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November 2020

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Maximizing the Profit Potential of Digital Movie Sales and Rentals Through Smart Windowing

Digital movie sales and rentals have soared during the COVID-19 pandemic, with digital movie distributors such as ROW8 benefitting from the fact that they get first-run movies and other filmed content before they show up on Netflix and the other popular subscription services.

Indeed, with people encouraged to stay home, digital film sales and rentals have never been stronger. Consumer spending in 2020 on digital movie sales, known as “electronic sell-through,” or EST, was up 15.8% to an estimated $2.2 billion, according to DEG: The Digital Entertainment Group, while digital rental, in which consumers pay a fee to have access to a movie for a 48-hour period, rose nearly 24% to an estimated $1.8 billion1.

ROW8 stands apart from such high-profile competitors as Google Play, Apple TV, and Vudu/FandangoNow because of a unique and patented geo-sensitive technology platform that helps content owners – the big Hollywood studios as well as smaller, independent film distributors – to coordinate the digital availability of their movies with theaters. And since its platform was designed for premium video-on-demand (PVOD), ROW8’s movie distribution technology also offers the highest-possible security, which has always been a key concern in Hollywood.

In addition, ROW8 offers consumers two incentives the other transactional video-on-demand (TVOD) services don’t: dynamic pricing capability tied in to day parts and demand, a welcome respite to consumers from the one-price-fits-all approach of the other services; and a “Movie Love Guarantee,” which gives customers the chance to swap out movie rentals up to 30 minutes into the viewing.

Geo-Locator: ROW8’s ‘Ace in the Hole’

Based in Los Angeles, ROW8 was founded in 2015 by George Christoph and Jasmina Christoph, serial entrepreneurs, startup founders and investors.  A short time later, John Calkins, an entertainment industry veteran who has held key digital distribution posts at Sony Pictures Entertainment and Warner Bros., as well as a stint leading studio negotiations for AMC Theatres, was brought in as CEO. The company launched with exclusive U.S. digital distribution rights to foreign and independent films, but in 2019 pivoted toward the mainstream through the signing of licensing deals with four major studios: Paramount Pictures, Sony Pictures, Universal Pictures and Warner Bros.  Disney/Fox licenses were added earlier this year.

The founders describe their motivation for launching ROW8, and the development of the geo-locator function, which the trades are calling ROW8’s “ace in the hole”:

“As a long-time film lover and technology enthusiast, it occurred to me that the issues preventing new films from coming to the home sooner were far more of a business nature, rather than technical,” George says.

“As a marketer, my starting point is always the consumer’s wants or needs,” Jasmina adds. “For one reason or another we can’t always make it to the theater, and not having access to a new film for three months after the theatrical release felt quite unfair to the movie-loving consumer. A the same time, bearing in mind the industry dynamics, we wanted to come up with a win-win solution that is mutually beneficial for studios, theaters and the consumer.”

“We came to the conclusion that there is a need for a neutral digital platform able to facilitate a geographically sensitive approach, that respects individual theater trade areas, to the current business model. The idea was to build a streaming platform that can relate individual consumers to their nearest playing theater location. We know how close a customer is to their local theater, and we can choose what movies they can see as available at home, based on what is playing in that theater in real time. We can geo-fence the local trade area for certain movies, or share the in-home revenue with the nearest theater – it all depends on the terms of the partnership agreement with the local exhibitor.” 

It works like this: In areas where a new movie is playing theatrically, digital sales or rentals can be blacked out, but in areas where theaters are dark or a movie is either not showing or has concluded its run, consumers will be able to buy or rent the film digitally through the ROW8 platform. Exhibitors and distributors can negotiate market-specific trade arrangements, based on exhibitor marketing support and the degree to which the home availability potentially is near a playing location.

“Our technology is already patented,” George Christoph says, “and we believe that this business model is particularly valuable for the smaller to mid-size films, as those have struggled to find a path to theater over the last few years, and even more so now, during the pandemic.”

ROW8’s patent covers the availability of a film for digital viewing based on the customer’s proximity to a theater where the same film is playing. Issued in 2019, this patent opens the door to exhibitors taking ticket sales beyond their specific physical locations, while still addressing the local nature of the movie-going marketplace.  ROW8 enables this by tracking what’s playing on every screen in the United States. When a ROW8 customer pulls the list of available movies, that list is tailored to reflect any local market restrictions that may be in place based on the distributor and exhibitor agreement. This also opens up the potential for revenue-sharing between the distributor based on actual, local market potential attendance impacts, rather than via some national blanket arrangement.

With windows on shaky ground due to the shuttering of movie theaters during the pandemic, Calkins adds that he believes ROW8’s approach is more relevant than ever.

“As in many business areas, we continue to see the unfortunate pandemic as an accelerant for digital behaviors,” Calkins says. “Certainly, there is more of a spotlight on digital consumption, and an acceleration of consumer shift to OTT services.  But even more interestingly, we think the market challenges are really forcing the discussion between studios and theaters about how to best create value for films through integrating windowed theatrical releasing, and eliminating any ‘black periods’ for consumer availability, which we think is a relevant question at a local level, not just a national one.”

