Goodbye To The Big Screen, Hello Everything Else – How Much Is Too Much?

How can traditional Hollywood studios compete in a new, digital world, and where do movie theaters fit in?

Digitalization is transforming the entertainment industry and disrupting how traditional Hollywood studios, such as Warner Bros. Entertainment (WB), deliver content. Consumers want more choices in where and how they view content(1) and new entrants, such as Netflix, disrupt the existing value chain and allow consumers to bypass traditional distribution(2). Consumption is shifting from the movie theater to digital platforms. This is reflected in the U.S. box office, where growth is derived from higher prices rather than increased attendance (1). To survive in a digital world, WB needs to develop innovative ways of delivering content.

New Strategies: WB is adapting to this new marketplace through three key strategies. First, WB is focusing on creating, investing in and acquiring digital platforms. Second, WB is exploring premium video on demand (PVOD), a new distribution strategy that will transform the theater component of the supply chain. Lastly, WB is leveraging telecom providers, such as AT&T, in a mutually beneficial partnership to bundle products for consumers, further compressing the supply chain.

Digital Investments: WB is a unit of Time Warner, who also own HBO and Turner. Time Warner recently took a 10% stake in Hulu, one of Netflix’s key competitors. Hulu now has additional power to increase market share and WB has a piece of a large digital player(4). Furthermore, WB has made investments abroad, where digital viewing is less saturated. WB holds a minority stake in Hollywood VIP, a Netflix-like Chinese video service launched by Tencent, China’s largest internet company(11).

In-House Creation: In June 2016, WB created a new division to house digital platforms and partnerships, allowing the studio to speed up new distribution(3). This division is building WB’s digital footprint and expanding OTT (over-the-top) video services, content delivered digitally to consumers. WB’s goal is to reach audiences anywhere, across any platform, and the current portfolio includes DramaFever, Boomerang, Stage 13, and a DC-branded service(5).

Growth in OTT: Last year, WB acquired DramaFever, a subscription service focused on Korean dramas, to obtain the underlying technology to create more OTT services(6). This acquisition will allow WB to get closer to consumers with digitally-native content and original programming(7). WB is also creating new OTT services – Boomerang is an OTT partnership with sister company, Turner, to deliver 5,000 animated titles to U.S. subscribers.

Transforming Content: Digitalization not only disrupts how content is delivered, but it also transforms what types of content can be delivered and how studios can interact with or understand consumers. Consumers entering a theater expect long-form content – movies that last around two hours. However, digitalization allows consumers to view short-form content in new ways. As such, WB is launching Stage 13, a short-form content brand with shows on YouTube, Facebook, and its own website. This will allow WB to reach audiences seeking new forms of entertainment besides long-form movies on platforms they use most(9).

Changing Consumer Interactions: The traditional supply chain included theaters as an intermediary between WB and consumers, which meant that WB did not always interact directly with or collect data on consumers. Digitalization allows WB to control the consumer experience and better understand consumer trends, transforming it into a more data-driven company a la Netflix. For example, WB is launching a DC-branded (Batman, Wonder Woman) platform that will provide traditional OTT services, as well as an immersive experience with fan interaction(10).

Disrupting the Supply Chain: In the medium term, WB should explore opportunities to transform the supply chain by potentially offering PVOD, allowing consumers to download movies at home at a price of $30 to $50, weeks after release in theaters. This would help make up for declining DVD sales in the age of Netflix(12) but would drastically impact the traditional supply chain because some movie-goers would stay home, reducing traffic and revenue to theaters(11).

New Partnerships: Lastly, WB has an opportunity to bundle its services with telecom providers. An emerging trend, Sprint provides its customers free Hulu subscriptions, while AT&T gives away HBO and T-Mobile customers get Netflix(13). As AT&T finalizes its acquisition of Time Warner, there is a longer-term opportunity for WB to explore new ways to leverage AT&T’s large consumer base digitally. This is beneficial for both parties because bundling services increases consumer stickiness and reduces churn.

