Why movie theater chains get so up in arms over video on demand.

HUNTING FOR THE END OF THE LONG TAIL • MAY 01, 2020

Today in Tedium: Of the many, many overreactions that have occurred as a result of the disease that has been the only topic anyone wants to talk about these days, perhaps the most interesting that doesn’t involve a face mask may go to AMC Theaters, which took a modest comment about a success story brought on by unusual times and turned it into an all-out business war. Trolls World Tour, which was released to premium video on demand (PVOD) due to the fact that nearly all theaters literally weren’t open, proved to be an unavoidable success story for NBCUniversal. “The results for Trolls World Tour have exceeded our expectations and demonstrated the viability of PVOD,” NBCUniversal CEO Jeff Shell said. “As soon as theaters reopen, we expect to release movies on both formats.” AMC called foul and said it would ban Universal films from its theaters—the negotiating equivalent of bringing a gun to a poker game. But conflicts between film studios and theater chains are nothing new, and today’s Tedium analyzes how that relationship has helped to shape the modern film industry. — Ernie @ Tedium

Editor’s note: This was mentioned during the last issue, but we are testing Tedium sends on Friday afternoons now, rather than overnight Thursday/Friday. Let us know what you think.

Also, a quick shout-out to my friend Josh Sternberg, who just launched a new newsletter recently. Be sure to subscribe! By the way, definitely check out our sponsor Rype. ↙️

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(igorovsyannykov/Pixabay)

The shifting fates of film studios and movie theaters leans on one essential Supreme Court case

Paramount Pictures is one of the oldest continuously active companies in the film industry, with roots dating all the way to 1912, when early film producer and nickelodeon owner Adolph Zukor bailed out the production of a film about Queen Elizabeth I of England after its former studio went bankrupt. Zukor’s funding allowed the film, most commonly known as Les Amours de la reine Élisabeth, to see release in the U.S., where it proved one of the first successful feature-length films in the American market.

The film company, originally known as Famous Players Film Company, came prominence thanks to a novel idea at the time: Zukor vertically integrated the production, distribution, and exhibition of films.

In other words, Zukor, through his various companies, owned both the film studio and the theaters in which his company’s films appeared. (He also, side note, owned many of the stars, a general concept reflected in the Paramount Pictures logo even now.) This combination of production and distribution is common today—I mean, it’s literally what Netflix is—but at a time when there were relatively few options for film distribution, this system created antitrust problems over time.

Now, it perhaps seems quaint that the idea of a major studio controlling a large portion of its distribution mechanism was once controversial, but it’s in large part because there are literally thousands of film production companies out there today, along with an infinite number of distribution methods. But way back when, options were extremely limited.

The stars around the Paramount logo reflect the stars it had under contract early in its history.

In the 1930s, after effectively following Paramount’s lead, four other major studios—MGM, Twentieth Century Fox, Warner Bros., and RKO—also had tightly integrated ties between their production facilities in Hollywood and their theaters. Two others, Universal and Columbia, tried to do the same, but never reached the scale to make it effective.

Reaching that scale wasn’t exactly easy, and during periods of struggle, having a full system behind your studio could be a huge liability. Paramount, for one, went bankrupt and nearly collapsed entirely in the mid-1930s, the result of massive overspending on its film productions in the early “talkie” era and the weight of running a whole chain of theaters during a depression.

But when things were working, the studios ran the show. This created some natural abuses of power, with the most common being something called block booking, or requiring theaters to book a bunch of secondary junk, sight unseen, along with a good film. This was an Adolph Zukor idea through and through, dating to at least the 1910s.

“Zukor could force theaters to rent an entire slate of mediocre films, just to get their hands on one Mary Pickford feature,” said Scott Berg, a biographer of contemporary Samuel Goldwyn, in an interview with Investor’s Business Daily.

This concept, beyond harming the quality of the cinema and being anti-competitive, kept independent producers out, and that may have eventually proved the studio system’s downfall.