Bigger movies, even tentpoles, can be blacked out while they are playing theatrically, but become available for digital purchase or rent sooner in areas where theaters are dark – or as soon as they conclude their runs, which are typically a lot shorter than the traditional three-month window. As a result, studios can maximize the profit potential by capitalizing on awareness earlier in a film’s life cycle, instead of having to launch a second marketing campaign all over again, from the ground up, when the film is finally cleared for home release.

“The inefficiency of having films largely out of theaters in 30 days but, somewhat arbitrarily, not allowed in homes for 90 days, has really come under scrutiny,” Calkins says. “And having theaters closed has put everything on the table, as evidenced in particular by the recent deals between Universal and two of the top three exhibitors, AMC and Cinemark.”

This “inefficiency,” he adds, “is only magnified when we look at the smaller films.” Independent, art-house films don’t generally get wide theatrical exposure, and even their limited runs are concentrated in larger metropolitan areas, since there are few, if any, art-house theaters in rural, less-populated regions of the country.

“There really are two different flavors,” Calkins says. “One is blacking out availability of a wide theatrical release, by market, if it’s in theaters there, or if theaters are open. But the other is for smaller films that aren’t getting a wide theatrical release. We can protect their theatrical platform release, but still open up availability, digitally, in other parts of the country they might not otherwise get to. Take a small, art-house film – there might be virtually no art-house theaters in Montana, so the film will be available digitally there on day one. But in a market like Los Angeles or New York, the film will be blacked out until much later in its run.”

Dynamic Pricing: Tailoring Rental Fees to Demand

Unlike other TVOD services, ROW8 doesn’t limit itself to the one-price-fits-all model. Typically, TVOD services rent newly released movies for $3.99 or $5.99, regardless of the day or time. At ROW8, prices are reduced during off-peak viewing hours, such as earlier in the day or on weekdays,  with ROW8 managing the access period for the consumer to watch the movie to prevent consumers from taking advantage of the low price but then watching the film during the peak hours. For example, ROW8’s matinee pricing limits the consumer period to a three-hour window, with the rental price reduced by $1.

“We’re seeing great traction in our off-peak business through offering a fair discount,” Calkins says. “And the fact that even in those off-peak opportunities some consumers are still selecting the full rights option, a 48-hour window, suggests that consumers are valuing the flexibility that this pricing approach is affording them.”

‘Movie Love Guarantee’: Mitigating the ‘Switching Cost’

ROW8’s Movie Love Guarantee was developed with the understanding that in a transactional video environment consumers have an inherent “switching cost” that might make them less likely to rent unless they are already familiar with the film.  With the Movie Love Guarantee, ROW8 has taken the risk out of renting a new movie. Consumers can watch any movie for up to 30 minutes, and if they aren’t satisfied, they can switch to another movie at no additional cost.  

“We had performed extensive market research about inhibitors to rental and what features consumers might be most excited about, and right at the top was the idea of not being trapped with a title that wasn’t to their liking,” Calkins says. “And that gave us the idea of the Movie Love Guarantee.”

Security: Forensic Watermark Capability

ROW8 is the only TVOD service in the United States to have already enabled the forensic watermark capability that is expected to be the key component of the security required for releasing titles early by the studios.  With the forensic watermark, ROW8 can create a unique session ID that is invisibly embedded into the film playback, and traceable to the file and the individual consumer, even if the title has been camcorded and then redistributed over the web.

“We wanted to get out in front of where the studios were likely to go in terms of new security for their most valuable properties, and also took note that the forensic watermark provided both a deterrent and a way to identify and counter potential leaks,” Calkins says. “And, as a server side implementation, not negatively impact the potential reach of the content to consumer devices and households.”

The forensic watermark, developed by a third party, works like this:  Two discrete copies, A and B, of each movie file, at every bit rate, are created.  The playback by the consumer is served by a randomized mix of those two copies in a unique pattern that is captured in a transactional manifest, unique to that consumer. Should that film playback be captured in any fashion, including camcording, by the consumer, the manifest reveals exactly which session and consumer account originally received that unique playback of the film.  All of this is done server-side, with no incremental burden of, or requirement for, extra consumer hardware, such as a proprietary set-top box (STB).

Timing: PVOD and the Pandemic

With the COVID-19 pandemic, the studios’ long-held dream of premium video-on-demand, or PVOD, quickly became a reality. With the mid-March 2020 closure of movie theaters due to stay-at-home orders and a ban on public gatherings, studio executives no longer had an avenue for first-run movies2. PVOD, in which a movie becomes available for home viewing at the same time as it begins showing in theaters, or shortly thereafter, was the only way for Hollywood to recoup production expenses. The traditional model, in which films only become available for home viewing 90 days after their theatrical debut, was no longer viable.