WB is aggressively pursuing a multi-faceted strategy internally and at the Time Warner-level to compete in a digital world. However, there are still opportunities for WB to expand its digital footprint and explore new distribution partnerships. As WB transforms, key questions remain:

  • Should WB have a vested interest in sustaining the movie theater-going experience, or shift its focus completely to digital?
  • Will consumers get subscriber fatigue – how many different OTT services can consumers really manage?

(Word count: 776)

(1)Lindsey Bahr, “Premium Video on Demand Is a Future Few Filmmakers Want,” U.S. News, April 1, 2017, https://www.usnews.com/news/best-states/nevada/articles/2017-04-01/premium-video-on-demand-is-a-future-few-filmmakers-want, accessed November 2017.

(2)Doug Creutz, “Updating Model; Acquisition Approaching,” Cowen and Company, August 3, 2017, accessed November 2017.

(3)Joe Flint, “Warner Bros. Creates Unit for Digital Platforms,” The Wall Street Journal, June 2, 2016, https://www.wsj.com/articles/warner-bros-creates-unit-for-digital-platforms-1464896641, accessed November 2017.

(4)Todd Spangler, “Time Warner Acquires 10% Stake in Hulu for $583 Million,” Variety, August 3, 2016, http://variety.com/2016/digital/news/time-warner-hulu-investment-1201829514/, accessed November 2017.

(5)Hanna Bolte, “Spotlight Is on Warner Bros. Digital Networks’ Stage 13, Launch Thursday, October 19,” Globe Newswire, October 18, 2017, https://globenewswire.com/news-release/2017/10/18/1149381/0/en/Spotlight-Is-on-Warner-Bros-Digital-Networks-Stage-13-Launch-Thursday-October-19.html, accessed November 2017.

(6)Todd Spangler, “Turner, Warner Bros. to Launch Boomerang Cartoon Streaming-Subscription Service for $5 Monthly,” Variety, March 7, 2017, http://variety.com/2017/digital/news/boomerang-cartoon-streaming-subscription-time-warner-turner-wb-1202003660/, accessed November 2017.

(7)Todd Spangler, “Warner Bros. Acquires DramaFever, Plans to Launch Other OTT Services,” Variety, February 23, 2016, http://variety.com/2016/digital/news/warner-bros-dramafever-1201713038/, accessed November 2017.

(8)Natalie Jarvey, “Turner, Warner Bros. to Launch Animation Streaming Service Boomerang,” The Hollywood Reporter, March 7, 2017, http://www.hollywoodreporter.com/news/turner-warner-bros-launch-animation-streaming-service-boomerang-984098, accessed November 2017.

(9)Todd Spangler, “Stage 13, Warner Bros. Digital Networks’ Edgy New Content Brand, Sets Fall Launch,” Variety, August 4, 2017, http://variety.com/2017/digital/news/stage-13-launch-warner-bros-digital-networks-1202516192/, accessed November 2017.

(10)Nellie Andreeva, “DC Digital Service To Launch With ‘Titans’ Series From Greg Berlanti & Akiva Goldsman And ‘Young Justice: Outsiders’,” Deadline, April 25, 2017, http://deadline.com/2017/04/dc-digital-service-titans-young-justice-outsiders-1202076831/, accessed November 2017.

(11)Anthony D’Alessandro, “Lionsgate Bullish That PVOD Will Happen In The Future Despite AMC Saying It’s Unlikely For 2017,” Deadline, August 8, 2017, http://deadline.com/2017/08/lionsgate-pvod-theatrical-exhibition-distributors-studios-1202145195/, accessed November 2017.

(12)Anousha Sakoui, “Hollywood, Apple Said to Mull Rental Plan, Defying Theaters,” Bloomberg, August 18, 2017, https://www.bloomberg.com/news/articles/2017-08-18/hollywood-apple-are-said-to-mull-rental-plan-defying-theaters, accessed November 2017.

(13)Aaron Pressman, “Why Mobile Carriers Want to Cover Your Netflix, HBO, or Hulu Bill So Badly,” Fortune, November 15, 2017, http://fortune.com/2017/11/15/free-hulu-sprint-hbo-netflix/, accessed November 2017.

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13 thoughts on “Goodbye To The Big Screen, Hello Everything Else – How Much Is Too Much?

