Market Insight

Napster founder turns disruptive attention to the film industry

March 18, 2016  | Subscribers Only

David Hancock David Hancock Director – Research and Analysis, Cinema & Home Entertainment, IHS Markit
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A new venture to shorten the theatrical window on major films has been launched in the US. The Screening Room proposes a $50 fee for online access to day-and-date releases, on top of the cost of an anti-piracy set top box ($150). From the fee, exhibitors would receive a cut of the rental, apparently up to $20 per rental, which could attract some exhibitors. The film’s window would be open for 48 hours and viewable only once. The distributor would also receive a cut, reportedly around 20% of the cost to the consumer, leaving the remainder to the Screening Room. The customer would also receive two free tickets to see the movie at a cinema at some point after the viewing. It is unclear how the cinema would be chosen and how the rental fee will be split amongst exhibitors. Actually, it is unclear at this point how many exhibitors are willing to buy into the scheme.

The founder of Napster and a fellow music industry executive are behind the plan, which although not the first to believe there is a link between shortening the theatrical window and higher prices, has attracted the support of a number of high profile industry names: Peter Jackson, Martin Scorsese, JJ Abrams, Steven Spielberg and Ron Howard. Pitted against them are not only James Cameron and Christopher Nolan but NATO, UKCA, and the Danish Cinema Association amongst others. 

Our analysis

The industry seems divided at present although the louder voices are currently the ones against the plan. Broadly, the split is between those that believe the cinema is sacred as the primary place to watch a film, and those that see this venture as maybe opening up a revenue stream that partially makes up for plateauing audience numbers in the USA. It is hard to believe that they are willingly trying to harm movie theatres, given the success that cinemas have given them. The argument would seem to rest with the extent to which this model will take cinemagoers away from the cinema. If it does take them away, it could harm exhibitors and the industry in general. If it doesn’t harm the cinemas, it could open up a new revenue stream and widen the audience for films. It is true that audiences have plateaued in the USA (admissions dropped in five of the last ten years and they now stand at approximately where they were in 2006 even if box office rises more consistently), and while the big films don’t struggle so much to generate revenue (the Top 100 films account for over 90% of the gross box office), those below this threshold do. However, it remains to be seen how many smaller films would actually end up in the Screening Room model.

This type of venture has been tried before with trials usually taking place outside the USA before being shut down due to a lack of interest. There has seemed to be little link between price and release window, although the cool reception in the past could be down to the choice of films which were often obscure (arguing against smaller films being the Screening Room’s core product) and the lack of consumer knowledge of the service. The Screening Room price is pretty high, and this in itself limits the interest from the mainstream of consumer film viewing.

This venture also comes at a time when the notion of premium cinema is very much at the forefront of the industry’s thinking. The premium price though is being justified by added value in other areas than the window, such as technological excellence (image and sound), comfort, dining, motion seating, location, and new content. These give the customer choices in how to watch a theatrical film within the normal theatrical window, but always in the cinema.

As film distributors, and now new players like Netflix have found in the past, exhibitors do have considerable power to derail a proposal they don’t believe is in their interests of the interest of the film industry at large. As IHS data has shown, cinema forms a significant proportion of the overall transactional income for filmed entertainment, which itself represents the greatest value for rights holders. A move towards digital subscription models, which happened in the music industry, lowers the overall income flowing back to these rights holders as well as altering the financial make-up of a film’s financial backing. The risk is that destroying the cinema’s role as a value creator and platform for subsequent windows without having a credible alternative in place is a massive threat to the overall value creation and maximisation model of a feature film. There are no doubt films for which a shorter window would be suitable, and there has been slow movement towards an industry-wide negotiated settlement for these types of films. There needs to be more negotiation by both sides, as the one size fits all approach to theatrical windows is clearly not appropriate for all films, but for the biggest films the cinema is an ideal launch pad. Even more so as it differentiates itself further from home entertainment, and is creating considerably higher perceived value for the consumer. And this extra value may be needed if the cinema is to compete with home entertainment for the same movie at the same time, a situation that has not existed before.


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