"Matrix 4" is one of many highly anticipated blockbusters that will be coming to your living room under the new arrangement.
Warner BrosWarnerMedia’s decision to blow up the decades old movie model and go all-in in support of its underperforming streaming service was not just a sonic boom that echoed throughout the industry. It was the latest huge swing by corporate parent AT&T to ensure its $85 billion bet on entertainment pays off.
Warner Bros. Picture Group announced that will release all 17 of its scheduled 2021 film slate—including such highly anticipated films as Lin-Manuel Miranda’s In The Heights, Matrix 4, The Suicide Squad and Clint Eastwood’s Cry Macho and a Sopranos prequel The Many Saints of Newark—simultaneously on its HBO Max streaming service and in theaters. Cinema stocks got crushed. Agents and lawyers deployed their best negotiating tactics to protect payouts for their clients.
“Clearly, Warner Media intends to sacrifice a considerable portion of the profitability of its movie studio division, and that of its production partners and filmmakers,” said Adam Aron of AMC Entertainment, the world’s largest theater chain, whose shares have dropped 15% since the news broke. “We will do all in our power to ensure that Warner does not do so at our expense.“
In a year that has brought unrelenting bad news, the shattering of traditional release windows provoked nothing short of panic in some corners of Hollywood, even as AT&T’s WarnerMedia sought to capture some of the streaming magic that has propelled The Walt Disney Co.’s stock to an all-time high.
“This is the first movie studio to put the consumer first, rather than legacy business models,” said Rich Greenfield, a media and technology analyst with LightShed Partners.
Yet, as savvy as that might sound, the execution of the plan will need to be flawless and, counter to the temporary nature of the move that Warner executives are pushing, establishes an untested new reality for movie economics.
“Once the windows change, it will be hard to go back,” says veteran telecommunications analyst Craig Moffett, who warns of a heavy financial toll for one of Hollywood’s biggest film studios, which over the past five years has averaged $1.8 billion in domestic box office receipts—second only to the Walt Disney Co., the largest entertainment company on earth.
The studio is WarnerMedia’s cash cow, bringing in 42% of its revenue, 12% of that coming direct from box office receipts. The rest of the revenue comes from “windowing” those theatrical releases through home video, premium cable networks like HBO or streaming services like HBO Max, and then, television syndicatication. Moffett notes that most films don’t break even until it finishes its run in theaters and gets dispatched to what is known in industry parlance as the “Pay 1 window” of premium cable or streaming. The move not only collapses the windows, but also a critical profit source, Moffett wrote in an investor note released this morning. “The Pay 1 window, which is now the HBO Max release, no longer generates cash; instead, it merely shifts content between WarnerMedia segments.”
WarnerMedia CEO Jason Kilar touted the decision as a triumph of consumer choice. Movie buffs can decide for themselves whether to watch a film in a theater or from the comfort of their own homes, a reality that Greenfield suggests is simply acknowledging the obvious — that no one knows when moviegoers, many of whom are elderly, will feel safe enough to return to the cineplex.
Indeed, in statements made yesterday, Ann Sarnoff, the chair and CEO of WarnerMedia Studios, stressed that the decision is a temporary response to unprecedented times. “No one wants films back on the big screen more than we do,” she said. “We know new content is the lifeblood of theatrical exhibition. But we have to balance this with the reality that most theaters in the U.S. will likely operate at reduced capacity throughout 2021.”
In fact, it is acknowledging a different kind of obvious. Wall Street values streaming giant Netflix, now the most influential force in the business, at $221 billion, or more than $1,000 for everyone of its 195 million subscribers. Disney’s successful streaming service Disney+ has 74 million subscribers and helped lift Disney shares 80% since from its Covid-induced troth in March.
HBO Max, which debuted six months later, has added an estimated 3.5 million retail subscribers, excluding the millions of pre-existing HBO subscribers who’ve tried out HBO Max. Moffett predicts WarnerMedia will need to wrack up 8.4 million more HBO Max subscribers to make up for lost theatrical revenue, which won’t be easy considering that among its many competitors—Netflix, Disney, AppleTV, Amazon’s Prime Video, Comcast’s Peacock—it is the most expensive option after Netflix.
“You can’t make money by simply moving content from one pocket to another,” he notes.
WarnerMedia used social media to promote same-day premieres as a holiday gift for HBOMax subscribers, noting, “I got you something nice this year,” though exhibitors clearly regarded the news as a lump of coal, with one even describing it as “a little sinister.”
The announcement landed on the same day that AMC filed regulatory documents, saying it hoped to sell more than $800 million worth of stock to remain solvent. Cinemark hinted at the possibility of retaliating by squeezing the studio’s films out of what could be a crowded — and much needed — summer movie season, saying: “in light of the current operating environment, we are making near-term booking decisions on a film-by-film basis.”
It also struck some insiders as premature with Covid-19 vaccines possibly getting distributed broadly by the spring. Analyst Eric Wold of B. Riley Securities sees the exhibitors eventually regaining the upper hand, once moviegoers head back to the cineplex and film studios release new movies.
“A more complete film release slate should lessen any dependence on any single studio (maybe with the exception of Disney),” Wold wrote. “And given the significant sunk costs associated with production and marketing around each film, we could see increasing pressure on Warner Bros. to abandon or meaningfully modify this new strategy.”
Warner Bros. says there are few surprises here — that the studio has been in constant contact with the exhibitors since the pandemic’s outbreak, and has done its part to support the struggling theater-chains, including the release of Christopher Nolan’s big-budget thriller Tenet in theaters in September, when other studios were postponing theatrical debuts or selling films to streaming services, bypassing exhibition altogether.
One studio executive described the hybrid release strategy as a “win-win,” which ensures the flow of new releases like Space Jam: A New Legacy or Dune into theaters through the uncertain year ahead. Releasing these same titles available on HBO Max for a limited period — just 30 days — ensures that when the studio spends millions to promote a forthcoming film, consumers will be able to see it, even if the pandemic forces theaters to close or operate at dramatically reduced capacity.
Still, the movie industry is nothing without its army of independent creators, who count on the tens of millions of dollars movie studios pay out on successful films, as well as the PR wins and ego boosts that come with dominating the cultural zeitgeist as the public lines up to see their work. Actors, directors, writers and producers behind box office successes often earn millions of dollars from their share of a film’s profit, payouts that will now be calculated by financial models that the studio and representatives for the creators will haggle over to fill in the gaps.
“The importance of how this is handled can’t be overstated,” says Moffett. “The mere appearance of self-distributing could be seen as running counter to the best-in-class culture that has long been Warner’s selling point to world-class talent.”
All the participants in those 17 releases from Millie Bobby Brown to Denzel Washington, will now face the same decisions thrown at actress Gal Gadot last month, when Warner Bros. announced that it would debut Wonder Woman 1984 on Christmas day this year using the same release strategy. When she signed on for the role Gadot took a smaller upfront paycheck of about $10 million in exchange for a small percentage of the box office proceeds. When it shifted the release strategy the studio imputed a $1 billion box office and paid the star an extra $5 million and $10 million.
“Maybe they're right. Maybe HBO Max will be a huge hit all of a sudden, and they look like geniuses,” says a leading Hollywood talent agent who requested anonymity for the sake of business relationships. “Or else they piss off everyone in this town.”