  1. Thank you for writing this piece. I do believe that WB should maintain a vested interest in the moviegoing experience because it is often the jumping off point to market feature films through trailers, posters, etc. Going to a movie is still an important part of the culture in America despite falling viewership.

    I fear that if the AT&T-TW merger fails due to government intervention that TW will have difficulty executing its digitalization strategy without a larger telecom partner that can enable bundling and easy access to devices. In either scenario, WB should continue to invest in and develop platforms focused on customized content that is best viewed outside of traditional channels such as movie theaters. Specifically, the longer running mini-series or multi-season models have worked well for Netflix and Amazon. WB is well positioned as a leading studio to potentially create even more compelling content than other largely digital providers.

  2. Brilliant essay, Hedy! Really enjoyed reading it. In terms of whether WB should have a vested interest in sustaining the movie theater-going experience, or shift its focus completely to digital, your essay inspired me to think about how WB could potentially differentiate the movie theater-going experience further from sitting in ones’ living room and watching a movie. In other words, could the movie theater somehow deliver an experience that is significantly different from that of sitting at home? I guess one way to think about this would be to try to distill what makes people go to the movie theater in the first place. My hypothesis would be that 3 things can be attributed to why people go to the movie theater:
    1) Ability to watch blockbusters as soon as they are released
    2) Experiencing the superior technology quality (i.e. visuals and audios)
    3) Engaging in social activity (e.g. first dates)
    Assuming that 1) is rather stable, I’d try to hone in on how levers 2) and 3) can be adjusted to differentiate the movie theater-going experience further. For example, for 2), could movie theaters start showing movies using VR-technology? And for 3), could movie theaters be set up to cater for couples through paired snuggle-seats? If these levers can be adjusted to differentiate the movie theater-going experience further, then I think keeping the movie theaters is the right thing to do strategically. If not, then I’d be a proponent of getting rid of them.

  3. Great essay! I believe that WB should continue to invest in the traditional movie-going experiences. While I do believe that the world is increasingly moving towards digital, there is an experiential element to the movies that is irreplaceable. What WB should focus on is how to make the movie-going experience better and more enjoyable to the end consumer (not necessarily just about the movie content). For example, as Philip mentioned above, WB could experiment with new VR formats to attract customers. Additionally, WB could partner with national movie theater chains on how to improve the movie-going experience (not dissimilar to the IDEO movie theater case). Furthermore, although the US is ahead of the curve on digitizing entertainment, much of the rest of the world still values the movie theater experience and eagerly waits in anticipation for US movie releases. To give up its leadership in that space would be doing WB a huge disservice.

    On your subscriber fatigue question, I do think that is a risk. Personally, I subscribe to Netflix as a loyal customer, then cherry-pick shows from all of the other streaming services (e.g. using my boyfriend’s HBO account, doing free trials on Hulu for a particular show) — it’s just too much to manage and pay for 3+ OTT services. As digital players and traditional studios move towards more original content creation, WB could have an advantage given its long-term industry expertise and access to talent.

  4. Loved this essay! It made me reflect on the experience of going to the movies. It is no surprise that attendance to movie theaters has been declining and we can partly blame digitalization and the shorter distribution windows for this. However, I’am a firm believer that the experience of going to the movies continues to be unique and many people still enjoy it.

    Is there any way that the experience can be made into something more unique and entertaining to maintain consumer interest? Maybe WB should look into what makes the movie going experience better for the consumer. I also think that in order to incentivize consumers to continue to go to movies, studios should focus on quality rather than quantity in their products. There is an article that mentions the willingness for consumers to go watch a movie that has quality in the theater rather than the typical franchise movies. It seems like the industry has lost its creativity in some way and started producing revenue making films which are easier to wait for. I believe that if WB focuses on producing quality content it can also have a positive effect in theater attendance.

    Finally I have to disagree with one of the points mentioned above. You mention how consumers would be allowed to download movies at a price of $30 dollars weeks after the movie is released in theaters. I think that this is a high price to pay for a digital movie. Considering that consumers can get the movie a few weeks after at a very low price. I also think that the problem here is not the price but the increasingly short supply windows in which a movie transitions from production to theater to online. In conclusion I think that WB should definitely concentrate in improving the movie-going experience since this is a unique experience for itself that cannot be replaced by watching a movie at home. There is something about watching a movie and sharing that experience with a bunch of strangers.

