiliar with, for fear they will not be as effective at navigating the industry under the new models as they were with the old one.
- Even if the execs understand the market and believe they could thrive in a new model, the major studios are publicly traded companies, and Wall Street is a fickle market. Many shareholders don’t understand the digital revolution and can be scared off if the studios suddenly focused on digital distribution over the theatrical market. Executive compensation is usually tied to share price, especially as the majority of an exec’s compensation comes in the form of stock options. Movie execs are under significant pressure to take actions that keep the stock price up, so even if the decisions make sense when looking at the market, they tend to make decisions that go against the market because shareholders panic when they do not understand the market a company is throwing all its chips behind.
The problem, of course, is the stock market is not based on actual profits but on speculation. This is why the “don’t-change-our-model-or-it’ll-ruin-our-share-price” attitude led Movie Gallery (owners of Hollywood Video, previously the #2 movie and video game rental company in the US) to ignore the market changes until they simply ran out of money and had to file bankruptcy (which led to their stock becoming worthless anyway).
In fact if you look at what the major theaters are doing right now — trying to grow through constant acquisition of rival theaters — it looks very similar to what Movie Gallery was doing in its last-ditch effort to keep its share price up.
Despite this obvious trend, I believe movie execs are going to keep green-lighting $100M+ blockbusters aimed at niche audiences until their world collapses when the distributors won’t buy the movies because the theaters aren’t able to afford to show them.
It is baffling how so many intelligent people have convinced themselves the solution to a dwindling theatrical and home video market is to spend more and more money producing fewer numbers of films. The tactic worked in the 60’s to combat declining theater attendance because piracy was not a factor. Today it is so obviously a bad idea — eventually the levee will break and folks are going to drown.
YouTube Stars Will Become the New Movie Stars
I think it is embarrassing that movie studios have been lagging behind the music industry in embracing the star quality of many web series creators; many of whom command fanbases larger than Hollywood film stars do. But that will rapidly change.
There have been indie films like AVGN: The Movie funded by fans and distributed online to great success. Rocket Jump’s Video Game High School series also had three seasons funded by fans; each season raising more and more money (Season 1 here, Season 2 here, Season 3 here).
There are also studios like Supergravity Pictures launching who plan to specialize in casting YouTube stars as the leads of the movies they produce.
The SMOSH Movie is the first of the big budget productions to feature an assemble of top YouTube talent. Produced by Defy Media and Awesomeness TV with distribution from Lionsgate, I think the film may do well at the box office. Freddy Wong is set to also produce a project for Lionsgate as well.
YouTube MCNs will become the new major studios, because they have invested into building long-term relationships with the movie stars of tomorrow. We’ll also see a lot more YouTube creator oriented startups spring up. Several already exist, such as Creator Up, Fanbridge, Tubular and Zefr, and we’ll keep seeing more and more of these types appearing until the market matures, which will probably be in 2025-2030.
That said, I think more YouTube MCNs will continue to get acquired by traditional companies; Disney’s acquisition of Maker Studios has received a lot of press, but Warner Bros. has a controlling interest in Machinima. Fullscreen acquired a couple MCNs to prepare its portfolio for an AT&T acquisition. DreamWorks acquired and then sold a 25% stake of Awesomeness TV to Hearst. They aren’t an MCN, but Amazon also purchased Twitch and I am sure it was for the same reasons; getting a foot into the door of the emerging creator-centric content market that is the future of the industry.
How many followers a star has on social media will be one of the key factors in deciding who is cast for major movie and TV show roles. The star quality will no longer be assumed; how popular stars are will be known by looking at their social metric scores. And the fact of the matter is, someone like PewDiePie (4.8M Twitter followers; 5.5M Facebook likes; 33M YouTube subs) is better positioned to be a comedian movie star than Seth Rogen (2.9 million Twitter followers. 4M Facebook likes and NO YouTube channel). It’ll be interesting to see which actors cannot thrive because they shunned their fans for too long.
The tales of someone moving to L.A. and working their way up the system through auditions will become few and far between; in 2020 the normal way to become a movie star will be by growing your personal brand organically on platforms like YouTube until you command an audience large enough to get a casting director’s attention. Better still the producers will be able to assess the interests of the talent’s fanbases and use that data for securing brand sponsorship deals.
These are my predictions. This is how I see the future for the industry turning out.