The COVID-19 pandemic has had a substantial impact on almost all businesses and industries. The film industry is no exception, and it is more likely than most to have sustained permanent changes even after the outbreak subsides. This event will likely accelerate the years-long trend of digital revenue making up a larger share of total film ultimates and forcing studios to adjust how they view other lines of revenue in the Ultimate. The following article will discuss the potential impacts of COVID-19 on film ultimate revenue.
Shortening of Theatrical Release
Historically, the center of the film ultimate has been the theatrical release. Theatrical rentals not only yield the largest direct source of revenue, but in many deals, box office receipts dictate the amount of revenue the studio charges premium and basic cable TV stations to air films.
The theatrical release schedule has largely been shut down due to COVID-19 and will likely continue to cause an extended period of lower theatrical sales. With distributors like AMC possibly preparing to file bankruptcy, studios will have unprecedented leverage to dictate new terms with theaters, likely resulting in a shortening of the theatrical release “window.” The “window” is the 3-month period from the time a movie releases in theaters to when it is first available on-demand. Major theater chains of have been insistent on keeping this window to protect their ticket sales, while studios have been pushing shorter windows to take advantage of film awareness to drive revenue for downloads and rentals. Studios are now likely to get the changes they want and reap more digital revenue in the process.
Additionally, studios can budget less advertising costs in the ultimate as digital advertising can piggyback off the theatrical advertising schedule. Shortening of the window will result in the same advertising dollars driving sales to both lines of business, rather than paying for a separate schedule to support digital sales after the window has ended.
Accelerated Digital Revenue
Revenue from Digital platforms was already becoming a larger portion of creating film ultimates, but the COVID-19 pandemic has accelerated that trend. Global usage is expected to grow 20% on streaming, and services like Disney+ have reported 22 million new subscribers since the COVID outbreak in February. This shift makes it imperative for studios to accurately account for the digital revenue increases in film ultimates. Digital revenues have more than made up for the plummeting of physical DVD and Blu Ray sales. However, it will be critical to adjust revenue projections to account for digital revenues that will replace some lost theatrical profit. This won’t be a one-size-fits-all for all marketplaces and film types.
In markets like the US, where digital consumption is high, major releases can do massive digital rental numbers. Trolls: World Tour, which was just released during the virus outbreak, is reported to have the biggest domestic digital opening ever. Universal is reporting it did about 10x more than its previous leader, Jurassic World: Fallen Kingdom, which did around $2-$3 million in rentals its digital opening weekend. Clearly the domestic revenue potential is there, but additional financial analysis is needed to determine the optimal on-demand rental release date to prevent cannibalization of theatrical revenue moving forward.
In international markets, like Italy, streaming is in its infancy and has a more linear TV market. These markets will have different ultimate projections, and there won’t be the same opportunity. International box office sales have become equally as important as domestic sales for studios, therefore accurate projections in each market will need to be made, accounting for the effectiveness of the digital footprint in each territory. Strategic planning of advertising dollars will be needed to account for the increase in digital revenues in strong digital markets, while addressing territories that lack the digital presence necessary to make up for theatrical revenue shortfalls.
More Reliance on Tent-Pole Features
The shift to streaming will change the way revenue is projected in the ultimate for certain types of films. In most territories, a shift to streaming means placing more emphasis on films with a universal international appeal and tent-pole features, where the studio will get more return on investment. Films with more regional or market-dependent appeal will have less margin for error on sales results and are likely to have more stringent cost estimates. Tent-pole releases are the films studios rely upon to cover the total slate theatrical profit and make up for the theatrical losses on the films with less broad-based appeal.
This is a big reason for the significant shift to summer-focused blockbuster film events today. The COVID-19 outbreak will likely continue to accelerate that trend with a shorter release schedule and less box office revenue for smaller films.
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About the Author
Justin comes from a diverse background of Sales Operations Finance, FP&A, Strategic Finance, and business analytics within the Media, Entertainment and Consumer Products industries. Prior to joining 8020 Consulting, Justin served as a Sales Finance Analyst for Mattel, the world’s largest toy manufacturer. He also worked in FP&A in with various other Fortune 500 Companies such as Warner Bros and Time Warner Cable. His specialties include financial modeling, budgeting and forecasting, data analytics and strategic finance. He attended the University of Michigan, Ann Arbor, where he received his Bachelor’s Degree in Political Science. He later received his MBA from the University of Southern California with a focus on Corporate Finance and Valuation.
Categorized in: Entertainment, Financial Planning & Analysis, Business Stabilization
