The Studios Followed Netflix Into a Streaming Future, but Left Theatrical Behind
Five years on, TheWrap investigates a Hollywood pivot, and whether it was a fateful error or a key to survival
The post The Studios Followed Netflix Into a Streaming Future, but Left Theatrical Behind appeared first on TheWrap.
The big reveal of Disney’s leap into a streaming future came on April 11, 2019.
On that day — seven months before the company launched Disney+ — executives gathered on the Disney studio lot in Burbank at their annual Investor Day and laid out their plans to Wall Street for how the entertainment giant was going to try to catch up to tech-entertainment company Netflix.
Wall Street was ascribing massive value to Netflix, a Silicon Valley creation, for the ballooning subscriber revenue it was generating, not just in the U.S., but all over the world. And Disney executive Kevin Mayer had lobbied inside the Disney C-suite for his company to get in the game now.
“It was intoxicating,” Mayer, then Disney’s chief strategy officer, recalled to TheWrap about Wall Street’s growing love affair with Netflix, which in a competition-free zone of 2018, had a market cap of $116.85 billion — roughly 78 times the company’s $1.6 billion operating profit and 7.3 times its $16 billion in revenue that year.
That day Disney introduced its pricing scheme for Disney+, talked about the exclusive content it would feature and the trajectory to initially grow the platform to between 60 million and 90 million paid subscribers by 2024.
The audience cheered.
“You could just taste it,” Mayer said. “This is going to transform our company, transform the industry, and our shareholders are going to massively benefit from it. We were sure of it. And we were right, by the way. It did happen that way — until it didn’t.”
Five years after Hollywood made a huge strategic shift to streaming, the studios are facing persistently low stock prices, a moribund theatrical business for the fourth year in a row and a streaming business that has yet to turn a profit, with the notable exception of Netflix.
The global theatrical box office for the seven major studios plummeted 31% from $27.5 billion in 2018 to $18.9 billion in 2023, according to Comscore. Disney topped $11.1 billion in 2019, but no studio has reached even $5 billion since.
TheWrap spoke to analysts and executives at the traditional studios that took the streaming plunge — Disney, Warner Bros Discovery, Universal and Paramount — and took a hard look at balance sheets and the prospects of growth in Hollywood and asked: Was that fateful pivot the right decision?
“You saw the industry take a ‘scale at all cost’ approach, and I don’t believe that is the right way to look at this,” said David Ellison, whose Skydance Media secured a deal to buy Paramount Global on Sunday. He spoke to reporters on Monday about his plans for Paramount+. “Scale is important, but it has to be achieved while maintaining profitability,” he said.
At the time, studio executives didn’t seriously consider how the move to streaming would ultimately affect its theatrical arms and train consumers to experience movies in their homes rather than theaters. And while the COVID-19 pandemic and the double strikes also have played critical roles in accelerating that shift, the Hollywood majors now find themselves in a race to make streaming profitable to offset theatrical revenue that may never fully recover, amid mounting debt and linear television divisions that are in an inexorable death spiral.
“The strikes clearly extended the pain at the box office, but rushing into streaming exacerbated the problem,” Michael Pachter, an analyst at Wedbush Securities, told TheWrap. “The box office must suffer if a cheaper alternative is offered within a reasonable period of time, just like eating out suffers from food delivery services.”
The question for Hollywood now is can it adjust the streaming pivot? Or reverse course altogether?
TheWrap found that, so far, at least, streaming has proved a salve rather than a savior.
“Most of these companies were losing money anyway,” Ross Benes, senior analyst at eMarketer, told TheWrap. “WBD and Paramount would still be in dire straits even if they didn’t launch streaming services. But being unable to sufficiently make money on their streaming services just made their financial situations grimmer.”
And some studio executives are resigned to being in this new world.
“Consumer behavior has shifted, and it is probably not coming back,” Universal Studios Chairwoman Donna Langley noted in May in an address at UCLA. “One of the things we’ve focused on is that pre-pandemic, the majority of the moviegoing audience would see four or five films in theaters a year. That same number of people are now seeing one or two films. We’re meeting the consumer where they are and with a lot of flexibility, giving them different ways to engage with our content.”
