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Calculating the Substitution Cost of Media Interruption

18 Sep, 2017 By: Erik Gruenwedel

Several studios, including Disney, are taking separate steps to buck convention and mine incremental revenue from emerging markets, including premium video-on-demand and subscription streaming video.

But at what real cost?

Studios, including Fox and Warner Bros., want to significantly shorten the theatrical window on select movies to give consumers the option of streaming a movie in the home at a premium ($30) price.

Theater operators thus far remain skeptical at best, heretofore boycotting any (i.e. Netflix) film earmarked for concurrent SVOD release and/or PVOD. But following a depressed summer box office, studios are pressing the issue — and exhibitors are listening.

Meanwhile, Disney, which has no interest in PVOD, has helped Netflix become a global SVOD juggernaut — and media disruptor — in part via exclusive pay-TV access to branded theatrical movies, including those from Marvel, Pixar and Lucasfilm.

Now Disney wants to go solo with SVOD, announcing it would pull original movies, including the "Star Wars" franchise, for a proprietary streaming service in 2019 — reportedly eschewing $500 million in annual license fees.

USB analyst Doug Mitchelson contends Disney generates about $2 billion a year licensing movies and TV shows to third-party distribution. Making that up through an unproven over-the-top video platform isn’t Mickey Mouse.

“Disney will need 32 million global subscribers just to break even at $9 per month,” Mitchelson wrote in a note. Netflix has more than 100 million global subs.

While the Disney brand could attract sizeable direct-to-consumer interest initially, so too should HBO (home of “Game of Thrones”) and CBS. Each proprietary SVOD service has just 4 million subs to date — the latter combined with Showtime OTT.

“While streaming is not a stretch at all given our bullish expectations for the growth in the SVOD marketplace globally, it certainly creates greater [earnings per share] uncertainty for the next several years — during a period where investors are already nervous about secular trends for ESPN,” Mitchelson wrote.

Separately, Michael Pachter, with Wedbush Securities in Los Angeles, believes studios’ efforts to expedite PVOD into consumer homes represent a slippery slope.

In a study of the top 50 box office releases in 2016, Pachter found 18 titles with domestic box office tallies from $50 million to $200 million he determined would be considered suitable for PVOD.

Using Universal Pictures’ Jason Bourne as an example, Pachter said the studio would have to generate $29.5 million through PVOD to cover the 18% generated following the movie’s 21-day theatrical window. This would require 980,000 transactions at $30 each.

When dividing the $162.4 million Bourne domestic box office by the average $8.65 national ticket price, 18.8 million saw the movie. Pachter estimated 15.4 million people saw Bourne within the first three weeks. As a result, he thinks theater operators would have lost 3.4 million moviegoers releasing the movie to PVOD.

“While we think that a studio may attempt a PVOD release without an agreement with the exhibitors, we doubt that more than one attempt will be made with these economics,” Pachter wrote. “It would be more beneficial for the studios to set the PVOD window beyond three weeks, and/or to find a mutually beneficial agreement with the exhibitors so that the films are not boycotted prior to the PVOD release.”


About the Author: Erik Gruenwedel

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