February 1, 2021
After a year in which COVID-19 upended Hollywood, 2021 looms as one big question mark for home entertainment executives.
The pandemic accelerated the growth of streaming and made premium video-on-demand (PVOD) an economic and logistic necessity due to the closure of movie theaters. And despite the lack of fresh theatrical product, the transactional end of the home entertainment business flourished.
In 2020, films that would have been major theatrical releases — including Disney’s live-action Mulan, Universal/DreamWorks Animation’s Trolls World Tour and Warner Bros. Scoob! — hit PVOD first before moving on to other windows. Studios made the most of captive home audiences by seamlessly transitioning from PVOD to TVOD, and at the same time dug into their vaults and came up with creative ways to market catalog titles.
“COVID didn’t introduce new trends to entertainment, but it did accelerate what was already happening,” observes Jim Wuthrich, president of Warner Bros. Home Entertainment.
With a vaccine rollout underway, the big question is whether things will return to normal — or whether the changes have been so pronounced, so significant, that Hollywood will never return to its old ways. Whichever way the wind blows, industry executives say, the strides made by PVOD are unlikely to be reversed even once most of the country has been vaccinated and it is safe for theaters everywhere to reopen.
“COVID was clearly an accelerant to move more entertainment consumption to the home,” says Galen Smith, CEO of Redbox. “Event films will still be big theatrically, but there will be a push to accelerate consumers’ abilities to watch at home through PVOD and shorter overall windows — both digitally and on disc.”
He adds, “We don’t believe the theatrical model will return exactly as it existed prior to COVID. The evolution over the last year benefited consumers and content creators through the introduction of new products — and a number of them, like PVOD, are here to stay. PVOD has been a model the studios have wanted to add for many years, and I expect to see more PVOD releases in 2021. It’s another way to provide customers choice, which is good for them as well as for the industry.”
Dametra Johnson-Marletti, corporate VP of Microsoft Digital Stores Category Management, agrees. “I think many consumers will be excited to return to the theaters when the COVID risk is nearer to zero,” she says. “That said, I also think that PVOD is here to stay, particularly for titles that are not forecasted to be box office blockbusters, and for a certain segment of viewers.”
The mantra for home entertainment executives, then, is to keep their fingers on the pulse of the industry, and on the consumer, and be prepared for more changes as well as more uncertainty.
“What we saw in 2020 was an anomaly, but it also demonstrated our ability to pivot and continue to monetize our content through the distribution strategies and platforms that are available to us and that make the most sense,” says Bob Buchi, president of worldwide home entertainment for Paramount Pictures. “All of these options — including traditional theatrical distribution — will continue to co-exist in a post-pandemic world.”
“I feel strongly that we need to stop framing things as ‘normal,’ whether that’s ‘back to normal’ or ‘a new normal,’” adds Amy Jo Smith, president and CEO of DEG: The Digital Entertainment Group. “Our business is currently in an accelerated state of evolution, as the pandemic created the perfect environment for overdue experimentation with distribution models. Many studios are working within this unique opportunity to offer consumers new ways to consume content at earlier points in its lifecycle, and consumers have embraced the change. There is no replacement for the experience of seeing a movie in a state-of-the-art theater, but we expect content owners will continue to meet entertainment lovers wherever it is that they choose to consume new content.”
Similarly, streaming is likely to enjoy continued high growth rates. “Recent research from the NPD Group shows that the average U.S. consumer now relies on seven different streaming video services, up from five in April,” says the DEG’s Smith. “This is another case of the pandemic accelerating a trend that was already underway. It’s great that consumers have so many streaming options at different price points and offering different content. It’s the belief of DEG’s D2C Alliance Steering Committee that as consumers continue to customize their entertainment experience, subscription and ad-supported services will continue robust growth, as will large, mainstream services and those that offer more-specialized content.”
The transactional end of the business is perhaps the most fluid as 2020 gives way to 2021. Against all odds, the business didn’t collapse when the theatrical business did. But that doesn’t mean there weren’t some dicey moments — nor will it be all smooth sailing ahead.
“The Microsoft Movies & TV transactional service thrives mostly on new blockbuster content,” Johnson-Marletti says. “With new production shuttered for much of the year, and top content releases pushed to 2021, our TVOD business certainly felt some headwinds. Our team had to become very creative and scrappy as they worked with our studio partners to find unique avenues for growth. We had a multi-part strategy that included shifting more focus to our catalog by bringing forward a lot of the fan-favorites and classics for consumers to find more easily. We also focused on building great thematic and seasonal collections.
“Given the current state of the pandemic-related shutdown, and the related outlook through the first two quarters of calendar year 2021, I think we will likely expect much of the same, with some positive light starting to emerge in the late April to early May timeframe. The pervasiveness of vaccine adoption, the openness of the world (as it pertains to theaters), and new windows and rollouts will all be key inputs to how the back half of 2021 plays out.
“I definitely think the approach [we took in 2020] represents a viable set of tactics that will continue to serve our customers, partners and business well in the new year.”