The Paramount Theater in Omaha, Nebraska. (Wikimedia Commons)

Regulators repeatedly tried to rein in the studio system throughout the 1920s and 1930s, in part because of the sheer amount of power it represented, finally succeeding through a 1948 Supreme Court ruling, United States vs. Paramount Pictures. The decision, which generally affirmed a consent decree decided upon in a 1940 federal court case, represents a turning point in film history—as it killed the studio system as it was known then and prevented film studios from double-dealing by also owning theater chains. While the case had Paramount at its center, every other major studio was a defendant.

“To the extent that these acquisitions were the fruits of monopolistic practices or restraints of trade, they should be divested, and no permission to buy out the other owner should be given a defendant,” the decision stated.

In the long run, this decision was good for the film industry, because it allowed for the growth of independence in the industry, letting new studios and art-house theaters gain prominence outside the influence of the major Hollywood film houses.

The problem for the theaters, however, is that right around the time of the Paramount decision, television was just about to go mainstream—and television networks had no such issues with vertical integration.

17.35%

The percentage of movie theaters owned by major studios at the time of the 1948 Paramount decision. Despite not being an outright monopoly, critics have noted that it actually represented a de facto one. A 1992 analysis in the Hofstra Law Review found 90 percent of important and prominent theaters were owned by major studios. It wasn’t about how many theaters they owned; it was really an issue of which ones.

(Daan Stevens/Unsplash)

How television proved to be the original sin for movie theater chains

If one were to create a ground zero for all the problems that movie theaters had in the latter half of the 20th century, nearly all of them would be rooted in the existence of television.

Television gave people a reason to stay home rather than go out for entertainment. And even back then, it was well-understood why, at least among theater owners.

In a 1949 speech to members of the Theater Owners of North Carolina and South Carolina, Theater Owners of America President Arthur H. Lockwood pointed at the dreary sky when he explained the understanding of television’s appeal.

“And on a day like today, the average movie-goer would much prefer to stay at home by his television set and avoid traffic, parking problems, and the expense of a theater ticket,” he said, according to The Charlotte Observer.

And while it wasn’t an immediate shift in demand, the gradual move from big screen to small is effectively what led to the outburst over Trolls World Tour this week.

The value of the TV wasn’t immediately obvious to many film studios, as proven by the fact that, after the Supreme Court case shook up theater ownership, many studios, Paramount included, ending up selling the rights to their vintage content, thinking it was less valuable now that they didn’t own a theater chain that could frequently replay it. Oh, how wrong they were.

(One important exception to this rule highlights how much of a folly this was: Walt Disney, who skipped out on a deal with United Artists in the 1930s because they wanted to control the television rights to his work before he even knew what television was, felt that RKO was undervaluing his prior work and started his own distribution arm in 1953. Given the popularity of Disney+, his decision was proven correct.)

Quickly, the added competition from television would prove hard for theaters to ignore. Efforts to differentiate theaters from television date back to the 1950s, when letterboxing became a common way to separate new-release films from golden-era productions.

But one particular thing scared the movie theater industry more than anything else? The idea that new-release films would somehow appear on television rather than in the theaters. A 1960 article from the Hollywood-area Valley Times laid out the deep fears among theater owners, as represented by the then-primary trade group, the Theater Owners Of America:

If pay-TV should become successful the exhibitors envision “shuttered theaters” throughout the country, in small towns and large.

They are plagued by recurring dreams of their former customers silting around pay-TV in droves, whole families watching new films at home for the price one adult would pay at the theater box office.

The theater men are outspoken in their criticism of the present Telemeter wired operation in Toronto, and the pending over-the-air experiment in Hartford, Conn. Their salvation, they feel, is seeking legislation which would outlaw any form of subscription television, and with this in mind the group recently inaugurated a campaign in its member theaters to obtain 30 million signatures on anti-pay-TV petitions.

(Sebastien LE DEROUT/Pixabay)

Experiments like pay TV were tried for decades before they became common, and theaters saw them as a threat just about every time. As an example, Computer Cinema, an early attempt to put pay-per-view in hotel rooms that was successful enough that it actually encouraged people to rent hotel rooms just to watch pay per view. According to author Kerry Segrave, the National Association of Theatre Owners called the initiative “a direct attack on our breadbasket.”

Of course, the rise of pay-per-view couldn’t be stopped—not when premium channels were being brought in through cable boxes and even UHF.