The road to the future
At the time Disney was considering a push into streaming, Netflix was gaining viewership and spurring consumers to cut the cord from their traditional cable-TV viewing, threatening not only premium cable revenues but all home entertainment revenue, including high-margin DVD and Blu-ray sales. In 2010, consumer home entertainment spending on physical media was $10.3 billion, according to DEG. In 2023, that total was down to $1.6 billion.
“There’s a big component of revenue that essentially disappeared for studios, Daniel Loria, SVP content strategy and editorial director at Box Office Pro, told TheWrap. “I don’t think studios ever went into the streaming conversation to address an issue that they had found in theatrical. It was a necessary step to plug a hole on the boat that was basically created when the home entertainment sales started dissipating.”
Linear television’s share of TV viewing fell below 50% for the first time last August. Streaming made up a record 39% of viewing, compared to 22% for broadcast and 28% for cable, according to Nielsen.
The London-based research firm Ampere Analysis has predicted that streaming revenues could overtake pay TV revenues as early as the third quarter of 2024, bolstered by recently launched ad-supported offerings.
That poses a huge challenge, since for most of the major studios traditional linear television still represents a large chunk of overall revenues, but less and less of their profits. Paramount Global’s TV Media division, for example, accounted for 68% of the company’s $7.69 billion in revenues in the first quarter, with WBD relying on linear for 51% of its $41.32 billion in revenues.
Paramount’s linear pressures combined with ongoing streaming losses prompted S&P Global to downgrade the company’s credit rating to junk status in March, and Moody’s warned on Tuesday that it may follow suit.
At first, the studios were content simply to license their movie and TV content to Netflix, which needed to fill its pipeline to keep scaling the business. But as cord-cutting accelerated, by around 2017 they realized they needed to plan for a streaming-dominated future.
Some executives, like Mayer, clamored for a disruptive approach, figuring that consumers were declaring by their actions that they wanted to enjoy more content at home. Movies seen in theaters would increasingly be reserved for big-budget tent-pole action films —including a heavy dose of superhero fare — where an elevated experience, with stadium-like seating and Dolby-infused sound systems, would better justify the ticket (and concessions) price.
Mayer said that Disney’s leadership had not counted on the decline of theatrical revenue when deciding to pivot to streaming.
You could just taste it. This is going to transform our company, transform the industry, and our shareholders are going to massively benefit from it.
Kevin Mayer, former Disney executive , on the push into streaming
“We weren’t thinking at the time that we would change or disrupt the theatrical experience,” Mayer said.
“There was a lot of belief at Disney and elsewhere that theatrical was going to shift in any event,” he continued. “Streaming was just a manifestation of the fact that authority had shifted dramatically from producers and distributors to consumers. And it was quite clear that consumers preferred watching a lot of these movies at home than in the theaters. In my view – and shared by many — Hollywood had this paternalistic attitude that we decide where people see movies.”
So, Warner Bros, Disney, NBCUniversal and Paramount all began to create streamers from the ground up, with Disney acquiring a majority stake in Hulu in 2019. (It first launched publicly in 2008 as a joint venture between NBCUniversal and News Corp.)
The one outlier was Sony, which went the route of being an arms dealer — licensing its content agnostically to all the streamers — which allowed it to be nimbler, Benes said.
“They don’t throw away money at a streaming service,” Benes said of Sony. “Instead, they profit off other legacy companies trying to compete with the new kids. They license the hell out of ‘Spider-Man’ for good reason.”
Sony had dabbled in streaming in 2015 with a service called PlayStation Vue. It also owned an even older platform, Crackle, which it sold in 2019 to Chicken Soup for the Soul Entertainment. (Crackle never accrued a serious subscriber count or received a significant investment in original content.)
In late 2019, Sony revealed it would shut down PlayStation Vue to focus on its core gaming business. It cited a “highly competitive” industry and “expensive content and network deals” that had been “slower to change” than expected. Since then, the studio has said it does not plan to create a general entertainment streaming service, though Sony does control the anime-focused streamer Crunchyroll through a joint venture with Japan’s Aniplex. Crunchyroll has over 13 million subscribers and has been described as a “top growth area” for Sony Pictures, according to CEO Tony Vinciquerra.