With the continued erosion of disc sales in 2020 — combined consumer spending on Blu-ray Discs and DVDs was down about 26% from 2019, to a new low of $2.5 billion, according to Media Play News Research estimates — digital retailers will likely continue to stress the collectibility of digital movie sales, as they did with catalog product during 2020.
“It may not be widely known or understood, but in many ways digital movie collections offer a level of security, portability and confidence that discs cannot,” Johnson-Marletti says. “Your entire library can be accessed from almost any device, it travels with you seamlessly, and you never have to worry about damaged or lost discs. To the purest of collectors, the absence of tangible boxes may not fully satisfy, but, again, there are many benefits that outweigh the cardboard. Lowering the cost of entry and creating compelling promotions and offers that inspire first-time adoption could be a way to spur greater digital movie sales.”
Despite the emergence of PVOD and continued growth in streaming, some observers expect theaters to stage a dramatic comeback once most of the country has been vaccinated.
“As [Paramount studio chief] Jim Gianopulos pointed out in November, when theaters re-opened in Japan and China, audiences returned en masse, driving huge box office returns for films that were available,” Paramount’s Buchi says. “Clearly, windows and consumer behaviors are shifting, but the theatrical experience will endure.”
Even so, Buchi says, “each film and situation is unique. For some films, like Top Gun: Maverick and A Quiet Place Part II, the theatrical model is optimal. On the other hand, we found tremendous success with PVOD for Love and Monsters and Spell. Some films make sense for subscription streaming services. It is not one-size-fits-all and every film needs to be evaluated individually.”
Ultimately, he adds, “we will continue to explore new distribution models and opportunities to bring our content to audiences wherever and however they want to enjoy it.”
Warner’s Wuthrich agrees. “Consumer empowerment is good for the industry and our goal is to meet the fans where they are — theaters, OTT, digital, physical,” he says. “While fans may have a preferred channel, they often participate in many, such as going to the theater, subscribing to HBO Max and picking up the Blu-ray. The multichannel experience could be one movie or across different movies, depending on interest.
“One thing is certain: If we are successful in creating compelling stories, fans will continue to show up.”
Fans certainly did continue to show up throughout 2020.
“The overriding trend we saw in 2020 was consumers’ hunger for, love of, and engagement with entertainment content,” said the DEG’s Smith.
“When new releases slowed as a result of production halts and theater closures during the COVID-19 pandemic, consumers hardly missed a beat.
“They just expanded their viewing to include many catalog movies and TV shows, as well as discovering films that were independent productions or may have had limited prior release.”
The pandemic in 2020 accelerated two trends, declining movie theater attendance and a surge in streaming, that were already apparent long before the first reports of a strange new flu originating in Wuhan, China, began circulating in January, as thousands of industry executives descended on Las Vegas for the CES.
Two months before the World Health Organization’s declaration of a global pandemic led to the closure of movie theaters around the world, the National Association of Theatre Owners (NATO) in January 2020 reported that the number of U.S. movie admissions in 2019 declined nearly 5% to 1.24 billion, from a 2002 peak of 1.57 billion.
Studios had been pushing for shorter theatrical windows for years, maintaining that most movies had pretty much run their big-screen course after 30 days, much less than the 90 days that typically elapsed between a film’s theatrical launch and its availability for home viewing. Some top studio executives were even calling for simultaneous releases, with films becoming available for home viewing — albeit at a premium price — the same day as their theatrical bow. The stumbling block: resistance from exhibitors, who balked at any attempts, or even just talk, of cutting into their exclusive window.
But when theaters went dark in mid-March, exhibitor leverage disappeared, overnight. PVOD was no longer a strategic objective, but, rather, a necessity, as studios had no other way to recoup production expenses.
Universal Pictures struck first, immediately making its entire theatrical slate available for home viewing on March 16. Three weeks later, Trolls World Tour was the first big film to premiere simultaneously on PVOD and in the handful of theaters, mostly drive-ins, that remained open.
The results were strong enough that more tentpole releases followed, including Scoob! from Warner Bros., the comedy sequel Bill & Ted: Face the Music and Disney’s live-action remake of Mulan — which debuted on Disney+ as a “Premier Access” title for an additional charge.
At first, exhibitors balked. AMC Theatres, the country’s largest chain of movie theaters, initially vowed to boycott all future Universal Pictures releases. But in a June report, Wall Street analyst Robert Fishman of MoffetNathanson wrote that while exhibitors have until now been able to stand their ground, “this time is different in that all of the major studios … are likely to be more aggressive with windowing strategies. As long as multiple studios push forward with PVOD or some other form of window changes, the balance of power in favor of studios shifts even more in their favor and reduces the leverage the exhibitors have as they would be unlikely to boycott multiple studios’ upcoming releases.”
