(Image Credit: Universal)
The shockwaves were instant.
As a result of the COVID-19 crisis, Universal (CMCSA) became the first of the big movie studios to shrink the theatrical window considerably. It also was not the last, as Disney (DIS) and Paramount quickly made plans to do the same. The longer this uncertainty goes on, more may follow… but the question becomes how many and at what price? And then there is the bigger question of whether it will make a difference.
Investors, consider this your primer, as the biggest test thus far is coming this weekend, and you can bet the industry is watching.
First, as always, some background.
Let me take this in stages, because there are a lot of moving pieces.
For one, let me answer the basic question of “What is the theatrical window?” Simply put, the theatrical window is the amount of time between when a movie enters theaters and becomes available for home purchase. Usually, that’s about three months, and in the cases of tentpoles (aka massive releases), it can extend to milk every last bit of money out of a theatrical run.
This is also why Netflix has always had an issue with theaters. It wants a day-and-date release, which means that a movie would hit theaters the same day it appears on its service. Most theaters see that as a slap in the face and have boycotted showing Netflix movies.
Netflix did try to work with them, and for its marquee award-bait films, put in a three-week delay between theater and platform, but audiences aren’t dumb (and neither are exhibitors) – most people would rather wait the three weeks to see the film for a price of a subscription, and the idea proved to be a non-starter.
The window itself has been at the center of a lot of debates in recent months. That, of course, was until COVID-19 struck and the world flipped upside down.
Studios don’t have a choice now that theaters are closed, and even if they were left open, many wouldn’t go. In some cases like Universal, it meant pushing its big Fast & Furious sequel to 2021. For MGM (MGMB), it meant delaying its big Bond film No Time To Die to November, and for others like Disney, it ended last week by playing its own version of musical chairs with tentpoles (and shifting one of its films to Disney+)
Needless to say, things moved fast.
So fast that not long after the box office went on a temporary bye, Universal decided to make a drastic change to protect what it could of its Q1 releases. The studio revealed it would basically close the window and release three of its most recent films on VOD for the price of $19.99 for a 48-hour rental period.
That alone would have been enough to make investors do a double-take, but the studio continued. On top of that, the studio said it was prepared to move forward with its next big tentpole, Trolls: World Tour, as a VOD option.
Keep in mind, the Trolls sequel was already moved once when Bond moved out, which showed Universal thought there was a potential edge to be had. The decision to keep the film on track and go in this new direction furthers that expectation, but it is also a fascinating litmus test for the industry.
Here’s why investors need to be aware.
On one hand, this is an easy decision because it’s a kids film, and with the number of kids home right now and losing their cooped-up, ever-loving minds – giving them an access to something shiny and new is a big deal (to them and their parents).
Disney did something similar by bringing Frozen II to Disney+ months ahead of schedule, and eventually doing the same thing with Onward. However, again, that’s just window-shrinking, and theaters likely made all they were going to off of both.
Universal skipped the process entirely.
According to an interview one prominent theater executive gave The Hollywood Reporter, it caught everyone off guard. John Fithian, chief of the National Association of Theatre Owners (NATO), told the trade that they only learned of the decision 20 minutes before the press was made aware… he then went on to say “exhibitors will not forget this,” but the truth is it may not matter what the exhibitors choose to remember.
Yes, Universal is testing the waters, but this is not its new normal. Proof of that (beyond the Fast & Furious shift) came when the studio last week shifted additional tentpoles to 2021 and beyond. What Universal is really doing is collecting data – it wants to play the game of “what if?”
And again, this is the beauty of streaming – Universal can gather all the numbers and then decide what it wants to report (if anything). All we as the public will ever see is the positive, but the studio will see the full picture. Its team will know the true value, which we won’t know about until much later (i.e., another sequel).
Remember, Universal is still going full steam with all of its advertising and promotion – even going so far as to say in trailers the film will be “in theaters and VOD,” which, as Fithian alluded to, is false because theaters are closed.
Well, almost all theaters.
The drive-in industry (in the markets not on lockdown restrictions) is booming, and technically those are theaters, so Universal isn’t misleading anybody… it’s just choosing its words carefully. Still, the point is should Trolls… do well, it gives Universal ammo to use down the line.
And that’s where the exhibitors are getting worried – and other studios are getting intrigued.
This argument over window-shrinking is not new. Investors should keep in mind that it has happened before, and Paramount got dinged for it in a variety of ways. The studio felt the ire of the exhibitors when it shrunk the window for a few of its films a few years back, but that was a calculated risk.
Even with some of the theaters boycotting the movies, they were so low-budget that executives felt they’d make more money in the long run by going straight to the consumers that had interest. It’s something they stumbled onto when its Hot Tub Time Machine sequel floundered in theaters but cashed in on demand.
It also proved to be an aberration, and Paramount hasn’t done it since – nor has any other studio.
And that’s the point, nobody really expects a Fast & Furious or Despicable Me film to bypass theaters. But other projects…? It’s possible. Netflix has shown it is possible to do so successfully, but it does come with a price.
Still, while it’s easy to shun Netflix, theaters would be hard-pressed to shun a major distributor for a major title. The Paramount example is about as “daring” as the exhibitors would get – nobody is going tell Disney that they won’t take its next Avengers movie if it pulled a stunt like Universal. Just like nobody will tell Universal they won’t take its next Jurassic World film.
It’s an empty threat, but one places like NATO have to make because its team sees the model crumbling beneath its feet. Personally, I’m a theater proponent, and I think what Netflix has done to skirt the rules is causing more harm than good – but that’s just me.
On the other hand, I’m fascinated by all of this, and it just shows how “stuck in its ways” this industry really is. I mean, it took a pandemic to get them to shift their thinking. However, now that they have, it raises a lot of questions, and for now, Universal may be the only one with the actual answers.
We don’t know how long these stay-at-home restrictions will stay in place, and we also don’t know how quickly Americans (and other moviegoers worldwide) will go back to theaters when they are allowed.
The reverberations of this are going to be extreme, and Hollywood is going to have to adapt, but the hope is the theater workers aren’t caught in the cross fire. A shared theatrical experience is a special thing, and the hope is that one day in the not-too-distant future it will again be the norm, but I can’t say that with the same level of confidence I could even a month ago.
Investors need to keep a close eye on the VOD/streaming market, specifically which studios have a hand in both spaces. Disney (and what’s left of Fox (FOX)) does with Disney+/Hulu, Universal will with Peacock, as will Warner Bros. (T) with HBOMax, and Paramount will get there soon with its CBS All Access or whatever it morphs into next.
That’s a sizable number of major players with the ability to distribute content through their own systems.
Still, there’s something about seeing your name in lights – and that’s going to be a harder habit for Hollywood to break than you may expect.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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