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The battle for our screens

Has streaming killed the movie star? No, it’s the future.

The logical position seems to be that streaming will kill off cinema. Watching a film from your sofa is much more convenient than going out to the cinema, and often works out much cheaper. Instead, I would argue that streaming and the cinema will enter a symbiotic relationship.

Matt Damon, while eating some wings, explained that the reason studios don’t take chances on smaller movies anymore was because of the rise of streaming and the death of the DVD. A film used to generate revenue at the box office and also in the form of DVDs. 

But streaming killed the DVD. In the UK, the Subscription Video on Demand (SVoD) market (streaming services) rose from <£1mn in 2009 to £495mn in 2018; the physical video rental market fell from £200mn to £30mn, and physical video film sales fell from £1.31bn to £451mn in the same time period. Films no longer generate that second form of revenue. 

Growth of the theatrical release market has stagnated over that period too. While box office revenue has increased about 16%, the revenue-per-film has decreased from £2.23mn to £1.66mn. 

A cinema’s success depends on the performance of each particular film. Blockbusters like No Time to Die helped the recovery of the cinema in the “post-pandemic” era. Blockbusters reliably attract customers, so they can help offset the risks associated with playing a less-publicised film. 

Conversely, a service like Netflix only generates income through subscriptions. While a successful hit like Squid Game can attract more subscribers, it does not generate revenue itself. 

As producers of exclusive Netflix content did not reap any rewards for success, there was no incentive to generate quality content, and since a bad movie generates as much direct revenue as a good one on a streaming service (i.e., none), Netflix felt it could afford to take a chance on a wide array of content. 

Such a subscription model suited Netflix very well. Until it didn’t. Over the past year, Netflix’ share price has fallen ~63% since the beginning of the year. Their growth has stagnated, and they lost 970,000 subscribers in the second quarter of this year. Their production costs are huge, so while they had a positive cash balance at the end of the most recent quarter of ~$6bn, their streaming content obligations represent a future cash outflow of $16bn payable over the next three years. Moreover, Netflix’ growth opportunities have been threatened by other major SVoD players entering the scene. The fragmentation of the market makes it harder for Netflix to acquire more subscriptions, as consumers have other options for content (and with current cost-of-living issues, having any service or more than one is more and more unlikely). So, investors are less convinced by Netflix’ growth-at-all-costs approach – the growth has shrunk, while the costs have increased. 

That’s where the theatrical-SVoD hybrid model comes in, where movies are released in theatres and then on subscription services, e.g., a film having a shorter theatrical run, before joining a subscription service’s content library, e.g., Marvel films joining Disney+ soon after leaving theatres. 

While subscriptions generate constant, recurring revenue, theatrical releases have the capacity to generate more revenue per title – Universal earned $500mn in 2020 from digital titles, while Avengers Endgame made $800mn at the domestic box office. So, while there are risks and costs associated with theatrical releases, including the risk of poor performance killing interest or marketing costs, a successful film can constitute a major payday and attract interest to the service, providing a new growth opportunity.

Successful hybrid releases would 1) generate their own revenue, paying for themselves and other titles, and 2) attract subscribers for the platform. And the box office may have taken a hit during Covid-19, but in the UK at least, it was still worth a sizeable £556mn post-pandemic. On the consumer side, direct revenue from titles would encourage greater quality, and would give wider access to content in the form of cinemas. 

The theatrical release is not dead. And the subscription market is threatened by itself. But if the two were to combine successfully, it would not only be mutually beneficial for them, the consumer would also win out in the end.  

Image: CC2:0 via Unsplash

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