COVID-19 and the Theatrical Industry: An Accelerant, Not a World-Changer
Of course COVID-19 will not fundamentally remake theatrical exhibition or the film industry at large.
The ongoing pandemic has already changed a lot about American life and our economy. Small businesses are shuttered, some temporarily, others permanently. Millions of workers have filed for unemployment. A previously inert federal government has spent trillions of dollars in recent weeks, including on programs that would have left many Republicans and moderate Democrats apoplectic just a few months ago – unemployment insurance, direct-cash payments to Americans, and free medical care, including testing. But more than anything, COVID-19 has brutally and effectively laid bare the numerous problems facing this country. Lack of affordable health care is not a new problem created by the virus. Overcrowding and poor conditions for incarcerated Americans; skyrocketing costs of housing; wage and inequality gaps; unavailability of paid sick and maternity leave; precariousness of corporate debt and over-leveraging. None of these are new issues, but a global pandemic has poured accelerant all over them and lit the match – and sometimes it takes a raging fire to get governments to pay attention. So no, COVID-19 won’t fundamentally remake the theatrical exhibition or the film industry – but only because that was already happening. Instead, the pandemic will exacerbate the existential threats already facing movie theaters and accelerate the changes that have been looming for years over the notoriously slow-to-change industry. In particular, the slow shift to streaming and the increasing corporate consolidation of the past decade will find in the quarantine an unwanted partner, an unwelcome kick-in-the-pants for an industry whose iron grip on the past has proven difficult to break.
Concentration poses the greatest threat to the way we watch movies. In 2019, Disney completed its fourth mega-merger of the last 15 years, gobbling up 21st Century Fox (following its acquisitions of Pixar, Marvel, and Lucasfilm). That same year, it became the first company to earn over $10 billion at the box office with a near-record 40% market share, including every single one of the top eight spots in the domestic box office. Three theater chains dominate the market, owning over half the screens in America. This consolidation has already begun crippling the theatrical industry, allowing Disney to impose coercive terms and fees on theaters. The company has restricted access to its classic movie titles, including those in the Fox archive, depriving independent, repertory theaters of their lifeblood. The studio has withheld new releases from smaller theaters until they play for an extended period at the larger chains -- even when there is no chain theater within reasonable driving distance, according to reporting in Vulture from Matt Zoller Seitz. Seitz also reported that Disney practices block booking, forcing theaters to take less popular movies if they want the studio’s bigger titles. The company also imposes exorbitant fees and anti-competitive practices on the major theaters that carry their blockbusters – it reportedly gave theaters “a set of top-secret terms that numerous theater owners say are the most onerous they have ever seen.” Reporting in The American Prospect suggests those terms included a record 65% of the ticket sales, a requirement that theaters reserve their largest screen for at least four weeks, and the imposition of a fee worth 5% of box office revenue if any condition was violated.
This is made possible by Disney and others studios’ corporate power, but it’s also due to the lax antitrust enforcement from the federal government. Indeed, earlier this year, Assistant Attorney General Makan Delrahim moved to wipe out the hallowed Paramount Decrees. Established in 1948 by a consent decree and affirmed by the Supreme Court, the agreement prohibited vertical integration by the major studios (preventing them from owning theaters) and cracked down on anti-competitive practices, including pooling agreements, block booking, and discrimination against smaller theaters. This would essentially turn the major studios into a federally sanctioned racket, giving them new tools with which to extort theater owners, including the threat of just buying up the theater if they don’t comply.
This was the landscape as of early March – enter COVID.
Theaters across America have shut down. Smaller theaters will be forced to shutter their doors permanently, with limited leeway to withstand a long-term economic shock. More importantly, studio consolidation will accelerate. Large studios still have revenue sources, including video-on-demand (VOD) and streaming - Disney, Universal, Netflix, Amazon, Warner Brothers, and Paramount all have existing or upcoming streaming services launched by their own company or their corporate parent. Small studios without their own platforms will receive the brunt of the shutdown’s impact, with few options other than indefinite delay. When theaters re-open, major studios will likely have increased their market power over their smaller peers, giving them even more incentive and ability to then wield that dominance over exhibitors.
