By John Fithian, President & CEO, National Association of Theatre Owners
According to many recent press reports, several leading distributors and exhibitors have engaged in one-on-one discussions about the future of movie release windows models. After those reports were first published, many NATO members contacted the association with their questions and concerns. Inquiries were also received from friends in the creative community who support the theatrical experience as the best platform for their art form. Given the paramount importance of theatrical exclusivity to the future of cinema, and NATO’s long history of support for that exclusivity, this column offers some thoughts in response to the many inquiries.
As described in more detail below, NATO has advocated for many years that exhibitors have a seat at the table of release model development. NATO has decried studio attempts to change windows without consulting with their theatrical partners. The reported fact that distributors and exhibitors are indeed negotiating represents significant progress.
The concerns expressed to NATO have not focused on the reports that talks are taking place, but rather the emphasis in many articles on what appears to be one important aspect of the talks – the possible introduction of a Premium Video on Demand (PVOD) window. NATO has indeed raised many concerns in the past about PVOD. The creation of an early PVOD window, in isolation, could damage the theatrical business.
This author notes, however, that several important articles describe additional, and potentially very beneficial issues on the table, including: essential parameters on the later, less expensive release windows such as Electronic Sell-Through (“EST”) and DVDs; compensation for exhibitors from any early PVOD revenue stream; and a term of years during which the parameters of these windows models would not change without the support of both distributors and exhibitors. Discussions that include this broader range of issues would better protect exhibitors and potentially “grow the pie” for both distributors and exhibitors, than would discussions on PVOD alone. Indeed, NATO has called for the inclusion of these latter topics in any such talks.
Given the apparent fact that negotiations are taking place, NATO’s role has necessarily changed. Any discussions regarding specific release models must and will be conducted between individual distributors and individual exhibitors. As a trade association, NATO cannot and will not advocate for any specific competitive terms such as length of windows, price points, or amounts of compensation.
NATO can advocate for a proper process. Release windows affect all exhibitors of all sizes. NATO urges the studios to include all exhibitors regardless of size in discussions that each of the studios may have individually with each of the exhibitors.
So, how did we get to this point?
Theatrical Exclusivity is Vital
From the first introduction of ancillary revenue streams, release windows have played an important role in the studios’ development of economic models related to the production, marketing, distribution and exhibition of movies. NATO and its members have long maintained that a robust period of theatrical exclusivity is vital for the health of exhibition and the movie industry as a whole.
Sequential release (higher value release formats come earlier in the sequence and command a premium) is well understood by the consumer and works for the industry. Collapsing windows muddies the value proposition for the consumer, blurs distinctions between theatrical and “straight-to-the-home” and undercuts one of the important selling points for theatrical exhibition – timeliness.
Every ticket sold in the theatrical window can be effectively priced, something that cannot be said for the ancillary markets – even a “premium” early VOD release. How many viewers will watch each home viewing? Three? Five? More? Also, will the price point hold? The studios have been unable to resist the inexorable downward price pressure and commoditization of its products in windows other than theatrical.
The Home Market is Important – to Exhibitors Too
It is no secret that studios miss the peak days of the DVD market. In 2004 the domestic home entertainment market was $24.9 billion, compared to $9.29 billion in theatrical box office. By 2016 the home entertainment market had shrunk to $12.05 billion, while theatrical had grown to $11.37 billion. Put another way, home entertainment has declined by 52% from its peak, while theatrical has grown 22% over the same period.
On one hand, the growing strength of theatrical versus home entertainment gives exhibitors more leverage with their suppliers. Nonetheless, movies are the life-blood of exhibition. Declining revenues for the studios result in a reduced ability to produce future movies for all windows, including theatrical.
An Early History of PVOD and NATO’s Reaction
Toward the end of the last decade, some studio leaders began to investigate the possibility of a high-priced video on demand offering significantly earlier than the traditional home video window. One concern, however, involved the likelihood that earlier digital deliveries to the home would exacerbate movie theft. Given that concern, the Motion Picture Association of America (MPAA) successfully lobbied the Federal Communications Commission (FCC) for permission to use “Selectable Output Control” (SOC) technology in set-top boxes. In the FCC filings the studios’ trade association described the desire of its members to offer PVOD significantly earlier than the “traditional release window” of 120 days for home video.
After the FCC ruling in May 2010, public speculation grew in the media that some studios sought to launch a PVOD model. In response to that speculation, NATO’s Executive Board of Directors approved a statement on PVOD on June 14, 2010, and that statement was published openly in the trade press. After describing the benefits of robust theatrical release windows and the risks of PVOD, the NATO statement called for three things: (1) an end to studio public trial balloons on windows and price points; (2) no surprise launches of short PVOD windows after a movie’s theatrical run had begun; and (3) a seat at the table for exhibitors.