  5. Hedy, as others mentioned – thank you for this article, it was a very interesting read.

    As to the theaters, I do agree with others that I do believe there is a future for them but that the experience does need to improve. Using Philip’s terminology, I would focus on point (3) – social activity to drive attendance, especially since I believe there is a market for more expensive early release movies (more later). While I do believe that theaters need to maintain great technology quality (2) but I am not certain that it is enough on its own. Technologies such as AR&VR might appeal to some parts of the market, I am not sure whether the market for this large enough to warrant the investments (however, I am someone who still boycotts 3D due to headaches I get from it so my opinion may not be completely representative).

    On the other hand, I want to push back against F1991 – I do believe that there is space for more expensive online releases of the new movies – assuming we are talking in a relatively short window after theater release – given the quality of home cinema technology, price of movies in theater, and convenience factor. Very often, I do not end up going to the movies because a) I become lazy b) the show times do not fit my schedule – and if I had the opportunity to download the movie for ~$30 at home, I definitely would. The way I would justify the price to myself would be that single movie ticket combined with the uber ride to the theater would be approximately the same amount (not even thinking about the overpriced concessions) – and this way, I would have the opportunity watch the movie again if I liked it.

  6. This makes for a great read! I personally believe that WB and other studios must continue investing in the movie theatre-going experience.

    For the longest time, movie theatres enjoyed an entertainment monopoly, with no real direct substitute. Then Netflix and other digital platforms arrived and shook the entire landscape. The arrival of a competitor made us realise how little the cinema has done to stay with the times. The theatre experience is often noisy, expensive and forced – no one likes watching trailers or the inability to control intermissions. However, the business continued to stay relevant because even today, the big screen experience, with high-quality audio and video, is difficult to replicate.

    In recent years, an effort has been made to turn the experience more pleasurable. IMAX, reclining seats, on-demand food and alcohol are all relatively recent additions to the dark hall. But this is just a start.

    Going forward, Hollywood studios must collaborate with multiplex chains to overhaul the experience. This means leveraging technology to create high-quality productions, often in expensive formats. The quality of the viewing experience must be visibly superior to the one experienced while on the couch at home. Movie theatre chains, on their part, must invest in infrastructure that makes the movie hall an added attraction, instead of an annoyance that theatre-goers must put up with. This could include more spacious seating, engaging the touch and sensory experience or transforming the viewing area itself into a second source of entertainment like, for instance, a hot tub. This has been successfully tried before – spectators in hot tubs are a common sight at sports matches.

    In today’s day and age, we certainly don’t NEED movie theatres. But it is up to production studios like WB, in partnership with multiplex chains, to make us WANT them!

  7. Thanks for writing this, Hedy! Although I do love the cinema-going experience, I’m concerned by the fact that WB has limited resources to gather data on cinema-goers. I think that the ideas Philip has proposed are fantastic, but they require a lot of investment to realize. These investments are risky if they don’t appeal to the customer. The movie-making world is used to coming up with ideas (e.g. movie ideas) in a vacuum with hopes that the audiences will embrace those ideas. However, it’s now time to figure out ways to gauge what the customer wants from a cinema-going experience (in terms of experience and content) before making any investments. Netflix and other digital platforms have paved the way for collecting data. I think it’s time for studios like WB to come up with innovative ways to track customer preferences before investing in changing their cinema related experiences.

  8. Thanks for this thoughtful piece! Really enjoyed learning more about WB and disruption in the entertainment industry.

    I think people will begin to become more selective in their subscriptions. We see this now in people who are no longer getting cable or un-bundling cable. https://www.nytimes.com/2017/02/14/business/dealbook/bundling-online-services.html I wonder how many internet services people will subscribe to and maintain and how much some services overlap. Some additional risks to the Netflix/ streaming business model is the high content cost and more recently the debate around net neutrality. I would love to get your thoughts on the impact this might have on the future of streaming. Also increasingly content providers are choosing to un-bundle themselves and provide content on their own platforms. To stay competitive, WB will need to pay attention to customer trends and how they will evolve over time.

