The Party's Over

Out in sunny California, the movie industry just held one of it's yearly conventions. Not a fan-boy, geektasitc convention with people in costumes (unless that is you count studio executives trying to pass for human beings), but an actual industry convention. Blu-Con is the industries largest Blu-Ray convention, and in the past few years has been the place where some interesting details about the strategies the studios have been trying to implement have first been announced. This year has been a rough one for the film industry. Ticket sales are down, way down. What's essentially been happening is that they've been having to rely on tentpole properties for the entire studio to produce a profit. In other words, the big movies are making more money (some in part because of 3D, some in part because they actually are popular) and selling more tickets, but everything else that's not a big huge success, is selling fewer tickets. If the trend continues, we're headed to having only movies that end up making billions of dollars, and huge flops, that don't even make the original investment back, much less the advertising budgets that are tacked on after production is finished.

On top of that, Blu-Ray and the digital download market aren't expanding as quickly as they'd hoped. Most consumer surveys are showing that price is the real sticking point. What's coming out of these surveys is that movie goers obviously prefer Blu-Ray, but the cost is prohibitive. In a slumping economy with millions of people unemployed, and millions more worried that they might not be employed next week or next month, this isn't really a shocking revelation. Blu-Ray accounts for about ten percent of the home video (cinema? what do we even call it now) market right now. Digital download (of the legal variety) accounts for about five. Obviously, there's no good way to track the percentage of people downloading illegally. That leaves eighty-five percent still dominated by DVD. The price of Blu-Ray players is starting to drop significantly, but in some circles, there's a discussion suggesting that the industries previous hype for Hi-Def, combined with it's current hype for 3D are essentially shooting it in the foot. How many people are going to make the jump to a Blu-Ray player if they're not sure that it's going to play 3D as well? Most of the 3D players will play straight Blu-Ray, but the marketing for the 3D players hasn't been focusing too much on that so far. On top of that, there are still many people who haven't made the jump to Hi-Def televisions yet. All of that adds up to this: why make the jump to Hi-Def televisions and Blu-Ray players if they're just going to have to buy a whole new system in five years anyway? They're shooting themselves in the foot on this one.

Yet another problem they're facing is the popularity of Netflix. Netflix streaming currently accounts for twenty percent of all the evening internet usage in the country. I don't know if I have to tell you this, but that is unheard of. The internet has only been a part of American life for a short period of time, but not since AOL has any company accounted for that large an amount of usage over any period of time. And AOL was an access provider, Netflix is strictly content.  Right now, there's a 28 day delay between the time a film is released on DVD and the time it's avaialable on Netflix, be it watch instantly or DVD by mail.

The L.A. Times has a good story covering some of this and detailing what a panel of heavy hitter studio heads had to say about the situation. The basic thrust of the story is that Netflix is pissing the studio's off by being more popular than any of the ideas they've come up with, and with revenue's down, they're trying to figure out how and when to either chare Netflix more for the content licensed to them or the studio's are going to try and come up with their own variety of digital streaming that will create direct revenue for them.

Studios have historically made money through what are called release windows. They release a film to theaters, and there's a window of time during which people are actually going to go and see a film. That window of time has been shrinking. The studio's believe this is due to the shorter periods of time they've had to turn to on the DVD release window. They shortened the period of time between theater and DVD releiase specifically because of the digital piracy problem. If they held a title from DVD release too long, more people were downloading it illegally. The DVD release window became a strong revenue stream very quickly after DVD was released commercially. DVD quickly outstripped VHS in both adoption and in revenues. People made the switch to DVD from VHS relatively quickly, and they were buying more DVD's than the had VHS. And, what are referred to as "catalog titles," older films which are still available for purchase, have been a good source of revenue as well. A DVD costs roughly three dollars for a studio to produce and ship (most of which is actually shipping). If they don't have to run a promotional campaign for it, every dollar above that is profit, either for them or the retailer. If you're paying nine dollars for a discounted "catalog title," the studio and the retailer are making money - the retailer makes an average of a dollar to a dollar and fifty cents. The difference is all mark up from the studios. The next window studios were able to establish revenue through was the television release window. They get paid every time one of their films is shown on television.

