Ready to Watch More Theatrical Releases From Home? How COVID-19 Could Spark a Tectonic Shift to Premium VOD

As even the year's most anticipated films face uncertainty at the box office, studios are exploring if premium video-on-demand titles could be the new business model.

The news that Warner Bros. and Disney have again delayed the releases of Christopher Nolan's Tenet and the live-action remake of Mulan, respectively, amid the coronavirus pandemic was a blow to hopes that the movie business could soon return to normal ­— and a surge in on-demand and streaming viewership has experts questioning whether short-term solutions could lead to lasting changes in distribution models.

Nolan's $200 million drama was set to bow July 17, then July 31 and now is eyeing an Aug. 12 opening. Niki Caro's take on the China-set fantasy tale was originally planned for March 27 before being pushed to July 24 and, now, to Aug. 21. Distributors and cinema owners are counting on the studio tentpoles to kick-start the summer box office after it was put on hold by the pandemic. Solstice Studios' Unhinged, starring Russell Crowe, also was pushed to July 31 while Sony's romantic comedy The Broken Hearts Gallery will now join 20th Century Studios' The Empty Man in opening on Aug. 7 and United Artists' Bill & Ted Face the Music was delayed to Aug. 28.

The few titles that do come out, amid scarce competition, could do well. Overall, though, it looks like the 2020 summer box office will be a write-off, especially after a recent spike in COVID-19 cases in the U.S. that could lead to businesses closing again.

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While the box office has sputtered, the business of streaming films is booming. Faced with the possibility of several more months of closed theaters and locked-down audiences, distributors are pushing out more of their films online, with the likes of Judd Apatow's The King of Staten Island(Universal) and Kenneth Branagh's Artemis Fowl (Disney) joining a growing list of studio titles skipping straight to premium video-on-demand. On June 26, Paramount shocked exhibitors by pulling its Aug. 7 theatrical release of The SpongeBob Movie: Sponge on the Run and taking the sequel direct to PVOD early next year.

In April, when Universal became the first studio to break the time-honored theatrical window — the gap between a movie's release in theaters and its sale on home entertainment platforms — by releasing Trolls World Tour direct-to-PVOD, it felt like an anomaly. These days, it's starting to look like a business model.

"The old system of releasing films in restrictive windows — theatrical, VOD, home entertainment — was a model that worked extremely well for people until corona threw a huge wrench in it," Ben Johnson, CEO of digital marketing group Gruvi, said June 23 at a Cannes Marché du Film Online panel, one of the virtual events held in place of the canceled film festival. "Now we have a new normal."

In addition to Trolls World Tour and The King of Staten Island, Universal has used the straight-to-PVOD model for the Steve Carell/Rose Byrne comedy Irresistible and Dakota Johnson/Tracee Ellis Ross music drama The High Note, Warner Bros. for animated kids comedy Scoob! and Lionsgate for mystery thriller The Quarry, starring Shea Whigham and Michael Shannon.

With marketing money for these new titles already spent, the financial argument behind PVOD is clear, especially for conglomerates with proprietary streaming services like Universal (part of the cable giant Comcast), Disney (Artemis Fowl went straight to the new Disney+ platform) and ViacomCBS-owned Paramount, which will quickly shift the SpongeBob sequel onto CBS All Access after its PVOD bow.

NBCUniversal CEO Jeff Shell praised the Trolls decision, pointing to an estimated $100 million the title earned in on-demand rentals in its first three weeks in North America and saying the results "have exceeded our expectations and demonstrated the viability of PVOD."

Some have suggested that because the studio's revenue split for PVOD was better than that for theaters, Universal could end up making more money on the sequel than its cinema-released predecessor. A studio typically pockets slightly more than half of box office revenue, with 40 percent to 50 percent staying with the cinemas. With PVOD, the studio typically takes the lion's share of an 80/20 split with an online platform. Trolls World Tour's $100 million on PVOD translates to $80 million for Universal, just $6 million less than estimated earnings from the original's $154 million domestic box office.

Go outside North America, however, and things look different. Compared with the theatrical box office, the PVOD market in much of the world is still tiny. It's near nonexistent in China and accounted for less than 5 percent of the U.K.'s $3.2 billion home entertainment market in 2019.