    As for the traditional movie-goer experience, I don’t think it should stay the same. We see a increase of movie theaters that now serve food at your assigned seat. I think this reflects a general goal of making movie going less transactional and more of a family experience. I do think movie theaters need to move beyond just showing a movie to retain customers. However, the tradition of going somewhere to see a movie will probably continue. The use case may change to either a family planned experience or a convenient way to kill time. The movies themselves may even become interactive. Movie theaters will need to adapt to that but there will likely continue to be a case for entertainment outside the home.

  9. It makes sense that new entrants such as Netflix can disrupt the existing value chain of movie theaters to a significant extent. However, I believe that solving this problem through reaching customers through acquiring digital platforms, PVOD, and leveraging telecom providers only addresses part of the issue – that of new entrants. One advantage that movie theaters have is the timing in which a customer can watch a new movie. Movie theaters are the very first place in which customers can watch a movie, as such I would also recommend that WB focus on marketing this advantage that other entrants do not have. I would also use digitization to better understand customer needs focusing on how we can capitalize on our timing advantage to convince the customers to attend movie theaters as opposed to wait till a movie is available on other platforms.

  10. I found this essay particularly interesting because I see many parallels with the music industry – with the rise of streaming and new consumption behaviors (i.e., shifting from a la carte like buying a song or attending a movie theatre to all-you-can-eat model of streaming). However, I think a few factors make music fundamentally more challenging than video. Specifically, windowing is shorter and less common in the music space than movies and often only doable by major stars with enough clout (e.g., Taylor Swift, Adele). Therefore, I think the movie industry is more well-positioned to capture revenues during the windowing periods, which makes the PVOD strategy potentially very compelling.

    Consumers have also been trained to expect to find all music on a single platform (i.e., pick Spotify, Apple Music, or Pandora) whereas consumers do not expect all video content to exist on a single platform. I believe this is why it is more challenging for players such as Spotify or Pandora to consider vertically integrating and investing in original content compared to video streaming services such as Netflix. This is perhaps why companies like Warner Studios appear to be reacting to the industry changes more quickly than their music record label counterparts. While I agree that there can be subscriber fatigue with OTT services, the number of services that reaches “fatigue” is something to still be tested. Fortunately for movies and television, the concept of exclusive content across “channels” such as “different OTT services” is something that consumers accept, unlike in music, and has, in many ways, already exist in incumbent cable subscription models.

    To continue the conversation with regards to the 2 questions you posed, I agree with our classmates that Warner should have a vested interest in sustaining the movie theatre-going experience. I think this is one of the reasons consumers are seeing higher adoption for 3D movies and action-heavy films that demonstrate the value proposition of a theatre, which enable a drastically different video watching experience than at home. I think managing theatre stakeholders while trying to capture value in between the theatre window and home/DVD through PVOD is very clever. One thing I’d be more curious to understand is how successful have partnerships with telecom players been in the past. For example, does the T-Mobile and Netflix bundle benefit T-Mobile more or Netflix more?

  11. I want to take a devil’s advocate position in the response to the above: I think it is very possible that WB should invest minimally in the maintenance and growth of the theater-driven model of distribution.

    It is true that the theater offers customers experiences that being at home or on a mobile device simply cannot – and Phil’s framework is a great way to distill that reality. But the question that WB must ask itself as a firm is whether or not its limited resources are best allocated to the specific projects associated with increasing movie theater attendance. As Ronald points out, innovation in this area is extremely expensive and unpredictable; collaborating with the supply chain intermediaries is also not a straightforward process. To introduce a little finance, I would project that the NPV of projects in digital is significantly higher than the NPV of projects in theaters. Meanwhile, earlier in the supply chain, the process of creating films that meet consumer needs and drive profitability within the theater-driven model is also much harder in an environment wherein there is such easy access to all different kinds of entertainment.

    In sum, while I think the loss of theater-based experiences would have negative ramifications throughout American society, I think from a pure profitability perspective, WB should de-prioritize the theater experience and continue the push to distribute more content via other platforms.

