..Gary Dretzka
..Noah Forrest
..Leonard Klady
..David Poland
..Douglas Pratt
..Ray Pride
..Kim Voynar
..Michael Wilmington

Week 12: An Immodest Proposal

This has been a mind-twisting summer.  As any column regular knows, I have been struggling with trying to get a grasp on it in this column and in The Hot Button.   And I doubt there will be any real perspective before August 18.

But the financially exhilarating first seven weeks of summer and the somewhat depressing last few weeks, combined with a story in The New Yorker (yes, The New Yorker) about the record business that delved into the digital piracy issue, got me thinking in a new direction.

With so much money going into marketing of the opening weekend of films in America and with the direct returns from those dollars diminishing every year and piracy a threat on the horizon, something has to give.  While the record business has a completely different dynamic than the film business, there are lessons to learn.

I believe that piracy is not as much a financial issue for individuals as it is one of entitlement.  The greatest irony for the record business is that the format that led to a massive boom in income for a number of years, CDs, also ended up being their downfall.  But I would suggest that it wasn’t the digitizing of the music, making it more copy vulnerable with greater clarity, which led to Napster’s appeal.  It was the $16 CD, which was priced that high at the start to make up for the extra expense of making a relatively small number of CDs for the market.  As the CD became dominant and the cost became lower than those for vinyl or tape, the price never came down.  On the contrary, the costs of tapes rose as the general price of music got set 30 –50% higher than it had been before the CD revolution.  As a result, people who wanted to buy music felt entitled to take the music for free, since they were being gouged at the record store checkout stand. 

The movie business, as it moves to DVD, has not fallen into that trap.  The cost of DVDs has been comparable or cheaper than sell-thru video. 

Another oddity of the record business is that there is a dominant form of product distribution that is already free, radio.  In the movie business, as sell-thru, rental and pay channels have become the standard.  Even free-TV broadcast premieres, now at least 18 months after a film is released, have become a relatively insignificant income line in the life of a film. 

A third distinction is that the ancillary market for music is concerts, which are where the performers make the biggest portion of their income.  As a result, the music industry will probably end up with a business model that acknowledges singles as a marketing tool for concert tours, and has record labels taking a piece of the concert tour pie as a way of supporting the costs of production and distribution.  No such added opportunity exists for film.  The closest we have is home entertainment. 

So, film piracy remains an issue.  And, while the $3 billion figure constantly bandied about as the amount of money lost to piracy by Hollywood is mostly from losses in countries that do not have proper theatrical or home entertainment outlets established, if people here at home start to believe they are entitled it will become a bigger problem here at home. 

So… what would make movie lovers feel that they were entitled to steal movies instead of paying for them? 

The system has already has had a major evolution, as the growth of DVD has reinvigorated the rental market and rebuilt a waning sell-thru market.  The home entertainment window is well under 6 months now, even on the big titles.  So “regular people” now decide whether a movie is one they have to see in a theater or whether they can wait four months to rent it at Blockbuster. At the same time, the industry has pushed  to frontload the box office so that the vast majority of domestic box office is taken in over the first three weeks of the life of a film. 

The result has been very successful as home entertainment has become a cash cow for the industry.  But as that market has grown, the costs of winning in it -  particularly in advertising -  continue to grow as well.  As time goes on, there will be diminishing returns. 

But more significant is that the industry has eliminated the middle class of theatrical releasing, in much the same way it has eliminated the middle class of movie budgets.  The logic behind both unofficial choices was profit maximization.  But now that the market has changed, thanks to DVD and the shortened theatrical window, it seems like time to make a decision to take a big step backwards.

For the most part, the industry is not anxious to squeeze every dollar out of domestic theatrical.  Once you get past the second weekend, it is hard to use advertising to push the box office enough to make up for the exorbitant cost of the ads.  How do you convince people to spend the amount of money now required to go to the movies… an amount that is growing every year… on aging product? 

It was only a decade ago when there was a very solid second run movie business.  The short window for the home entertainment market eventually killed second run. 

But what about two-tier theatrical ticket pricing based on the age of a release?  If Weekend Six of 2 Fast 2 Furious was available for a $5 ticket instead of a $10 ticket, who would object?  It works for exhibitors, who want to fill their auditoriums with popcorn buying audiences, especially in light of the small percentage of the gross they are currently getting from explode-and-burn-out titles.  It works for studios, which are seeing audiences disappear more and more quickly after opening. 

Most importantly, it works for the public, especially the critically important frequent moviegoers who drive the industry.   It empowers them to have the theatrical experience with films that might otherwise be classified as “wait for video.”  And it empowers an entire range of potential moviegoers who are getting more and more selective about the movie on which that are going to drop $35 for two adult tickets, a couple of sodas and a tub of popcorn. 

The key word in this idea is “empower,” not “profit.”  It may be the key to avoiding the sense of entitlement that killed the record business as movie tickets in major markets hit $11 and $12 in the next few years. 

X2: X Men United grossed $1.1 million last weekend.  The film has been hovering just above the $1 million mark for four weekends now.    How much more business – especially repeat business – could X2 be doing at this point if it was available at a lower price point?  If 150,000 people went to see the film last weekend, could there be an additional 200,000 people who would be heading into theaters to re-experience the film for the price of a $5 ticket? 

How many more people would be taking a shot at Hollywood Homicide or Alex & Emma if they could do it at a price? 

Of course, there are worms in this apple.  A movie like Finding Nemo is going into its seventh weekend and will still be grossing nearly $10 million a weekend. 

But look at From Justin To Kelly.  Fox Home Entertainment knew what was coming.  And they were forced to pull back from plans to go to video in just six weeks.  Yet, in its third weekend, the film was on just 108 screens.  The exhibitors bounced them.  And now, home entertainment has to wait.  To what end? 

Of course, From Justin To Kelly is probably not a film that would do terribly well in a “New Wave Second Run” outing.  But after grossing less than $5 million, there could well be a million dollars out there that could be grabbed if people weren’t making a head-to-head, same dollars expended choice between this thing and the new hot release of the week. 

Importantly, there is no reason to believe that motivating larger audiences to see movies in weekends 8, 10, 12 and beyond would in any way hurt home entertainment sales and rentals.  I would argue, quite the opposite. 

But again, the key pieces of this puzzle are that it would put studios back in control of a greater portion of the only post-release period where they are really living in a void and it would give the industry an argument to make that is servicing a middle price point, between first-run and home entertainment. 

Find better ways of servicing the people who you think will be willing to steal your products and a significant portion of them will not start stealing.  A new generation of second run theatrical…. if you build it, they will come. 

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