As soon as theaters closed, studios began pushing up their home release through digital channels and on disc. Universal Pictures struck the boldest move, making its entire theatrical slate available for immediate home viewing3. Trolls World Tour was the first big film to premiere in homes rather than on the big screen, and the results were strong enough that more tentpole releases followed, including SCOOB! from Warner Bros., the comedy sequel Bill and Ted: Face the Music and Disney’s live-action remake of Mulan4.

At first, exhibitors balked. AMC Theatres, the country’s largest chain of movie theaters, initially vowed to boycott all future Universal Pictures releases5. But in July, AMC and Universal announced a landmark distribution deal for the studio’s new release movies6. 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 split. Three months later, AMC CEO Adam Aron called the arrangement a success7.

In a June 2020 report, a leading Wall Street analyst, Robert Fishman of MoffetNathanson, put things in perspective. While studios have long called for shorter theatrical windows, he wrote, exhibitors have until now been able to stand their ground. However, he wrote, “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.”8

Six months later, this “balance of power” shifted further with the bombshell announcement by Warner Bros. that it would simultaneously release all 2021 movies in theaters and on HBO Max.9 This includes 17 high-profile films, beginning with Wonder Woman 1984 and including the Dune remake, The Matrix 4 and The Suicide Squad. The move is believed to have been designed to prop up the studio’s HBO Max streaming service, but further clears the way for other studios to bring films into the home faster.

Until a COVID-19 vaccine is widely distributed, theaters in key markets, including California and New York, are likely to remain closed, while in other areas they are operating with reduced capacity. A revenue-sharing pact with studios for digital distribution provides exhibitors with a steady stream of revenue, and ROW8 is already set up to act as an enabling platform.

Post-Pandemic: A New Business Model?

Observers expect the concurrent release of movies in theaters and PVOD to continue even after the COVID-19 pandemic subsides. Even before the virus, theatrical admissions have been declining for nearly 20 years, with revenue holding up primarily because of steady increases in movie ticket prices, concessions, and capital investments in the movie-going experience. The National Association of Theater Owners (NATO) in January 2020 reported that the number of movie admissions in 2019 declined nearly 5% to 1.244 billion10. “Although the 2019 tally was slightly higher than the 1.236 billion recorded in 2017, the totals for both 2017 and 2019 rank as the worst years for movie ticket buying since 1995,” Deadline observed at the time. Variety noted that the 2019 figure was “the second-lowest admissions number during the current century,” and that theatrical admissions, after peaking in 2002 at 1.57 billion, have been declining ever since11.

ROW8 gives consumers more choices as to where to see a movie without hurting theaters, since they have the potential to share in the revenue and also protect their local trade areas.

“People will still go to theaters on date nights or to see a hot new event movie on the giant screen,” Calkins says. “The theatrical market might shrink a bit in terms of overall size – admissions, after all, have been trending downward for the last 20 years – but there is no reason to believe that all of a sudden everyone will want to stay in their living rooms 24/7 indefinitely, particularly since a vaccine is already available. Talent, too, will still want to see their work on the big screen, and having that distribution capability as a major studio will be a key point of differentiation over the large streaming services.

“The only question, then, is how do theatrical windows again create the best economics for films – not just for tentpoles but even more so for the smaller ones that drive frequency and product breadth? That’s where a more dynamic approach to making films available to home audiences could be a key capability for both distributors and exhibitors.”

Footnotes

1“DEG: Home Entertainment Spending Surges in Q3 of 2020,” Media Play News, November 11, 2020, accessed on DEG website at DEGOnline.com

2“AMC, Cinemark Close All U.S. Theaters as Cinemas Across the Country Go Dark Amid Coronavirus,” The Hollywood Reporter, March 16, 2020

3”NBCUniversal Breaks Theatrical Window, Will Make Movies Available on Demand Immediately,” The Hollywood Reporter, March 16, 2020

4“All the Hollywood Films Arriving on Demand Early Because of the Coronavirus,” The Wrap, June 18, 2020

5“AMC, largest cinema chain in US, announces boycott of Universal,” The Guardian, April 29, 2020

6“Universal and AMC Theatres strike a deal allowing new films to play at home sooner,” CNN.com, July 28, 2020

7”AMC Theatres CEO: ‘We Came Out Ahead’ on ‘Come Play’ PVOD Release,” Media Play News, Nov. 2, 2020

8“U.S. Media: Broken Windows & Empty Seats: The Future of the Film Industry?,” MoffettNathanson.com, June 1, 2020

9“Warner Bros. Releasing All New Movies in 2021 on HBO Max and Theaters on the Same Day,” Media Play News, Dec. 3, 2020

10“U.S. Movie Ticket Sales Dip Nearly 5% In 2019, Reflecting Competition,” Deadline, Jan. 17, 2020

11”U.S. Movie Admissions Plunge 4.6% in 2019 Amid Box Office Decline,” Variety, Jan. 17, 2020