Question

Movie studios split ticket revenues with the owners of the movie theaters that show their films. When a movie is no longer being shown in theaters, theater owners earn nothing further from the film, but studios continue to earn revenue when the movie is available for home viewing on DVD, Blu-ray, streaming, and cable. Theater owners would prefer that the time between when a movie appears in theaters and when it becomes available for home viewing be as long as possible. Typically, movies are not available for home viewing for at least 90 days after they are first shown in theaters. An article in the Wall Street Journal in 2017 noted a possible change to this system: "Hollywood studios are preparing to upend decades of tradition by releasing movies at home less than 45 days after they debut on the big screen." The article went on to note, "Studio executives say they would prefer to reach a deal with theaters, one reason they have been reluctant to unilaterally announce a new policy." Typically, would you expect that the profits of movie studios are more at risk from the bargaining power of theaters, or would you expect that the profits of theaters are more at risk from the bargaining power of movie studios? Have streaming and other online ways of watching movies changed the relative bargaining power of movie studios and theater owners? Briefly explain.

Short answer

The profits of theater owners are more at risk from the bargaining power of movie studios. With the advancement of online viewing platforms, the bargaining power of studios increased significantly as they have an additional medium to release and profit from their movies.

Step-by-step solution

Understanding The Revenue Streams

Movie studios and theater owners have a mutual relationship, they share the revenues from ticket sales. For theatres, the revenue ends once the movie stops playing. However, the studio continues to earn money from DVDs, Blu-ray, streaming platforms, and cable. Hence, theaters prefer a longer duration before the movie is available for home viewing as it reduces their share of the profits.

Changes in Policy

As the Wall street Journal article suggests, studios are considering a reduced wait time before a movie is available for home viewing. This implies that theaters would have a shorter window to earn ticket revenues. While the studios would want to reach an agreement with theaters to maintain their relationship, it's clear that this new policy change would favor studios more.

Impact of Online Streaming

Streaming platforms and online mediums have changed the scenario significantly. It not only offers an added source of revenue for studios but also poses a competition to theaters. The bargaining power of movie studios has definitely increased because of online viewing platforms since they now have an additional, very popular, medium to release and profit from their movies.

Key concepts

Revenue Sharing in Movie Industry

The economic relationship between movie studios and theaters is critical to understanding the movie industry. In this partnership, when a movie is released, both the studio that produced the film and the theater that exhibits it earn revenue from ticket sales through a process known as revenue sharing. The terms of this agreement usually dictate that a certain percentage of the ticket sales goes to the studio, while the theaters keep the rest. However, this partnership is weighted more favorably toward studios since their ability to generate income extends beyond the theater's showings.

Studios continue to profit from a movie after it leaves the theater by selling rights for home viewing through mediums such as DVDs, Blu-ray, and, increasingly, digital platforms like streaming services and cable. The longer a movie stays solely in theaters, the more theaters can capitalize on their share of box office profits. Therefore, theaters have a vested interest in delaying the release of films to home viewing to maximize their exclusive earnings window.

The Bargaining Dance

When policy changes are proposed, such as reducing the exclusive theater window from 90 to 45 days, the balance of power shifts. Theaters risk losing a significant portion of their revenue period to studios, who can capitalize on the home market earlier. The prospect of such changes often leads to negotiations between studios and theaters, as they each aim to protect their interests within this revenue-sharing model.

Movie Theater Revenue Streams

Beyond sharing revenue from ticket sales with studios, movie theaters must cultivate other revenue streams to sustain their businesses. Concessions, such as popcorn, candy, and soda, are a massive part of a theater's income, often boasting much higher profit margins than ticket sales. Additionally, theaters may also generate revenue from in-theater advertising, movie merchandise, and special events like private screenings and film festivals.

Diversification as Survival

Maintaining a diverse range of income sources is critical for theaters, especially as the exclusive window for showing new releases may shrink. With the increasing competition from streaming services, theaters have been forced to get creative with their offerings, including introducing luxury seating, gourmet food options, and immersive viewing experiences to entice moviegoers into choosing the traditional cinema experience over at-home viewing.

Streaming Platform Impact on Cinema

The ascent of streaming platforms has profoundly impacted the traditional cinema experience and the movie industry's economics. Studios now have an alternative, highly popular channel to release their content, which they control more directly. This evolution has undeniably shifted the bargaining power towards studios, as they are less dependent on theaters to reach audiences.

A New Competitor in Town

With the convenience and variety offered by streaming services, viewers have increasingly opted to watch movies at home, leading to a significant shift in where and how movies are consumed. This change puts pressure on theaters to provide an unrivaled experience that justifies the trip and ticket price. While streaming platforms usher in flexibility for studios and convenience for consumers, they also introduce a challenge to the traditional revenue-sharing model, and thus, theaters must adapt to this changing landscape or risk being left behind in the industry's evolution.