In April of 2021, Sony doubled down on its strategy by striking a deal with Netflix to release the studio’s theatrical titles on the streaming service six months after they hit the big screen. As other studios began building their streaming plans, “It did become clear at a certain point that many companies were going to lose many billions of dollars beating each other’s brains out,” Sony chairman Tom Rothman told The Wall Street Journal.
Big Tech got in the streaming game as well, but with different motivations. Looking for another way to market their consumer products and later seeking Hollywood prestige, Apple launched SVOD streamer Apple TV+ in 2019, and Amazon continued to expand its video-on-demand offering, which started in 2006 in the U.S. as Amazon Unbox. In 2011, the service became a perk for Prime members, offering access to 5,000 movies and TV shows, and it later was rebranded as Prime Video.
Currently, Prime Video boasts 200 million monthly viewers, including 115 million in the United States. The tech giant has not reported the streamer’s metrics on a quarterly basis. But Amazon CEO Andy Jassy said in February that the company has “increasing conviction that Prime Video can be a large and profitable business on its own.” AppleTV+ has offered no insight into its profitability or subscriber figures — Apple lumps it in the results of its services division.
Project Popcorn and the post-pandemic theatrical shift
In 2021, after the pandemic had shuttered theaters throughout the world for the better part of a year, it wasn’t clear that the theatrical industry could recover.
Complicating matters, China, the second-largest market for American films, continued to scale back on the number of U.S. films it exhibits in theaters to prioritize its growing local film output. In 2019, U.S. films earned $3.3 billion at the Chinese box office, or a 36% share. That plummeted to $1.2 billion, or about 16%, in 2023, Sony noted in a presentation.
Each studio took a significantly different approach to how it released films, resulting in a wide range of strategies. In December 2020, then-CEO of WarnerMedia Jason Kilar abruptly dumped the studios’ traditional movie release strategy, moving instead to release all 17 of Warner’s 2021 theatrical films simultaneously in theaters and on HBO Max. The strategy was dubbed “Project Popcorn,” and it was partly viewed as a temporary but necessary move because of the uncertainty inflicted on the theatrical market by COVID-19.
But it was also a choice that suggested Kilar was moving Warner decisively into a digital future that sacrificed current-day revenue for future state streaming profits, and it rankled top talent like Christopher Nolan and Denis Villeneuve in the process.
Universal deployed a dynamic windowing strategy and deals with movie theaters that continues to this day, and it has also leaned into Premium Video On Demand (PVOD).
Disney’s plan has been to release films on digital rental roughly 60 days after their release in theaters, followed by a release on Disney+ about 100 days after theatrical release. It started with the release of “Avatar: The Way of Water” in theaters in December 2022, one month after the ousting of Bob Chapek as CEO.
Before the pandemic, Chapek experimented with day-and-date PVOD releases on films like “Mulan” and full pivots from theatrical to streaming-exclusive titles like Pixar’s “Luca” and “Turning Red.” Except for Disney subsidiary Searchlight Pictures, the studio has for nearly a decade focused almost entirely on big-budget films with production price tags of $200 million or more.
Insiders at Disney say that current CEO Bob Iger sided with executives in the company that favored a renewed dedication to theatrical with firm windows, seeing that model as the key to turning its films into franchises that spawn years of downstream ancillary and theme park revenue.
Disney did not respond to a request for comment for this story.
Universal, with a more varied slate of films in terms of genre and budget size, has made PVOD a significant element of its theatrical strategy since the studio pulled “Trolls: World Tour” out of theaters in the early days of the pandemic. Universal settled a dispute with AMC Theaters with a windowing deal, later signed by other theater chains, that gave the studio the option to release a film on PVOD as early as 17 days after theatrical release if the domestic opening weekend earns less than $50 million. If it clears that mark, the PVOD window extends to 31 days.
The impact such PVOD windows have had on the box office has been debated. Films that get released on PVOD at the 17-day mark, like the recent flop “The Fall Guy,” are not seeing a major drop in theatrical revenue afterwards. Still, some exhibitors who spoke to TheWrap said they’re concerned that the practice may train audiences to expect that certain films, even at a premium price, will be available in their living rooms faster — and that may factor into their decision on how they see an upcoming film that interests them.
