Could Movie Theaters Soon Go the Way of the VHS?

Do new distribution models and virtual reality headsets mean it's curtains for theater chains?

Keith Noonan
Keith Noonan
Aug 23, 2015 at 3:49PM
Consumer Goods

Source: Wikimedia Commons.

The movie business is still growing, but the future of the silver screen has never looked so uncertain. In July, Viacom (NASDAQ:VIAB) (NASDAQ:VIA) inked a deal with AMC (NYSE:AMC) and Cineplex, the two largest movie chains in Canada, to bring movies to digital distribution platforms as little as two weeks after their theater release.

The emergence of digital video distribution as a competitor to movie screens isn't the only threat facing multiplexes. Proponents of virtual reality, including big tech players such as Facebook (NASDAQ:FB), are readying devices and software that will enable users to step into virtual movie theaters. Increasingly immersive video games also present a challenge for consumer time and spending.

Is the age of the silver screen slowly drawing to a close? What obstacles stand in the way of a future in which movie theaters no longer play a central role in the success of big-budget films?

Viacom and Paramount push for new distribution paradigm
The beginning of July saw Viacom and its Paramount film division finalize a deal with AMC and Cineplex to speed the rate at which movies could be brought to home distribution channels. Per the arrangement, new films would be available for digital distribution two weeks after their screen count drops below 300, with theaters receiving a portion of the home viewing revenue.

Viacom is making the case that certain films can be released in a home video format shortly after or in tandem with the theatrical run to the benefit of all parties involved. Its new model represents one of the first major cracks in the long-held 90-days-to-home-formats policy.

Looking ahead, DreamWorks Animation CEO Jeff Katzenberg has indicated that he anticipates a future in which movies launch on home formats just 17 days after theatrical release, with pricing tiers based on screen size or level of immersion.

Unsurprisingly, not everyone is on board with this direction. Just around 30% of the theater market is reportedly in favor of Viacom's new model, and the largest movie chain, Regal Cinemas (NYSE:RGC) which has roughly 7,300 screens, has rejected the new plan. However, abstaining chains like Regal may wind up facing competitive pressure from the new distribution model while losing out on the potential benefits, as Viacom has indicated that it's moving ahead with its plan, and that it expects to garner very strong support. 

The new distribution timeline alone doesn't signal a serious shake-up for the theater business, but it starts to look significant in light of other trends. 

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Virtual reality's role in speeding the death of the cinema
Facebook made news in 2014 as information surfaced about its efforts to pitch the potentials of the Oculus Rift to Hollywood studios. Oculus VR setups have already been used in the promotion of popular television and film properties such as Game of Thrones and the upcoming Pacific Rim 2

While the Oculus Rift and other headsets will be used to promote upcoming blockbusters, VR devices also have the potential to damage the movie theater business. Apps designed to replicate the theater experience have already been built for the Rift and are -- perhaps over-idealistically -- being touted as a way to escape some of the more unpleasant elements of the theater experience while preserving the social atmosphere.

Supporting a dour view for the future of multiplexes, visionary filmmakers Stephen Spielberg and George Lucas have predicted that cinemas will eventually be unsustainable, as Internet VOD will become the dominant method of video distribution. Spielberg and Lucas also stated that increasing emotional complexity in video games has the potential to take away from the appeal of film. VR headsets might wind up becoming a major catalyst on both these fronts.  

Why the end of theaters is still a ways off
If trends in the American movie market were a perfect microcosm of the broader film industry, the case for the end of theaters would be much stronger. 2014 saw total domestic cinema revenue decline year over year, while 2013's slight improvement relative to 2012 came from increased ticket prices amid decreased attendance.

Still, the theater business is booming in markets like China and India, and this trend of international growth encourages entertainment companies to deliver traditional content through traditional distribution models, with some mild variations. Viacom and Paramount's new distribution model probably won't have a big effect on theaters immediately -- but a significantly shorter window of exclusivity for movie theaters and broader scope for home format distribution would likely have greater impact.

With regard to virtual reality, widespread adoption is still a ways off -- and contingent upon significant technology advancement and cost reduction. More broadly, the promise of home streaming falls short when it comes to providing the social atmosphere of a theater screening. As such, premium viewing formats are likely to continue to account for a greater portion of ticket revenue, as increased differentiation from home formats is needed. Smaller movies will likely see successful debuts on digital platforms, but it looks like the appeal of the big budget, blockbuster theater experience will remain.

Changes in technology and viewing habits do represent a meaningful threat to theater chains, and small- to mid-budget pictures will probably continue to find success increasingly elusive on the big screen, but multiplexes have the event movie to fall back upon for the foreseeable future.