Is Warner Bros’ attempt to shrink the theatrical window with the launch of a premium VoD window really the enormous threat international cinema owners fear it could be? Jeremy Kay reports on the eve of CinemaCon.

When CinemaCon gets underway in Las Vegas on March 28, the issue of premium video-on-demand (VoD) will not be on the official agenda. But as attendees at the inaugural convention staged by the National Association of Theatre Owners (NATO) line up for sneak peeks of summer releases, learn about breakthroughs in seat design and listen to Paramount Pictures International president Andrew Cripps talk about emerging markets, the controversial subject will be a major talking point in the corridors and convention halls of Caesar’s Palace.

The burning topic of how, when and if premium VoD will take off has been simmering for some time. Last month Time Warner head Jeff Bewkes turned up the heat when he announced Warner Bros would become the first studio to launch a premium VoD service. US consumers will be able to watch films on their TV sets 60 days after theatrical release — pushing the VoD window up by at least one month — and it will happen in the second quarter of this year. The industry is on tenterhooks.

Exhibitors have the most to lose if premium VoD succeeds. The theatrical window came under attack in early 2010 when the European cinema chains were up in arms over Disney’s proposal to accelerate the DVD release of Alice In Wonderland. The parties reached an agreement on that occasion with the tacit understanding the issue remained unresolved. What makes the Warner Bros development so unsettling in the eyes of cinema owners is that it represents unilateral action.

‘We’re talking to directors, actors, producers, lawyers, and the response has been this radical business model is a danger to the creative process’

John Fithian, NATO

The studio does not appear to have consulted its exhibitor partners on the premium VoD play and market forces may render such a move irreversible once it is set in motion. The studios are desperate to make up for revenue lost through declining DVD sales (the average DVD release, incidentally, comes 130 days after theatrical) and would have no interest in a U-turn once they accelerated the VoD platform. NATO knows there is no time to waste and is in discussions with film-makers in the hope of creating a broad coalition against such a move.

“We’re talking to directors, actors, producers, lawyers, and the response has been this radical business model is a danger to the creative process,” says NATO president John Fithian. “They want their projects on the big screen; it’s the best way for their art form to be seen. Cinema owners consider this to be the most important issue we have confronted in the last decade.”

“We’re in a challenging place,” agrees Blue Valentine producer Jamie Patricof of Hunting Lane Films. “It’s important everybody works together so we do what’s best for both sides. A movie like Blue Valentine works on any screen, but seeing it in a theatre with a couple of hundred other people really adds to the experience of the movie. VoD and Netflix offer exciting possibilities but it would be devastating if theatrical distribution went away.”

“The golden goose of DVD sales has declined in the last few years and studio executives are considering ways to supplant that loss in revenue,” says Fithian. “But we don’t get the math, because to use a simple metaphor, we think they risk losing two dimes to make one nickel. On the front end, the earlier they go with a VoD release the more damage they do to cinema sales. On the back end, by moving a VoD release they’re giving the pirates access to a pristine version of the movie and so they are going to damage their DVD sales. Their economic theory is if they sell enough VoD at a certain price point, they can make up for those two losses. We don’t think it’s going to work.”

Patrick Corcoran, NATO’s director of media and research adds: “People are concerned about the price point. What happens when you move the home window so it encroaches on the theatrical window? What happens is you have a situation where you’re competing with the cost of a cinema ticket. One of the things that’s important for us is the exclusivity of the theatrical window — it works.”

Warner Bros has not yet announced a price point though experts believe it will fall in the $25-$30 range. Then there is the question of who will pay for such a service.

“I have trouble seeing where these customers will come from,” says Greg Marcus, CEO of Marcus Corporation, whose Marcus Theatres subsidiary operates around 670 screens across seven states in the Midwest.

“There’s been this rallying cry not to become the music industry but the devaluation of units is what’s crushing that industry and I see the same thing happening in film. There’s such a proliferation of available product for $1 or $3 that the customer has any number of ways to watch something at home. So why are they going to buy a 60-day-old movie for something like $30?”

‘The devaluation of units is what’s crushing the music industry. I see the same thing happening in film’

Greg Marcus, Marcus Corporation

NATO will not comment on price points and stresses its exhibitor members must make these decisions. “All we can do is argue the case and develop allies,” Fithian says. “I’m still hopeful exhibitors and studios can work something out that makes sense for the industry. We want them to make money in the home. When they sell lots of DVD and VoD, we want them to be successful. It’s the window and the timing that matters to us and whether there’s a way to do VoD without encroaching on our window.”

Pioneering footsteps

Warner Bros has taken a bold step, regardless of the arguments on either side. The studio’s home entertainment head Kevin Tsujihara has clearly been given a mandate to secure the future of Warner Bros’ movie revenue streams and grow them through new technology. Warner is arguably the leading film company in the world and its MPAA cohorts could follow in its pioneering footsteps.

The proliferation of windows Marcus refers to has created a complex picture. Bewkes has intimated the studio might renegotiate its 28-day window with Netflix and Redbox. The premium VoD move could keep the lawyers busy for a while. Exhibitors may choose to argue for a greater split in theatrical revenues, or could charge to play trailers. Failing that, theatre owners could pursue the nuclear option and refuse to take a studio’s film. On top of this, any potential collusion issues could attract the attention of the US Department of Justice.

So far, no other studio has declared its intentions and it is Fithian’s belief Warner Bros is trying to create “a stampede of inevitability”. Only Paramount appears to be against the idea, largely based on concerns over piracy.

Four months, 12 days

Average time for a release to reach the home after theatrical release

Vue Entertainment CEO Tim Richards says that while there are significant structural differences between the US and international industries, exhibitors share universal concerns. “Exhibitors around the world are watching very carefully what’s going on in the US,” he says. “Film-makers make films for the big screen. We’re at a time when box office is growing internationally and exhibition is investing in digital and 3D, so this is not a mature market in any sense. It’s not something any rational businessperson would want to mess with.

“We have a very close working relationship with distributors internationally and that’s why when we had a dispute last year with our partners at Disney [over Alice In Wonderland] we worked out a deal that allows some flexibility on releases.”

NATO says it is prepared to explore a milder premium VoD roll-out within the existing home window, which currently averages four months and 12 days from the date of theatrical release. If there is in fact a stampede of inevitability rumbling towards Hollywood, reconciliation could be the best bet.

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