And then there was home video, which was upsetting theater owners as early as 1981, when 20th Century Fox floated the idea of releasing tapes three months after a film’s theatrical release, something the National Association of Theatre Owners didn’t like.

The theatrical window, the separation between when a film appears in a theater and when it hits a secondary format such as video, has been a complicating factor between the film industry and movie theater chains for decades. Observers would frequently watch to see when efforts to sell or distribute films on new formats would cause potential tension with the theater industry.

At one time, that window was six months on average for most releases, but up to a year for major films; but in recent years, the window has started to make less and less sense as much more of our content has been viewed on windows far from a movie theater.

Oscar nominees, which often are never big box-office hits anyway, now often only have a tiny theatrical window and a quick leap to video on demand, which probably drives the theater industry nuts. But until now, they could count on blockbusters like Trolls World Tour. Not anymore.

A 2016 Los Angeles Times piece perfectly captured the tension created by an industry being propped up by little more than a business agreement.

“In today’s culture of instant, virtually unlimited access to entertainment, waiting three months after opening weekend to stream a summer blockbuster can seem like an eternity,” the story stated. “Movie studios’ attempts to toy with the delay have sometimes been met with swift backlash from theaters.”

It’s unusual to think about, but United States vs. Paramount Pictures, the 1948 Supreme Court ruling, untethered the fates of theater chains and the film industry. It was a good decision at the time, as it gave theaters freedom and discouraged dangerous consolidation among film studios. But is there a case that the two industries need to be more directly linked once again?

20k

The number of customers that took part in an industry research test called “Your Choice TV,” an attempt to see if consumers would go for a non-linear approach to accessing channels on the cable dial. It did not use the internet—unlike Hong Kong’s ITV, it was less an all-you-can-eat streaming service and more a pay-per-view service that sold the ability to shift time. The platform, according to a white paper by creator (and then-Discovery Communications CEO) John Hendricks, essentially gave an entire cable channel to a single show every week, and did this over 54 channels. In a New York Times article in 1993, Hendricks implied that he wanted to run first-run movies using this method, too, though it never came to pass.

In 2020, there’s nothing stopping a film studio from also running a broadcast television network, a streaming service, an internet provider, or even the largest cable service in the United States.

(I am literally describing Comcast, the owner of NBCUniversal, the creator and distributor of Trolls World Tour.)

But one thing that it cannot own, even to this day, is a chain of movie theaters. In many ways, this is good—it discourages a single chain from barring distribution to certain kinds of films, for example.

But it is not the trump card that it was in the 1940s. And the reason for that is that distribution methods are so wide everywhere else. You can have a successful movie that makes tens of millions or even hundreds of millions of dollars without it ever having the chance to set foot in a traditional movie theater. Trolls World Tour proved it.

The movie theater is an important part of life. Even if many people prefer to stay home, it is worth saving. But it is expensive and faces competition from screens large and small. It deserves protection—and the theatrical window ain’t doing it anymore.

Perhaps it’s why, for this reason, that the Justice Department announced last fall that it’s looking to terminate the consent decrees that prevented major movie studios from owning movie theater chains for decades.

“We have determined that the decrees, as they are, no longer serve the public interest, because the horizontal conspiracy—the original violation animating the decrees—has been stopped,” Assistant Attorney General Makan Delrahim told the American Bar Association last fall.

If that happens, it may actually prove to be an unexpected godsend for the movie theater industry. The reason is that those theaters were already struggling before the COVID-19 crisis, and it’s already been speculated that the film studios may be in a position to bail out what could soon be bankrupt chains.

Which makes the AMC’s tough words seem more like a bargaining chip than they actually are. NBCUniversal CEO Jeff Shell can talk about putting movies on premium video on demand, even in passing, because he knows he has the upper hand.

There is of course a case that film studios should probably not be able to own TV stations or streaming networks, or that a streaming network like Netflix should not be able to build itself into a studio so large that it warrants MPAA membership. But because they can do all these things, it makes the prevention of studios from owning theaters seem arbitrary.

In the roughly 70 years since the Supreme Court weighed in on vertical integration between film studios and movie theaters, the film studios have been able to vertically integrate just about everywhere else that matters.

And while theater chains are by no means small, a failure to make a change now could diminish their future in a big way.

Chew on those Raisinets.