"The digital business has spiked, but not nearly enough to compensate for losses for films they were, or still are, planning to release theatrically," says David Garrett, head of production/sales group Mister Smith Entertainment.

Plus, theatrical releases drive home entertainment revenue, including PVOD, adds Jeffrey Greenstein of Millennium Media, the production group behind the Expendables franchise. "We don't see PVOD replacing theaters," he says. "We need the theaters to make PVOD work." And PVOD has a dark side: piracy. A new study by British analysts at Muso suggests that studios releasing films online faster has led to a spike in piracy as better rip-offs are available sooner. Sony's Bloodshot, a Vin Diesel actioner, saw a massive 1,600 percent increase in piracy streaming in the first seven days after the studio rushed out the film on PVOD after the coronavirus cut short its theatrical release. Piracy traffic for Sonic the Hedgehog, a Paramount title, jumped 719 percent. To compare, Warner Bros.' Joker, which bowed Oct. 4 and had a full theatrical release window, saw only a 29 percent increase in pirate site visits after a high-quality copy of the film leaked Nov. 10.

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"During the worldwide lockdown, people are consuming a lot more films online," Muso CEO Andy Chatterley tells THR. "That's helped lift PVOD and VOD numbers, but those same locked-in audiences are finding, and using, piracy sites."

It's undeniable, though, that lockdown measures have helped the VOD business. U.S. consumer spending on VOD was up nearly 20 percent in the first half of this year compared with 2019; and spending on SVOD, or subscription video-on-demand, was up 27 percent. Netflix added 15.7 million new subscribers in the first three months of the year, more than double pre-pandemic market expectations. Independent film sellers at virtual Cannes noted that, for the first time, demand from online platforms was outpacing supply.

"Platforms have to buy more and buy faster because, as consumers, we are watching more films faster than ever before, and so the platforms are looking for finished films to fill holes in their production schedules," Ian Mckee, CEO of Vuulr, an online marketplace for film and TV rights, said at the June 23 Cannes discussion.

"Before COVID-19, the attention of all the big guns was skewed toward their own originals, their own back catalogs of film and series," adds Wendy Bernfeld, founder of digital sector consultancy Rights Stuff, who also buys for international VOD platforms. "But because no one can shoot right now, production on originals is stalling, and the platforms, from the very big to the smaller niche players, have to replenish their inventory."

The indie industry also has used the COVID-19 crisis as an opportunity to innovate. While some have embraced the PVOD model, the biggest changes have come from independent theater chains, which have adapted to the new normal by launching their own VOD platforms. In May, Alamo Drafthouse launched Alamo on Demand, which streams films to its local customers, a model pioneered by Curzon Cinemas in the U.K. Unlike the studio PVOD model, which has drawn the ire of traditional cinema chains — after the Trolls sequel was moved to PVOD, AMC CEO Adam Aron banned Universal titles from his theaters — indie on-demand platforms are being built with cinemas in mind.

Speaking at a virtual Cannes event June 22, Richard Lorber of speciality distributor Kino Lorber said his new online initiative, Kino Marquee, has generated nearly $700,000 in virtual ticket sales from 13 films the past two and a half months. Half of that revenue goes to its partner theaters, all closed independent and art house cinemas that would have been showing its films had they been open. Even while going digital, Kino Lorber is staying true to its cineaste roots. Kino Marquee's first screening was for 2019 Cannes prize-winner Bacurau from Brazil. "We've had much more engagement from the theaters for virtual screenings than we were ever able to achieve with physical for the simple reason that most of the art houses in the U.S. are small," explained Lorber.

Still, no one is ready to predict what lasting impact the coronavirus crisis will have. When Tenet and Mulan come out, there isn't a theater in America, or much of the world, that won't book them on as many screens as it can as fast as it can. But it's clear the inadvertent digital revolution COVID-19 caused is here to stay.

"The innovations we're seeing now is what the business has been calling for for years," said Mckee. "It's exciting. Demand is going up. It's a great time to be in the film business."

Article written by: Scott Roxborough

Reposted from: The Hollywood Reporter

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