Explanation of WB’s 2021 film historic deal for HBO Max

On Thursday, the Warner Bros. Picture Group announced that it has committed to releasing its list of films for 2021 via a unique, consumer-centric distribution model in which Warner Bros. will continue to show films in theaters across the country. world, adding a one-month exclusive access. period on the HBO Max streaming platform in the United States to coincide with the national release of the film. The hybrid model was created as a strategic response to the impact of the ongoing global pandemic, particularly in the United States

In an increasingly competitive world battle that has seen deep streaming services trade gladiatorial blows, WarnerMedia has just made the most seismic shift in modern entertainment. This is where Dorothy unequivocally realizes that she is no longer in Kansas. Parent company AT&T saw its shares soar in after hours trading after the announcement, while shares of major film exhibitors fell 15%.

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In a first analysis, a lot has changed and a lot has become clearer. In the immediate aftermath of this groundbreaking industry pivot, it’s natural to be scratching your head while you work it out. Here are the answers to the most pressing questions facing the entertainment industry as it takes its boldest step in the streaming revolution.

https://www.youtube.com/watch?v=bGy16GQHz-g

How did WB come to this point?

Amidst theatrical closures enforced by the global coronavirus pandemic, film studios have been experimenting with different release strategies. This coincided with the evolution of WarnerMedia’s film strategy for HBO Max. In the beginning, the company started putting original films on the platform that critics weren’t thrilled with. Yet consumers have not responded to this lower level content.

Warner Bros. attempted to emulate Universal’s premium video on demand success with Trolls World Tour sending the like suitable for families Scoob! to PVOD. But the study did not follow up on this with other significant PVOD thrusts, suggesting that the results did not meet their internal expectations.

“They’ve narrowed down their options and now they’re here,” David Offenberg, associate professor of Entertainment Finance at LMU’s College of Business Administration, told Observer. “They’ve moved all in and can’t back down. Even though theaters are open and the economy is booming in the fourth quarter of next year, they have yet to release day-and-date movies on HBO Max. It shows how they are reorienting the company and reaching a place to compete with Netflix. “

What is the strategy?

WarnerMedia CEO Jason Kilar and Warner Bros. CEO Ann Sarnoff have just expressed their strong and clear intentions for the foreseeable future. “It’s a huge marketing investment in HBO Max,” Offenberg said. “They put their best films on the platform from day one.”

Mortal combat, In the Heights, Space Jam 2, Matrix 4 is Dune—There will be something for every movie buff on HBO Max throughout 2021. Consumers will respond to an investment of this magnitude and position HBO Max for an upcoming powerful run after a softer-than-expected launch. But that’s not the only reason WarnerMedia has changed direction.

On a global pandemic scale, the United States is far worse off than many other major box office regions such as China, where nearly all 70,000 theaters are fully operational. Over 60% of US theaters are currently closed, while international territories are faring much better. This move suggests that WarnerMedia doesn’t expect traditional home cinema to rebound to pre-pandemic levels until 2022. Only time will tell.

Pending stabilization, this new strategy allows the studio to distribute films overseas and tap into global film distribution. After all, around 75% of the world box office comes from non-US markets. For example, 2018 Aquaman earned 71% of its gross total outside the United States in 2019 Joker has accrued 69% of its cumulative total abroad.

“The global box office is so big for these films that WB can afford a haircut in the US,” Offenberg said.

What does this mean for cinemas?

Exhibitor chains receive a higher percentage of Wonder Woman 1984is theatrical gross in exchange for Warner Bros. permission to break the traditional 60-90 day exclusive theatrical window. It’s safe to assume the studio has reached similar deals with movie chains for their upcoming 2021 list. But that’s a short-term answer to a long-term question.

“Clearly, WB is throwing a rope to the theater owners. It is unclear whether this is a lifeline or a noose, ”Offenberg said. “It could be a great thing for home cinema owners to bring the product to theaters. But if you’re putting so many great movies on HBO Max and Netflix, Amazon and Disney + are also fueling more movies, what’s left for release in exclusive theaters? “

One of the main questions that cannot be answered now is the impact of this shift on long-term consumer behavior. Once audiences have access to blockbuster films at home, day by day with their theatrical releases, will they ever want to give up that freedom?

