Theaters Against a Wall in PVOD Debate

13 Jul, 2017 By: Erik Gruenwedel

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With Hollywood studios actively moving toward streaming new-release movies in the home at a premium price (from $35) concurrently with theatrical screenings, exhibitors find themselves increasingly between a rock and a hard place.

Following a second-quarter box office that saw some tentpole releases underperform domestically — but not internationally — studios appear to have the upper hand negotiating premium video-on-demand (PVOD) with reluctant exhibitors. While some theater owners shrug it off as a non-starter, observers say non-believers would be wise to negotiate a deal with studios.

“We think this is the main reason theater owners should not overplay their hands during the critical next few months of negotiations and risk being left with a lower split for the future,” Robert Fishman, analyst with MoffettNathanson wrote in a July 13 note.

The fiscal impact of PVOD on exhibitors could range from a loss of $88 million to $400 million annually, even when factoring a 20% share of PVOD revenue, according to research firm MoffettNathanson. Losses increase substantially as revenue share percentage drops.

For studios, PVOD could generate from $665 million to $2.3 billion in incremental revenue depending on revenue splits.

With Netflix planning to release 40 to 50 original movies with or without exhibitor cooperation, PVOD, say backers, is an antidote to SVOD and not an attempt by studios to supplant one distribution window with another.

“Studios believe that in addition to the benefit of more effective marketing spend to avoid the current dark period between theatrical and home video, there is also incremental opportunity to capture revenue from non-moviegoers,” said Fishman.

While PVOD could cannibalize existing moviegoers, thereby creating risks to both studios and exhibitors — the latter losing lucrative concession revenue and screening splits — Netflix poses a bigger threat. The SVOD pioneer, which once competed primarily against home entertainment, is now competing against pay-TV.

“It is hard to ignore a company whose investors are willing to look past material cash burn to grow subscribers,” said Fishman, adding Netflix’s heavy investment in theatrical releases will continue to impact subscriber viewing habits going forward.

“[Regardless], some of the biggest issues around the ultimate success of PVOD comes down to ease of use of the product, how effective the marketing of a new window will be, and whether PVOD can have consistency of use to avoid consumer confusion,” Fishman said.

 

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