Netflix, eats into all of that. If I only have to wait a month to see a film I missed in the theaters, I'm much less likely to go pick it up on DVD or find a rental organization that has it on the day of it's release. I'm certainly not going to buy a catalog title before checking to see if it's available from Netflix. And, I've only watched two things on television for the past three months, the news and The Walking Dead on AMC. Netflix is the reason for that.

The studios have been laying the groundwork for a premium VOD (Video On Demand) service which will make movies available to consumers a month or two after their theater release, but before release to DVD. It would basicaly establish a new release window, and therefore a new revenue stream. They've been talking about a price point of twenty to thirty dollars. That seems a little extreme for what basically amounts to a rental, no matter how much earlier it is than DVD. But, there are ways that a service like this, at this price point could make sense. The best example I've so far heard is with something like the Harry Potter franchise. If the studios were to make those films available to a limited audience during or before their theatrical release, they'd be able to add some revenue as Harry Potter fanclubs across the country would be getting together to watch the films. Peter Jackson's upcoming The Hobbit would be a good candidate for something like this as well, and it would help get the early word out on the film. If the studio and the film maker feel they actually have a good film on their hands, it could help start to build word of mouth that's worth more than any amount of promotion. 


The other way a service of this kind could work would be in tandem with the new theatrical release strategies the studios have been using. All of the big films, things they've put a lot of production and advertising money into have been getting nationwide releases. But, most of the smaller films that haven't had huge production budgets or that they've picked up for distribution at film festivals etc. that they haven't put production money into, but aren't willing to spend the money for a nationwide promotional campaign on, have been getting targeted, limited release first. They'll go to major cities, with a modest, but not stingy promotional budget. If the film does well enough during that limited release, they expand it. It may just begin with less limited release or go directly to a nationwide release, depending on how it performs. The kind of premium VOD service the studios are suggesting would be excellent for films like these. A good example would be Buried, which was released a few months ago. It garnered a strong word of mouth, was adored by the internet film press, and was put into limited release, and because it didn't perform as well as it's marketing budget required in limited release, it never made it nationwide. I'm two hours away from the nearest theater that will play most of these films. We've got an arthouse theater here in Richmond, but honestly, it's a little too "uppity" for me. Right now, they're showing The Girl Who Kicked the Hornet's Nest, and I'll probably go see that, but for the most part, they're showing "respectable" movies. The other film they're playing is 127 Hours, which is supposed to be excellent, but is also playing at the local multiplex. They sure as hell weren't playing Adam Greene's Frozen when that as in limited release. I don't expect to see the new Christmas horror movie about an evil Santa called Rare Imports: A Christmas Tale there either. I think I know enough people who would be interested in seeing these films before they get to DVD to make a VOD service for those worth our money. If four or five of us were to throw together five or six dollars each, we could watch them in one of our living rooms, and since we're not getting the full theater experience, we still don't have to pay the full ten dollar ticket price. Something like this could work. It could even be a way for studios to draw some revenue from films they just don't know what else to do with. Trick'R Treat sat on a shelf for two years, while word of mouth dwindled from a roar in the horror community to a "what ever happened to that?" When it finally got a DVD release, the studio didn't even have to do much in the way of promotion, because it was done for them by internet sites excitedly touting their "cred" by reposting reviews and articles they'd written on the film two years before. I'd have paid to see it through an On Demand kind of service, and then I'd probably have bought the DVD as well. On the other hand, The Poughkeepsie Tapes has been sitting on a shelf for about four years now, with no release date in sight, a rash of new "found footage" films that it's definitely better than making boatloads of money, and having had the same positive reaction from the internet film community. People probably won't pay twenty or thirty dollars to see it, but making an exclusive offering to a relatively small number of people who've already demonstrated an interest in it or films like it, could generate enough interest to give it a respectable run in limited release. 