For now, this raises the bar for the theater show in 2021, ensuring that a number of high-profile films will hit theaters rather than face further release delays. While ticket sales are expected to be significantly depressed and the number of open theaters is shrinking (over 60% of US theaters are currently closed), some admissions are better than none for the chains that are able to operate.

How does Warner Bros. make money this way?

HBO Max and Warner Bros. are both under the WarnerMedia brand, which is owned by AT&T. Given vertical integration, anything that’s good for HBO Max could help Warner Bros. Ultimately, if HBO Max manages to recruit $ 15 a month from a few million new subscribers for billions of dollars in new revenue, it gives Warner Bros. the ability to create even more movies and shows. The potential success of HBO Max allows Warner Bros. to increase production and artistic vision and vice versa. And again, Warner Bros. will still be reaping all global distribution revenues from these theatrical releases as HBO Max isn’t available overseas yet.

Internally, the Warner Bros. movie redirect exclusively to HBO Max or PVOD sells the entire theatrical marketing and distribution divisions. Every large film studio has a huge army of employees dedicated to distribution and marketing. Creating a daily release between theaters and HBO Max allows them to leverage these employees and use their experience. Helps prevent further sunk costs.

As a result, do actors lose money on box office incentives?

Ultimately, these are performance-dependent compensation (box office bonuses and profit sharing), not base compensation. The studios work very hard to ensure talent knows that contingent compensation is unlikely to materialize in the best of times. Robert Downey Jr.’s massive $ 55 million bonus tied to Avengers: Endgamethe back-end profits it is the exception, not the rule. This new model further complicates an already complicated situation, forcing talents, agents, lawyers and managers into an even more difficult position from a negotiating point of view. For example, some partners like Godzilla vs. Kong producer Legendary wasn’t even aware of WB’s impending decision, however THRis Aaron Couch.

If the talent had good lawyers, their contract language will cover all possible outcomes, such as selling a movie to a streaming service at a market price. If the representation of talent has not supported such protective language, then talent has no right to anything (see: The Chappelle show).

The extent to which the firm is willing to renegotiate such contracts is questionable. For example, WB refused to pay Irwin Winkler a backend cent for Good guys, due to the original contract he signed. That is, the firm refused to pay him until he had leverage (I think). Likewise, it’s possible that the studio will only renegotiate if the talent has leverage. Presumably, WB will already sacrifice mountains of short-term cash in exchange for HBO Max’s long-term advantage with this deal. As such, they may not take the opportunity to pay even more for talent right now.

As Ken Ziffren explained THR in February, talent deals are evolving as studios become increasingly focused on streaming.

Is this the new normal for movie releases?

In WarnerMedia’s announcement, the company pointed out that this hybrid release model only applies to its next 2021 film and does not cover any films after next year. But Offenberg likens the situation to when Netflix lost Starz’s content library in 2011. At the time, it was shocking and the company’s stock suffered soon after. But Netflix was able to bounce back into a world largely devoid of streaming competition. Now, if HBO Max loses these headlines day and date after consumers adopt the new format, they won’t be able to recover smoothly due to stiff competition in the industry.

“I don’t see how they can put the genius back in the bottle,” he said.

Including Wonder Woman 1984, Warner Bros. will release 18 films in theaters and on HBO Max over the next 12 months.

How does Warner Bros. benefit as a first to adopt this aggressive strategy?

At the moment, there are six large studios that consistently release motion pictures: Disney, Warner Bros., Universal, Sony, Paramount, and Lionsgate. Sony cannot emulate this formula because it does not have an internal streaming service. Paramount has Paramount +, but they can’t generate nearly enough subscriber revenue to justify such a move, which is why they spent 2020 selling movies to Netflix and Amazon. Lionsgate is in the same boat with Starz. Universal has not positioned Peacock for such a change and has instead found success with the PVOD model.

“The only studios that can do that are Disney and Disney + and Warner Bros. and HBO Max,” Offenberg said. “History shows that in any market there can only be three dominant competitors. This helps secure WB and HBO Max’s position at the top of the competition. “

Years of consumer surveys also support the idea of ​​three long-term winning platforms. This move also has the added benefit of putting more pressure on Disney to continue redirecting high-profile movies to Disney + such as Soul.

HBO Max quickly went from punchline to powerful player with this new strategy.