COVID-19 has changed many business models over the past few months. Here Andy Turner, Audit and Business Advisory Partner at Mercer & Hole considers the impact on the Cinema business.
The current situation
All the UK Cinemas have closed under government advice during the period of lockdown. The large studios have therefore not been able to release content to the cinemas and have been unable to generate revenue in terms of their box office share instead have looked to an alternative business model to generate revenue.
Historically the business model of the big Hollywood Studios was to produce content (“films”) and distribute this content to cinemas (often called “Exhibitors “). The cinemas traditionally are given a window of up to 3 months to air the film and generate revenue. Then there is a secondary revenue stream in terms of the titles release on other mediums such as streaming , Pay TV and DVD.
In lockdown they have had to consider the new business model of releasing by digital distribution effectively by passing the cinema and the 3 month window.
Digital distribution
Universal were the first large studio to break the traditional business model with the film ‘Trolls World Tour’ which was due for release on 10th April. Instead Universal made the film available for distribution by way of digital download on Amazon Prime for £15.99. This strategy was very sucessful and the film generated more revenue in just a few weeks than the previous Trolls film. This led Universal to announce that when cinemas re open they expect to release movies on digital download format at the same time. This move challenged the existing business model as a family can view a film at home when they want to for an overall lower cost compared to going to the cinema.
This certainly prompted reaction with AMC (owners of Odeon) and Cineworld introducing a global ban on all Universal content when they re open. The cinemas have long been aware that the threat of digital distribution by passing theatrical exhibitors could be shown to be a viable business model. Universal have recently announced that ‘The King of Staten Island’ due for release on 19 June would also be a digital download. Warner Bros have followed with ‘Scoob’ and other studios are expected to follow.
So does this signal the end of the UK Cinema ?
I would suggest not… while the cinemas need to look closely at their offering in a post lockdown world the studios will only go down this route on the smaller / medium sized budget films.
The larger blockbuster films with the big budgets will remain for intial distribution in theatres. So the cinema may need to adapt to either give an alternative offering or prepare to exhibit less of the lower budget films and concentrate their offering on their big budget blockbuster tiltles. The reason for this is that the studios for this type of film get a large initial revenue stream representing the share of the box office receipts from the initial showing and another large secondary revenue on the digital release. They will not want to dilute this revenue share into just one stream.
“The large studios have been considering the business model around direct distribution since the impact of digital technology. COVID -19 has provided the catalyst that could change the shape of the traditional operating model” – Andy Turner
No time to die
In fact the new blockbuster big budget James Bond film ‘No time to die’ has been rescheduled for release later on in the year and the studios are not considering immediate digital release for this very reason.
Whilst this may be good news for the cinema industry there will still be challenging times in the future. The impact of the new digital business model provides the studios with more negotiation leverage for a greater share of box office income on some secondary titles notwithstanding the post lockdown issues around social distancing most may need to cope with.
About Andy
Andy has a strong background in the Media Sector. He is a BAFTA member and has works with many high-profile media clients. These have included ITV ,Endemol NBC Universal and Working Title Films.
Client relationships are all important to Andy and he has become a trusted advisor to a number of publicly known business people. He is recognised as being fair and reasonable, pragmatic and hands-on.
To contact Andy please click here to view his profile.
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