The 1918 Spanish flu is instructive on this point. Karina Longworth, historian and host ofYou Must Remember This, recently discussed the impact of that pandemic on the theater industry. In particular, she described how Adolph Zukor, the head of Paramount Pictures, bought up movie theaters that were struggling to re-open after the crisis subsided. In moves that rhyme with the extortive tactics of today’s studios, Zukor’s allies even threatened to open competing businesses across the street to lower prices and incentivize sales.
Of course, other studios had to compete with Paramount, and a wave of vertical integration swept the industry – leading, inevitably, to the 1948 Paramount Decrees. This is the same danger facing the industry today. A similar public health crisis is squeezing small and independent theaters. The Department of Justice ended robust enforcement of the Paramount Decrees long ago, and has officially abandoned them altogether. With lax antitrust enforcement and economically hobbled theaters, major studios have every incentive to swoop in after the crisis and lean hard on theaters. Maybe they’ll begin vertical integration; more likely, they’ll extort the theaters desperate for their product, forcing them to give up a higher percentage of returns and reserve more theaters for longer periods for the studios’ blockbusters.
Over time, this will run small and independent theaters out of business, and certainly out of the business of showing unique films, including classic, arthouse, independent, and foreign titles. It will accelerate the dominance of IP-based tent-poles – a dominance that is further entrenched by the second revolution facing Hollywood: streaming.
Let’s be clear on one point: streaming has not, thus far, fulfilled its promise as harbinger of the theatrical apocalypse. Study after study shows that in particular, Netflix’s impact on the theater industry has been muted. But with a spate of new streaming services set to launch this year following the premiere of Disney+ last November, the continued parallel growth pattern of these two related markets has become uncertain.
Enter COVID. Claims of theatrical death that ballooned out when Universal announced it would move a subset of new releases to VOD have been much exaggerated. The company announced day-and-date release for Trolls World Tour on April 10th, but for its other movies, including F9 and No Time to Die, the studio merely delayed the release date. Other studios have similarly pushed back their major releases, unwilling to sacrifice the massive box office returns that 1) justify the production costs on major blockbusters, and 2) subsidize the studios’ less cost-effective ventures.
On the other hand, Paramount ditched its planned theatrical release for Michael Schowalter’s The Lovebirds, shifting the smaller romantic comedy to Netflix. This is the calculation that studios will continue to make as the quarantine stretches on: continue pushing small movies back on the calendar in hopes of a break-out hit, or sacrifice the likely $5-20 million in box office returns in exchange for the immediate payout of shifting to a streamer.
As the crisis subsides and theaters open back up, this calculation won’t go away. Streaming services – including new ones like Apple TV, Peacock, HBO Max, and others – have an opportunity for massive growth during this pandemic, with millions of Americans stuck at home looking for something to watch. When theaters return to business, studios will face increased competition and an all-out arms race in the streaming markets, and will likely feel pressure to send smaller films straight to their (or other) services.
As studios bully theaters into friendlier deals, it will become more feasible to flood screens with the major blockbusters that dominate their revenue streams. This will give the studios more leeway in sending smaller and mid-sized films straight to streaming services. Smaller theaters will be run out of business. The ones that survive will face obstacles to showing the unique programming they’ve relied on in the past, and will turn more and more to major blockbusters.
Unless, of course, someone comes to the rescue. Maybe a new administration’s DOJ takes its cue from its predecessors in the Roosevelt and Truman administrations, restoring and enhancing the Paramount Decrees (and applying them to Disney, Netflix, and other major players). Maybe round 4, 5, or 6 of the federal government’s stimulus will respond to the theater owners’ plea for assistance, bolstering their defense of the theatrical experience after the economy re-opens. Or maybe the passion Hollywood has for its past – the same passion that has seen Netflix buy the historic Paris theater in an attempt to become the darling of cinephiles rather than their enemy – will lead to the rise of smaller, successful studios like A24, Neon, and others.
We can only hope.