At a conference in 2015, Netflix (NASDAQ:NFLX) CEO Reed Hastings famously predicted, "We will come to see that linear TV declines every year for the next 20 years and that internet TV rises every year for the next 20 years."
In 2020, that forecast looks more prescient than ever. Viewing hours on streaming services like Netflix and Roku (NASDAQ:ROKU) have boomed during the pandemic as consumers have been stuck at home.
At the same time, linear TV and movie theaters are reeling from COVID-19. Broadcast and cable networks are highly dependent on advertising revenue, which has shriveled up because of the pandemic and accompanying recession. Live sports, one of the biggest draws on traditional TV, has been largely absent during the crisis. Magna Global forecasts a 12% decline in global linear TV ad spending this year. Overall advertising in the U.S. excluding political spending is expected to fall 17%. Meanwhile, cord-cutting is likely to accelerate as consumers cut back on spending in a bad economy and switch to skinny bundles.
Movie theaters are under even more stress. Chains like AMC Entertainment (NYSE:AMC) and Cinemark (NYSE:CNK) have been closed since March and are awaiting the go-ahead from both state regulators and studios before reopening. AMC, the world's largest theater chain, warned in June that its status as a going concern was in doubt. The company has since been forced to push back its reopening date to July 30.
A permanent shift
The pandemic is accelerating a number of transitions in the realm of e-commerce, video conferencing, and cloud computing. The same is happening with video streaming.
With theaters shuttered, Hollywood has taken new releases directly to home viewers. Paramount sold The Lovebirds to Netflix, and widely anticipated features like Jon Stewart's Irresistible and Pete Davidson's King of Staten Island both went straight to multiple on-demand platforms.
It was Trolls World Tour that struck the biggest blow for the straight-to-streaming movement, however. The Comcast-owned (NASDAQ:CMCS.A) Universal product earned close to $100 million in on-demand sales in just three weeks at $19.99 a pop. That prompted NBCUniversal CEO Jeff Shell to tell The Wall Street Journal, "As soon as theaters reopen, we expect to release movies on both formats," meaning in theaters and on demand. The statement rankled AMC, whose CEO responded by banning Universal's movies at its theaters. The two sides have since been in negotiations.
The chips are increasingly stacked on the side of the studios. They now aim to break the windowing protocol, whereby movies are exhibited exclusively in theaters for 75 days before being available at home.
A new survey shows that consumers also support ending the windowing practice. The chart below shows how U.S. adults expressed their preferences for watching newly released movies in a survey from Morning Consult/The Hollywood Reporter:
|Strongly prefer watching movies in theaters||19%|
|Somewhat prefer watching movies in theaters||18%|
|Somewhat prefer watching it at home via streaming||21%|
|Strongly prefer watching it at home via streaming||32%|
While a substantial percentage of respondents prefer going to a movie theater, watching at home is the clear winner here, especially as nearly a third of those polled said they strongly prefer the at-home experience. In other words, consumers, like studios and streamers, want to see the windowing process come to an end.
The infrastructure is in place
All of these studios have some kind of streaming assets they could use to screen new releases directly to at-home viewers. Disney owns Disney+ and a majority stake in Hulu. Warner Bros. has AT&T's HBO Max. Comcast's Universal has the soon-to-be-launched Peacock and Comcast's cable subscribers. ViacomCBS owns CBS All Access as well as Showtime Anytime, and Sony owns Crackle.
It wouldn't be hard for any of these studios to make new releases available on their streaming platforms either for an a la carte price or a premium subscription. Studios generally keep only 50% of box office receipts, splitting them with theaters, while they tend to recoup 80% of on-demand sales, making the straight-to-home method more appealing from a business perspective.
If consumers, streamers, and studios prefer to release movies on a day-and-date basis -- industry jargon for simultaneously in theaters and at home -- it seems like only a matter of time until windowing dies out. Theaters will resist, but COVID-19 is putting enormous pressure on their finances. The longer the pandemic continues, the more current habits will set in, and the more time studios will have to experiment with finding an on-demand model that works best for them.
The end of windowing would be a big win for streamers as well as studios. Movie theaters and the rest of the theater ecosystem, which includes malls and advertisers like National CineMedia, could be on a downward spiral that might prove impossible to escape.