The recent ho-hah in German about 20th Century Fox’s attempt to shorten the theatrical window on a couple of block-buster movies has now spread to our fair shores, with Exhibitors closing ranks in a way reminiscent of a drug cartel, and pulling a slew of high grossing fox movies from their cinemas in “retaliation”. Everyone expects Fox to cave here, as it did in Germany, and in self-flagellating shame, re-affirm the sanctity of the 16 week theatrical window.

Christian Grass, President of Fox EMEA, and a thoroughly good guy (disclosure: we share a gym and have debated the issues around window crashing both in public and in private) hasn’t done that yet, describing the whole incident as a “storm in a tea-cup“.
In my view, it’s worse than that. It is a missed opportunity for an industry which is breaking down to try and heal itself, and a classic case of what game theorists call “The Prisoner’s Dilemma“: a situation where two parties (represented by two police prisoners accused of the same crime based on circumstantial evidence are being interrogated in separate rooms). If they act in each other’s interest by both denying the other was involved in the crime) they would both benefit. But because they choose to betray the other and work for their individual interests (he did it, nothing to do with me), both end up loosing and going to jail, condemned by the other’s betrayal.
Game Theorists use the Prisoner’s Dilemma to show that situations that appear Zero-Sum when viewed from a single perspective, are in fact win-win when parties take into account each other’s interests.

I think both Fox and the Exhibitors are acting like idiot prisoners over this one.

Now before I get my house picketed by Cinema owners and Rupert Murdoch alike, give me a minute to explain.

1. I don’t dispute the fairly clear evidence that shrinking the theatrical window has, in a lot of instances, the effect of depressing box-office returns. Which in a context of steadily decreasing cinema audience numbers (particularly in Germany where exhibitors are under real threat)
2. But neither is it possible to dispute that releasing the DVD early during a key shopping season (Fox wanted to be able to get the DVDs into shops in time for Easter break) would have provided significant uplift to DVD sales.
3. So the key question would appear to be, what’s the net gain in revenue. Do the gained DVD sales more than make up for the lost theatrical revenue. Right? Surely Fox having done the calculation had decided that more DVDs more than made up for lost theatrical revenue, and that should have been the end of it.

Wrong. Because the math works out differently if you are Fox or if you are the Cinema chains. The interests are not fully aligned.

Because of the way the deal terms between studios-exhibitors and studios – retailers are structured, and because DVDs cost more than cinema tickets; Fox earns more per DVD sold than per ticket sold. Cinema owners on the other hand don’t earn a penny from DVDs, where else for each ticket sold, they earn not only 50% or more of the ticket price, but 2-3 times as much again from concession sales and advertising. And the loss of that would be so painful that they are willing to yank high grossing movies out of their chains rather than contemplate a set precedent for a shortened window.

The prisoners, in their separate rooms, come to different conclusions as to what is best for them personally, and end up screwing each other.

The obvious question might be, why doesn’t Fox offer the cinema’s a piece of the DVD action to compensate them for lost theatrical revenue? Everyone in the industry knows that DVD success is intrinsically linked to the hype and awareness created by a theatrical success – why not acknowledge that in the deal.

Such an obvious question that there is no good answer to it. In theory, its the obvious thing to do. So obvious, that when, in June last year, I put a group of industry execs (including people from studios and exhibitors) to work on a hypothtical case study on the best release pattern for a DVD friendly block-buster, the vast majority proposed a strategy that combined some crashing of windows and some non-conventional sharing of revenue between exhibitors and studios.

But no matter how sensible they are in theory. In practice, entrenched habits and vested interests mean they keep acting like prisoners and keep screwing each other.

By contrast, this path of action has been tried, on a smaller scale, by niche distributors in the US such as Magnolia and IFC, both of whom have been doing “day and date” or crashed window releasing of small films for several years now – and presumably find it is working out rather well for them – using the theatrical buzz to drive DVD sales and maximising their marketing spend. How come they can do it? Because they are vertically integrated – Magnolia is owned by Cuban / Wagner companies, which also own the Landmark Theatre Group, and IFC owns a handful of its own cinemas. They are in a position to stop acting like two separate prisoners with competing interests, and act in concert.

I bet a lot of studios are wishing that anti-competitive laws didn’t prohibit them from buying up cinemas right now. Is that the only way? I hope not. Watch this space.

This entry was posted on Friday, February 2nd, 2007 at 10:40 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.