“My worry is that if there’s another film like ‘Fall Guy’ that isn’t a sequel but is getting good reviews, they’ll think, ‘Well, it will probably come out at home in a couple of weeks’ and then they’ll see it that way, maybe with some friends,’” said one theater executive who spoke anonymously. “The theaters get a cut of that, but we lose out on any concessions they would have bought.”
Insiders at Universal say that “optionality” is at the core of their strategy. They continue to orient the marketing strategies for all their films around encouraging audiences to see them on the big screen, while maximizing potential revenue among those more disinclined to buy tickets than before the pandemic.
Three years later, the differences between studios’ strategies aren’t as stark. There’s widespread agreement that day-and-date doesn’t work and that the box office needs to be rebuilt. But there’s also a general consensus that the moviegoing habits that helped push the domestic box office to $11 billion per year in the 2010s aren’t coming back.
How exactly to work around those new habits is something the major industry players can’t agree on, because the gaps in theatrical output caused by the pandemic and the double strikes have muddled the data.
The path forward
Most of the streamers have yet to reach profitability in even one quarter, let alone two in a row. To try to turn those businesses around, the studios have been cutting costs by laying off workers and removing content from the platforms.
Warner Bros. Discovery reported an $86 million profit in its direct-to-consumer business in its latest quarter, though that included traditional HBO cable subscriptions in the results. WBD is targeting $1 billion of streaming profit in 2025. Disney has said it’s on track to reach streaming profitability by the end of fiscal year 2024. Paramount is aiming for domestic profitability in fiscal 2025. Peacock has offered no timeline.
Further exacerbating these challenges are heavy debt loads and tumbling stock prices. Disney, with a market cap of $176.9 billion, has seen shares climb 10% in the past year, but fall 31% over the past five years. Shares of Warner Bros. Discovery, which has a market cap of $17.9 billion, have plunged 43% in the past year and 70% since the April 2022 merger. Comcast, owner of NBCUniversal, has a market cap of $147.2 billion, and has watched its stock slip 10% in the past year and 15% in the past five years. And shares of Paramount, which has a market cap of $8.1 billion, have fallen 29% in the past year and 78% in the past five years.
By comparison, Netflix shares have soared 55% in the past year and 83% over the past five years. The company’s market capitalization sits at $295.5 billion, up two-and-a-half times from 2018. Netflix has $13.2 billion in long-term debt, compared to Paramount’s $14.6 billion, Warner’s $39.1 billion, Disney’s $39.5 billion and Comcast’s $94 billion.
Even for Netflix, the road to streaming success has delivered some speed bumps. In April of 2022, Netflix’s first sequential loss of subscribers in over a decade sank its stock to its lowest levels in more than four years — flashing how tenuous streaming viability appeared to Wall Street.
Lately, Netflix’s competitors have been hiking subscription prices, licensing more content and opting to team up through bundles — or offering their streaming services through deals with pay TV providers like Spectrum owner Charter Communications or telecoms like Verizon or T-Mobile.
Peacock, Apple TV+ and Netflix will be made available through Comcast’s StreamSaver bundle, while Disney+, Hulu and Max are teaming up for a bundle launching this summer. Paramount’s new co-CEOs have said they are in talks with other streamers and technology platforms — including WBD’s Max, according to CNBC — about packaging struggling Paramount+ in a joint venture or strategic partnership.
A recent spurt of theatrical grosses from two animated films won’t totally alter an expected down year at the box office in 2024. But next year a horde of big films will give Hollywood more data to finally understand whether the new lower box office is the new normal — or just a blip on history.
Pachter, for one, believes that even as they continue to chase Netflix’s tail, the major studios could still opt to dramatically change course. He suggested they create a three-year window for streaming, put only catalog TV and older movies on their streaming platforms, and maintain the theatrical and broadcast windows.
“We’ve reached a point of no return for studio heads to understand this, as they are hopelessly clueless,” Pachter said, “but a new generation of studio leadership can salvage this.”
The post The Studios Followed Netflix Into a Streaming Future, but Left Theatrical Behind appeared first on TheWrap.