Probably the most interesting bit in the L.A Times article is Universal studio cheiftain Craig Kornblau proclaiming, "We want to advantage methods that are more profitable." That's a no brainer, so here's where it actually gets tricky and Kornblau demonstrates an attitude I wrote about earlier in a piece called "Blockbusted," Kornblau went on to say, "We don't have an obligation to give consumers what they want when they want it." The thing is, he's wrong. If you're actually interested in capitalism, that's exactly what you have to do, otherwise, the consumer is going to find another way to get what they want. It might be illegal digital downloads, which studios can spend huge sums of money to fight, but are never going to really eradicate, especially with the number of free information activists out there who are going to be constantly coming up with new ways to undermine whatever efforts the studios use to cut down on it. Even if it's not that, there are new methods of financing film making cropping up all of the time. The film makers are able to go directly to the source more and more often. The fans are playing a part in financing films in a more direct way than they ever have before. The studios didn't have to give consumers what they wanted, when they wanted it in the past. Now they do. The entire reason the film industry is in the shape it's in is because they are still holding on to an ideal, a way of doing things and a perspective on profit that is no longer a reality. 


The age of the studio executive is over. If the film studio's are going to continue to exist in any form that resembles what they are now, they are going to have to deal with the reality of a changing industry and market place that is opening up in a way few people could possibly have foreseen. With all of the new distribution methods available, there are going to be so many different hands involved with it that the studios are never going to be able to cover all of that ground with the model and methods they have today. It's going to mean that studios are not going to be able to make big tent pole franchise films, and make L.A. Confidential at the same time. The only thing wrong with that is that there are going to be films like L.A. Confidential might not find the kind of audience it has. It's going to be completely different than it is now. There are going to be new, smaller companies that are going to be in the business of producing films specifically for these new kinds of distribution. They are going to be the companies producing Up in the Air, and Juno. Those films are not going to star George Clooney and Ellen Page, but they're going to get made, and they're going to get distributed, and some of them are going to be damned good. A lot of them are going to be navel gazing crap with bad scripts, bad acting and even worse direction, but they're going to get made, the same way studios are making more crap movies than good ones every year. The difference is, those movies are going to cost thirty thousand dollars to produce and distribute, instead of thirty million dollars (which is about the average cost of a Hollywood film these days). And studios are going to have to come to the realization that they are going to have to do what they do well, and leave the rest of it alone. 


They're only going to be able to pay actors and directors millions of dollars if they have a track record of being able to put asses in seats, and they're going to have to start cutting the number of multimillion dollar executives they have on staff if they're going to be able to five or six successful Hollywood productions put out each year. Things are already starting to go that way, which is why they are employing a new strategy of only releasing the really big, expensive pictures nationwide. But soon, there are going to be companies who have reached some level of success with the other forms of distribution they've been using, and they're going to be able to finance the kinds of limited releases that the studios are scaling back to. At that point, the studios are going to have to start asking themselves whether or not it's worth it to continue to release a seven million dollar film in a limited number of theaters when they are competing with a film that was made for five hundred thousand, and needs to make that much less in order to be profitable. And that's just for the kinds of movies that the audience feels are worth going to see in a theater. At some point, the only things people are going to go see in a theater and pay a full ticket price for are going to be the big Hollywood spectacle films, comedies and the occasional horror film. They go to the theaters to see the huge, expensive spectacles, because it's best to see those on the big screen, with the sound systems more expensive than most people can possibly afford to have at home, and they go to see comedies and horror films in theaters because a big part of what makes those work is the theater experience of being able to see those films with a crowd of people. 


The future of American cinema is going to look vastly different than it's past. We all know this. What exactly it's going to look like, none of us can completely be sure. But there is one thing we can be sure of, if Americas film industry doesn't start changing more rapidly than it's been willing to so far, and start actually trying to develop some real innovation in the distribution of film, it's not going to be around for the 50th anniversary of Avatar. There's a great article taking a really humorous look at this over at Cracked.com.