The continued viability of some of the major theater chains is now in question.  AMC Theaters, the world’s largest chain of movie houses made an announcement a month ago that it was “doubtful” that it could survive the shutdown, having lost somewhere between $2.1 and $2.4 billion in the second quarter of 2020.

In California, where the desire to get movie theaters open again is probably felt with the most sense of urgency because of its link to the entertainment industry, some movie theaters were allowed to open in mid-June, but only at 25% occupancy.  But even then, individual California counties were given final authority on when to allow theater chains to open and most counties in California have not done so yet.  Now we are seeing increases in positive test numbers in many states which will likely lead to further delays in the authorization to reopen theaters in California and elsewhere

Even those that are open have significant problems with content — most distributors shelved all their big summer “tent-pole” releases, and the normally stacked summer months of big box office draws are devoid of new releases.  Theater chains are opting to re-run movies from many months – or even years ago — in order to sell tickets.

To understand the finances of movie theater chains, you should know that almost every penny of the price you pay for a ticket goes to the distributor of the movie.  The theater showing the movie receives nearly all its revenue from the concessions customers buy.  Every day they are closed is money they cannot get back.  They will not be able to “make up lost revenue” once they are allowed to reopen.  This is why you have seen such an emphasis placed on the movie goer’s “experience” in the past decade — leather reclining seats, enhanced snack and dining options, and even alcohol sales.  That theater chains realize nearly all their revenue from concessions is the reason why a large box of popcorn and large soda now costs close to $15 in some places.   But what will happen to a theater chain in California once allowed to reopen if California imposes its “wear a mask indoors” rules?  Wearing a mask is incompatible with enjoying movie theater refreshments — which takes us back to the point about theater chains making all their revenue from concession sales.

At the same time theaters have been closed, distributors have begun to experiment with on-demand video distribution of “first-run” content that was originally set for a wide theatrical release.  The most successful release to date was “Trolls — World Tour”, a DreamWorks Animation movie that was originally set for a wide theater release on April 10, 2020 — right at the start of the “summer” movie season. In response to the shutdowns caused by COVID-19, DreamWorks ended up releasing the movie through most video streaming services, and On-Demand video through Cable TV networks.  Revenue numbers are hard to come by, but it is estimated that DreamWorks made approximately $40 million the first weekend the movie was available, charging $19.95.  Given that a normal box office cost for one adult and one child would have been close to that, the price was reasonable for a new release which is a follow-up to a very successful first movie.   At that price, it would need 10 million purchases to reach $200 million in revenue.  It is estimated that it reached half that total in its first month of release.

This reduced revenue model may become more of a “standard” in the industry if the theater chains do not survive the pandemic.  The days of 4000 screen releases and $200+ million opening weekend summer blockbusters may never return.  I recently read that total box office revenue — ticket sales that go to the companies that produce the movies — is expected to be off 70% for 202o.

It is the box office revenue earned by the studios and production companies that pay the salary demands of the Hollywood “A-List” talent.  The upfront salary demands made by those stars — as well as their “back-end” share of box office revenue — are not just a huge source of their personal income, but also a significant component of production budgets.  With less overall revenue from ticket sales and costs of production remaining the same or going up as a result of pandemic complications, the consequences for COVID-19 on Hollywood income is going to land hard on “talent”.

Maybe as significantly, as more entertainment companies look to move into streaming content directly to consumers, a new model is developing with respect to handling the costs of production.  Disney and NBC are among the first “old line” media companies to move towards streaming their own content, and streaming companies that began their businesses by broadcast rights to content that was produced by other companies have now moved into creating their own content in a big way.  Original productions from Netflix and Amazon are becoming a more prominent feature of the content they offer, with Netflix and Amazon now spending hundreds of millions on producing shows for their own platforms.  Now you have a tech company, Apple — which at one time owned Pixar Studio but sold it to Disney — with its own streaming service, and beginning to spend some of its huge cash reserves to produce content for that service.  Google is the next obvious candidate, using YouTube as its delivery vehicle for content it produces.

Traditionally, the producers of television programming have retained ownership of the shows they developed and produced, and licensed it for distribution by broadcast networks.  At the conclusion of a popular show’s run on a broadcast network, the producers were then able to realize a second — often much larger — stream of revenue by selling the same show in syndication.  The syndication rights and the residual payments that went with a popular show every time it was broadcast, have been the source of tremendous amounts of wealth for Hollywood stars who were fortunate enough to land themselves in a popular television series.

But the emergence of the major streaming companies as production companies is turning the financing model for generating content inside out.  Rather than license shows from production companies for a specific period time as has been the model historically between content creators and broadcast networks, the streaming companies are purchasing shows from developers on the front end — paying a higher price to take ownership at the outset, and cutting off downstream revenue to the shows’ creators and on-screen talent from possible syndication.

This topic first caught my attention when I saw a story in the Hollywood Reporter about the fact that only 3 of 30 shows created and broadcast by Netflix had their broadcast runs extend beyond three seasons.  One of the reasons for that is the production contracts with the developers of the shows Netflix produced early in its expansion into content provided for enhanced revenue to the creative teams for shows that went four seasons or more.  But experience has taught Netflix that shows on a streaming service are “boxes on the screen”, in an environment where there are hundreds of boxes for the viewer to choose from.  Season 4 of Netflix’s big hit “Ozark” is likely to be hugely popular with Netflix’s members who were fans of Seasons 1-3, but Season 4 is unlikely to create a large number of new Netflix users.  Because there is no advertising revenue, the number of viewers of a show is less important than the number of new subscribers that a show is responsible for attracting to the service.  Season 1 of anything that generates a large amount of buzz creates more new viewers — increasing Netflix’s revenue — than does Season 7 of “Orange is the New Black” which now has a greatly increased production cost compared to when the series was first developed.  Three seasons seems to be the “tipping” point that drives the decision-making on which shows to renew and which shows to cancel.  It also happens to be the point where stars of popular shows start to make noise about wanting to renegotiate their contracts for appearing in the shows.

A second aspect of the changing dynamic of content production in Hollywood is a seeming return to the old “studio system” of having contracted-talent kept in-house.  Streaming services and old-line companies like Disney and NBC are using exclusive contracts to keep creative talent — show developers and show-runners — away from the competition.  If a particular A-List actor wants to work on a specific project, or work with a specific creator or director, that on-screen talent will have no choice but to work with the streaming company that has the creator or director under exclusive contract.  It is only a small step from that point to signing the on-screen talent to exclusive contracts as well.

All these arrangements put more negotiating leverage in the hands of the streaming companies as they move more into content production.  Larger upfront payments to purchase shows outright, and exclusive contracts with creative and on-screen talent keeping them tied to a particular streaming company for a guaranteed fixed sum, provide for more stability in production costs over time.  In the long run, this will result in more revenue remaining in the hands of the streaming companies — and their shareholders — and less flowing to the creative community in Hollywood.

Hollywood’s creative community has always been a bastion of liberalism, and a great source of financial support for the Democrat party.

The tech community is the same.  But as these technology companies move into production of Hollywood content for their streaming services they are more likely to be concerned with the basics of business and finance — that revenue needs to exceed production costs of the business model to work.  There are two ways to make that happen — increase revenues or hold down costs.  The shifting position of leverage that seems to be underway is likely to impose more discipline on the latter than bet on the former.

If both happen simultaneously, so much the better.