Despite that statement, four studios (Fox, Sony, Universal and Warner Bros.) proceeded with plans to release certain of their films to the home via early PVOD through DirecTV. The plan became public through the trade press during CinemaCon 2011. Theater operators had not been consulted. With the support of its Executive Board, NATO issued a strong statement in response, and referred back to the statement of June 2010. Again, the goal was to make sure exhibitors had a seat at the table, i.e., that all stakeholders be involved in the process.
Previously, NATO’s Executive Board had called for staff outreach to the creative community to seek their input on the issue. On April 20, 2011, NATO published an “Open Letter from the Creative Community on Protecting the Movie-Going Experience.” In the letter, more than 30 leading movie directors and producers (e.g., Michael Bay, James Cameron, Christopher Nolan, Quentin Tarantino and many others) raised strong concerns about the early PVOD window and asked for a seat at the table as well.
Though the studios never released any specific sales data from the DirecTV PVOD initiative, commentators in the media and elsewhere labeled it a complete failure. Subsequently, Universal abandoned a PVOD plan on the movie “Tower Heist” after substantial opposition from exhibitors.
The Background of Shrinking Windows
In the years leading up to the FCC’s decision on SOC, the theatrical release window had remained relatively stable. In the six years prior to 2010, the average theatrical release window had not varied more than nine days (between 131 days and 140 days) according to NATO’s comprehensive windows tracking data. In the six years after the FCC’s decision, however, the window has shrunk considerably. In 2016 the average home window was 91 days, down 40 days or 31%.
Several factors might explain (but certainly not justify) the decline in average windows. First, over the time period involved studios began to offer EST ahead of DVD. Second, frustrated by their inability to successfully launch PVOD, some studios have sought to improve their home revenues by accelerating their home releases generally.
Also during this time period, additional attempts at windows experimentation were less than successful. In the fall of 2015, for example, Paramount released two horror pictures under a plan in which the titles would go to the home within a certain number of days after the screen count for each film dipped below a defined number. Participating theaters received a small percentage of the digital revenues accrued in the early window, based on the theater’s share of theatrical gross. Given the fact that many exhibitors chose not to exhibit the movies, the experiment produced very limited results.
Then in early 2016, the trade press reported on a PVOD model involving simultaneous release (i.e., no exclusive period for theatrical), called “The Screening Room.” Several different high profile movie directors publicly stated their support for the model, some claiming that the model would be good for motion picture exhibitors. NATO responded on March 16, 2016, with a statement that movie theater operators will individually decide what business models work for them. The statement also reminded the industry, once again, that NATO had consistently called on movie distributors and exhibitors to discuss as partners release models that can grow the business for everyone. The statement concluded by saying that “More sophisticated window modeling may be needed for the growing success of a modern movie industry. Those models should be developed by distributors and exhibitors in company-to-company discussions, not by a third party.”
NATO Pushes Successfully for Comprehensive Distributor-Exhibitor Dialogue
In January 2016, the NATO Executive Board authorized the association’s chairman and president to meet with the major studios to encourage individual discussions on theatrical release windows between distributors and exhibitors. Specifically, the Board asked that general concepts, but not any competitive details or terms, be addressed in those meetings, including:
- A sophisticated and comprehensive model for windowing be considered that would grow the pie for distributors and exhibitors;
- Such a model might provide for different windows for different categories of movies;
- Such a model might provide possible compensation to exhibitors for any risk undertaken; and
- Such a model would provide certainty in windowing for a fixed term of years.
The Board made it clear that any negotiations would be undertaken company-by-company between individual distributors and individual exhibitors, in full compliance with applicable antitrust laws. Finally, the Board made it clear that NATO could not and would not represent the position of any individual exhibitor.
NATO’s president and chairman met with many different studio executives to express these general principles. Some studios indicated a willingness to meet with individual exhibitors. With that, NATO’s role in the process necessarily came to an end.
Interested Exhibitors Should Reach Out to their Distribution Contacts
NATO operates in strict compliance with its Board mandate, and with all applicable laws. Given the publicly reported existence of discussions involving competitive terms between individual distributors and exhibitors, NATO can serve only as a supporter of a process where individual exhibitors decide what specific models work for their company.
As stated at the beginning, release windows affect exhibitors of all sizes. As a supporter of the process, NATO can and does encourage all interested studios to include all exhibitors regardless of size in discussions that each of the studios may have individually with each of the exhibitors. Similarly, NATO encourages all interested exhibitors to reach out to their distribution contacts.