Covid-19 Disruption Experiments

What will become of the movies?

Welcome to Plugging the Gap (my email newsletter about Covid-19 and its economics). In case you don’t know me, I’m an economist and professor at the University of Toronto. I have written lots of books including, most recently, on Covid-19. You can follow me on Twitter (@joshgans) or subscribe to this email newsletter here.

Covid-19 has forced many desperate businesses into ‘forced experimentation.’ Faced with an acceleration of trends, these businesses have no longer had an excuse to put off facing those changes and working out how they are going to face those challenges into the future. For instance, I suspect that airlines and hotels will have to grapple post-covid with what business travel looks like going forward. To be sure, I think people have an appetite for some travel but I suspect they will never have an appetite for the levels of pre-Zoom business travel.

One of the most interesting of these industries is the movie business. That industry has been remarkably stable. It started with viewing in cinemas as that was the only option and then, with TV, it continued with that model, delaying TV releases — first on broadcast and then on video/DVD/OnDemand — until after cinema runs. The success of the cinema run was paramount even if the importance of it for the overall earnings from a movie had relatively diminished. It was seemingly doomed each time but amazingly, people kept going to the cinema. They kept paying for over-priced popcorn. There was something about it. Frankly, I am no fan of crowds and the like but I miss the event of going out to the movies. It was a focal point. An excuse. And if done right, a memorable social experience, especially for families.

The last movie I saw in a cinema was Little Women. We saw it on Christmas Day. It is our big family tradition going to see a first release on that day. We have done it for 20 years now. The one before that was The Rise of Skywalker but, like much of 2020, I have spent the year trying to forget that one. (In retrospect, it was an ominous forewarning of the disturbance that was coming). But I suspect that in a normal year we would see 8 or more films at the movies.

I know for a fact that, if a movie is available for viewing at home, I won’t go out to see it. Even if it were the same price, it would have to a pretty special movie to get me out. I suspect it is the same for most. This is the fundamental challenge of getting people to go to movies. It is not competitive on equal terms. Thus, to make it competitive, movie distributors have had to choose to exclude it from equal terms competition for a time. It is a fundamental ‘tenet’ of the industry.

The tenet was protected. To understand what might happen without cinemas, you needed a situation where cinemas were removed from the equation. The industry could no more choose to do that than I could choose to tear off my arm. It was not something they could risk. But Covid-19 changed that. The arm was ripped out and the industry was shut down.

During the whole of 2020, the industry tried to hang on. It converted cinema releases to on-demand releases. Disney tried a plan whereby it bundled a new release with Disney+ and saw if people would pay a premium for that. We don’t quite know what became of that but we do know that Disney is still hoping for cinema releases in 2021.

But WarnerMedia is not. First, they announced that Wonder Woman 1984 would be released on HBO Max on Christmas Day. That is only for the US. The rest of the world would get a cinema release which, for us, means, nothing as the cinemas are all closed. But then they decided to move their entire 2021 release schedule to HBO Max and to (essentially) give up on cinemas for the year. (Actually, not totally, it will be released simultaneously in cinemas). If you are in the US and subscribe to HBO Max, you can see all of their movies including some very big planned releases like Dune.

In the battle to see who the major streaming survivors will be, HBO has struggled. Unlike Netflix, already well established, and Disney+ on its way to getting there, it is the pure player who faces a big uphill battle extracting itself from the cable legacy. It has none of the dual motives of Amazon and Apple in this regard to help the transition. Finally, that cable legacy is preventing it from pursuing a world-wide strategy as it remains locked into ill-thought-out agreements with local monopolists.

This is also what makes WarnerMedia’s move so interesting. It could have just waited it out. Done some releases to boost HBO Max and stockpiled assets for 2022 and beyond. In doing that, it would have learned a little but not a lot. It would have been experimenting with one hand tied to the past.

Instead, committing to a full HBO Max release for 2021 changes the experiment. It is now saying to customers, this year, don’t even think about ‘waiting for movies to come out in cinemas.’ We are going to pretend movie theatres do not exist and we are going to do what we would do in that situation. The idea is to get the clearest possible signal of what the future may look like and evaluate what it means for movie earnings.

That signal is, of course, modified by the tenet. After all, if the goal is to boost HBO Max to a new level and work out if it is a long-term player worth making multi-year bets on sustaining, people have to subscribe and stay subscribing. No more of the just coming in for Game of Thrones stuff here. No more collecting of blockbusters for a few months and then subscribing for a month. Cable TV and Netflix showed what it means for people to just subscribe and then not worry about it as a discretionary expense. That is surely the aspiration for HBO. If that works, they can fight for a global model.

The modified tenet will be that movies will be released on HBO Max for a month and then pulled before going to other distribution channels. In other words, HBO Max is now the cinema release and it is time-stamped. Want to see it all, keep subscribing. With a good release schedule, the bet is that people will subscribe and then forget about unsubscribing. In other words, the primary thing that WarnerMedia wants to know is how valuable a customer is. That will justify the acquisition cost.

What might be the outcomes of this experiment? One possibility is that HBO Max becomes Netflix in size and WarnerMedia pull out of cinema releases altogether. The other possibility is that it doesn’t and WarnerMedia try something different in 2022. We don’t know what will happen. It is kind of exciting really.

Covid-19 has forced businesses into experiments. But there are piecemeal experiments and then there are disruptive experiments. WarnerMedia took a deep breath and decided to launch a proper disruptive experiment. We will all learn from it.

What did I miss?