A month later, AMC and Universal announced a landmark distribution deal for the studio’s new-release movies, beginning in November. The agreement allowed Universal to distribute titles on PVOD three weekends (as little as 17 days) after their initial bow in AMC Theatres, in return for a revenue split. Four months later, AMC CEO Adam Aron called the arrangement a success, telling analysts on an earnings call, “On the only one of [six planned] PVOD movies that has been released as of yet, our analysis is that AMC [not only] came out ahead financially as we had modeled, but much better than some [analysts] had postulated or feared.”
In December, the “balance of power” Fishman referred to in his report shifted further with the bombshell announcement by Warner Bros. that it would simultaneously release all its movies through 2021 in theaters and on Warner’s new streaming platform, HBO Max, beginning with Wonder Woman 1984 on Christmas. The 17-film slate includes the new Dune adaptation, The Matrix 4 and The Suicide Squad.
The coronavirus pandemic also accelerated the push toward streaming, although subscription video-on-demand, or SVOD, had long been on a roll, with DEG: The Digital Entertainment Group reporting annual gains in consumer spending on steaming services of 22% to 45% for the past 10 years.
Part of this was due to the launch of several new high-profile services competing with established leaders Netflix, Amazon Prime Video and Hulu. Two launched in November 2019 — Disney+ and Apple TV+. This year saw the rollout of two more high-profile services, WarnerMedia’s HBO Max and NBCUniversal’s Peacock.
Fears that the proliferation of subscription streaming services would lead to cannibalization have been unfounded. Instead, with captive audiences choosing, or ordered, to stick close to home due to the raging pandemic, it’s truly been a case of the more the merrier.
Disney+ is far and away the biggest success story, with the Walt Disney Co. in December 2020 announcing that its branded subscription service had reached 86.8 million subscribers. Meanwhile, Netflix was no slouch, quieting critics with outsized subscriber growth projected at 34 million additions through the end of this year and double-digit revenue gains.
In November 2020, Hub Entertainment Research found the average person was accessing 60% more streaming video services in 2020 than they were in 2018, while 90% of households with children living at home subscribed to more than one OTT video service.
“We’ve seen the number of providers per [survey] respondent rise to an all-time high during the pandemic,” analyst Jon Giegengack said in a note at the time. “The average respondent had 4.8 services. That was going up anyway, but the pandemic turbocharged it.”
Aside from the crash of the theatrical business, the emergence of PVOD and the near-saturation of subscription streaming, 2020 will be remembered as a year when home entertainment marketers, with no fresh theatrical product, managed to survive and even thrive.
A month into the pandemic, in April, Warner’s Wuthrich said home entertainment transactional spending shot up 38% since mid-March.
“Our digital sellthrough business [has] been up over 100% each week since safer at home began,” he said, speaking at the virtual DEG Expo.
The trend slowed as the country began to open back up, but in August the DEG reported that consumer spending on digital entertainment purchases and VOD rentals in April, May and June shot up 54%. Even nine months into the year most studio home entertainment divisions reported year-over-year gains in revenue despite virtually no theatrical product.
“We kept our content pipeline flowing by leveraging our vast catalog and releasing many remastered 4K UHD titles, both physically and digitally, including Beetlejuice, The Goonies, Full Metal Jacket and 300,” Wuthrich said. “The ongoing demand for classic titles in 4K for at-home viewing will continue to make our catalog business a relevant and profitable area for us.”
The DEG reported electronic sellthrough spending in 2020 was up 16% over 2019 to an estimated $3 billion, while electronic rental was up nearly 18.3% to an estimated $1.8 billion. Only disc sales were down, with DEG estimating combined consumer spending on Blu-ray Discs and DVDs slipped nearly 25.6% in 2020 to about $2.5 billion — a not uncommon decline, given the normal transition to digital, but one that observers say might have been compounded by store closures due to regional bans on “non-essential” retail.
The DEG’s Smith notes that during the second quarter, “at the height of new stay-at-home orders across the United States, consumer spending rose 57% on electronic sellthrough. This tells us that consumers are interested in building their digital collections, and that collecting favorite films provides a great value, particularly for families. Electronic sellthrough is also a model undergoing some really interesting innovation and experimentation in terms of pricing and release windows.”
Paramount’s Buchi listed some of the changes at his studio in 2020. “We successfully launched our first PVOD releases, shifted our emphasis to catalog titles, and maximized our distribution deals with companies like Saban, Miramax and Romulus, which has greatly helped us to meet consumers’ demand for new entertainment while they also discover old favorites,” he said. “And because of the year’s unique circumstances, we exceeded our revenue projections.”
The effects of the pandemic, he added, “have magnified the shifts across all industries — from telemedicine and online education to flexible work arrangements and the entertainment industry. The transition to digital ownership has been steadily growing amid the explosion of streaming platforms, all of which has opened up new ways for consumers to enjoy content — a trend that is certain to continue.
“What we saw [in 2020] was an anomaly, but it also demonstrated our ability to pivot and continue to monetize our content through the distribution strategies and platforms that are available to us and that make the most sense. All of these options — including traditional theatrical distribution — will continue to co-exist in a post-pandemic world.”