  12. Hedy,

    Thanks for the note on Warner and the vicissitudes of the video content industry. I found it quite helpful to see the run down of existing and potential future initiatives that Warner is undertaking to combat the multi-faceted competitive threat that it’s facing from Netflix and the other tech behemoths.

    Honing in on the current and future role of the telecom providers, it would be instructive to recall the takeaway from a classic 1964 cartoon, “He who owns the gold, makes the rules!” I would modify this to Warner’s context and argue that those who own the pipes through which content will be delivered are likely to emerge as the long-term sustainable winners of the video ecosystem. The one thing that all of the digital content and digital platforms in the world have in common is that the “last mile delivery” occurs via a wired or wireless Internet connection. Because of economies of scale and network effects (less strong in Internet than in telecom more generally, but important nonetheless), the players who control the delivery of Internet to the home, workplace, and smartphone have traditionally been few in number and large in size. Despite all of the change in digital world, this fundamental fact about industry structure is not changing. In fact, the only changes are ones that reinforce the consolidated nature of the industry, e.g., the recent merger of Time Warner Cable and Charter Communications. On the other hand, the world of content is becoming increasingly fragmented as technology and a fragmentation of demand dynamics push the price of marginal content down to zero. Structurally, there are far more video content creators in a world with YouTube than in the old world dominated by a handful of TV and movie studios. Similarly, the so-called digital platforms, which sit “in the cloud,” i.e., deliver their content via the ISPs pipes, are also encountering fragmentation, as the cost of starting up a platform goes down over time and the “old” content providers, like Warner move into the platform game. The view that emerges (consolidating ISPs, fragmenting content providers, and fragmenting digital platforms) at least suggests that the structural winners will be the ISPs.

    As your entire essay articulates, the big question is what can Warner do as they stand in the proverbial quicksand. I am a firm believer that the content providers are dying, and the evolution of their public valuations only substantiates this claim. [2] One need only look at the stock price trending of CBS, Viacom, and Discovery Communications to realize that the industry is in deep trouble. Although Warner Bros appears to be taking a try everything and anything approach, I see one viable path for Warner Bros and one path that is bound for failure. The wrong path is likely to involve copying what all the other content providers are trying to do: create a digital platform to compete with the premier digital platforms (the Hulu and Netflix contingency). With the exception of HBO, which has seen some short-term success with its platform, there is little to no evidence that investing a tremendous amount of resources behind creating a subpar digital platform, with a subpar digital viewing experience, is likely to solve the fundamental problem that Warner and its peers are facing today. A more sensible approach, in my view, would be to “cash flow out” the business. A transformation into a digital company will never compete with digital-first alternatives in a world where Warner’s core asset, its content, is facing massive and sustained price compression; the only successful strategy may be an orderly failure.

    [1] “The Big Picture: The Technology to Meet the Challenges of Media Fragmentation,” Nielsen, February 2017, http://www.nielsen.com/us/en/insights/reports/2017/the-big-picture-technology-to-meet-the-challenges-of-media-fragmentation.html, accessed November 2017.

    [2] “Sample Portfolio: Content Providers,” Buy Upside, http://www.buyupside.com/sample_portfolios/contentproviders.php, accessed November 2017.

  13. Thank you for sharing your thoughts – this is very interesting! I believe WB should have a vested interest in sustaining the movie theater-going experience because WB’s access to an existing theater channel differentiates itself from the other digital platform providers. First, the theater channel contributes to WB not only by making box office revenues from WB’s films but also by promoting its films for WB’s other channels, such as DVDs and digital channels. As the other digital platform providers do not have the theater channel, WB’s marketing capability should be much stronger than that of the other digital platform providers. I also believe that consumers can hold only a few OTTs as their marginal utilities from an OTT would decline assuming each OTT applies a subscription model charging a similar price. To watch additional collection, a consumer would not spend as much money for the second OTT as the one would spend for the first OTT. Thus, I believe the OTTs market is close to a winner-take-all market so that WB should accelerate its acquisition of other OTTs, first in a specific subcategory, and then in the overall content, to establish the overall dominant position. From this perspective, I believe WB’s investment in Hulu is a good strategy, and RB should gain the control of Hulu and merge it with other OTTs that RB owns.

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