When Disney (NYSE:DIS) CEO Bob Iger argued that the film industry should narrow the gap between the time that a new flick hits the big screen and when it is released on DVD, it obviously didn't make theater owners very happy.
Attendance at the local multiplex has dropped for three straight years, and here was the head honcho of a major Hollywood studio threatening to make the theater owners' lives even more taxing. It was hard enough for them already, with folks building out home theaters with high-definition plasma and LCD wide screens, IMAX (NASDAQ:IMAX) luring popcorn-munchers with their larger-than-life treatments of first-run blockbusters, and the existence of a free market outside of their velvet-curtained walls where soft drinks and popcorn sold for pocket change. How dare Iger suggest that the retail market move to a "day and date release" model, in which a DVD or VHS title hits the shelves just as the same movie makes its box office debut?
The industry's backlash came as expected, and it seemed as if Iger was backing down from his comments made at the company's fiscal fourth-quarter conference call last month. Was the coast clear? Was it all a dream? Perhaps he was just floating a trial balloon to see how quickly the industry would hurl darts at his inflated suggestion.
However, in Monday's edition of The Wall Street Journal, Iger is again discussing the possibilities.
"We'll have a conversation with theater owners to see whether we can move them more peacefully," he was quoted in the interview. "But I think in the end, it's going to have to be more by force than through negotiation or diplomacy."
It's no longer a trial balloon. It's the Hindenberg.
Lights! Camera! Faction!
Iger's reasoning is sound. Why should a movie studio spend money to promote a film during its theatrical run only to have to pitch it again six months later, when it rolls out for the home video market? More and more these days, you see studios using their current-release print ads to advertise upcoming DVDs. It's a waste of money. But it's even worse than just that.
More than 10,000 new DVD titles have been released this year, yet just a little more than 400 of those have been recent theatrical releases. Television shows, direct-to-video ventures, and older flicks have flooded the slate. It's harder for a new DVD to stand out these days. We found that out when both Pixar (NASDAQ:PIXR) and DreamWorks Animation (NYSE:DWA) this year announced higher-than-expected unsold product returns of their latest hits.
That's why Iger is so anxious to strike while the projector's still hot. Would the crowds stay away from the theater this weekend if they could snap up Narnia at a Disney Store? It would likely have a negative impact, sure. However, Disney would probably sell far more copies now with the buzz still reverberating than it would next summer with a second ad campaign.
As long as the movie is fresh, it will be that much more valuable to a consumer and that much more likely to stand out against a crowd of tens of thousands of competing titles. The move would also do wonders in wiping out pirated bootlegs.
Making nice at the multiplex
Elective euthanasia isn't in the cards for the movie theaters. They would put up a fight initially and would probably even refuse to show a renegade picture. They would need to send a message to rival studios that their hallowed aisles are sacred.
But Iger has thought that out, too. One of Disney's ideas was to have movie theaters sell the DVDs. If you caught Narnia and were pumped enough to buy the disc at the theater itself, it would be far more lucrative than the thin slice of box office revenue that movie theaters keep during a film's opening week.
It shouldn't stop there, of course. Theater chains should already be setting up kiosks inside to sell movie-related merchandise. Recently, I took the industry to task for wallowing in self-pity for what has been a self-inflicted wound. Even before audiences started to sour on a night at the movies, the history of the multiplex operators has been filled with bankruptcy reorganizations and sector consolidation, coated with a deep-fried layer of stagnancy. There aren't too many publicly traded chains these days once you get past Carmike (NASDAQ:CKEC) and Regal (NYSE:RGC).
Iger suggests allowing day-and-date releases based on the prospects of DVD sales, and I'll argue that related video games, plush toys, soundtracks, T-shirts, and movie posters should be sold right alongside the flick itself. It's only logical. It's how live theater gets it done. When my wife took my son to see Blue Man Group this past summer, he came back with a CD. And a T-shirt. And a poster. I doubt that he would have bought any of those impulse items a week later. A film house is an experience peddler, and that buzz lasts about as long as it takes for the exit door to swing open.
In-theater merchandising would obviously help the movie studios, too. The chains would have an attractive revenue stream and gain more leverage with the film industry as an outlet for licensed goods, but Hollywood naturally wouldn't mind the merchandising royalties. That's also why the movie studios may have to be the ones to initiate the process. Too many nervous theater operators are too busy sweeping the floor of their nibbled fingernails to innovate. For example, the digital distribution of new films to the movie chains makes perfect fiscal sense, yet it's been a slow adoption process for an industry that won't even bother to rearrange the deck chairs on their sinking ship.
They're just not trying. If you walk into a theater that's offering the same bland ballpark concessions that they have for decades and a few video games out front, please do the industry a favor and vote with your feet. Force the dinosaurs to think outside the box office.
Iger is proposing something radical. The skeleton key to unlock that inevitability may be more radical still, like setting up localized revenue pools where theater operators that do play along with day-and-date releases get to split the pot of territorial merchandising sales. If it's just a matter of greasing the box office split so that it favors the theater owners earlier on, then it's just the movie studios that aren't thinking creatively enough.
The point is that movie theaters don't have to die unless they want to. For investors, there may even be some attractive situations here. IMAX was a Motley Fool Rule Breakers recommendation earlier this year, in part because it is improving the value proposition of first-run releases at its growing chain while giving theater owners a fighting chance with economically feasible retrofits of their existing multiplexes. Content will also be a big winner, and it's why Pixar, DreamWorks Animation, and Time Warner (NYSE:TWX) have all been recommended by the Motley Fool Stock Advisor newsletter service.
Get it together, theater chains, before you too fade to black.
Longtime Fool contributor Rick Munarriz loves a night out at the movies, but he is more than willing to settle for a matinee. He owns shares of Disney and Pixar. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
