Paramount's Direct to Streaming Pivot

Involuntarily shoved into a potential blue ocean of noncustomers.

Much like shopping malls, movie theaters were already struggling before COVID. It’s December 2020, and I can buy a stunning 65” Sony OLED TV for about $2,100. Another $2,100 buys me a top-of-the-line Sonos home theater speaker setup with Dolby Atmos. Combined with popcorn, that combination meets or exceeds the quality viewing experience I’d expect in anything besides IMAX theaters.

And yet, there is still something magical about going to a movie theater. My wife and I are movie fanatics. There is nothing we love more than dinner and a movie at a movie theater. If we had to drop one, we’d be eating at home (we’re really good cooks but, still…).

I wrote the blue ocean strategy case about the turnaround at Marvel, from their time as a small comic book publisher to the bankruptcy and the modern incarnation, including the movie studio, sold to Disney. That case won the prestigious 2020 Case Centre Award for Strategy & General Management. I’ve worked with many Marvel executives, more than a few who hold senior positions in or even own movie studios. Thanks to the suggestion of a different Hollywood insider, I’m working on a screenplay with their help.

Which is to say that I’m a movie fanatic. I love movies and Hollywood and everything about the movie business. I wish it well and want the industry to thrive and continue. I’d personally love to break into the industry and think that Hollywood, both the movies and also TV shows, are a valuable and important contribution to society.

And yet…

That $4,200 system listed above is pricey but many middle-class people can afford it. It’s also possible to spend far less and buy a very good home theater system rivaling all but the most modern theaters.

While I love going to the theater, there is a downside. Rude people talk or even use their smartphones, the noise and light interrupting the movie-watching experience. Snacks are overpriced, chairs often dirty, floors mysteriously sticky, lines annoying, and being forced to sit through 20-minutes of commercials is boring and intrusive. And, of course, it’s required to drive or take public transport to and from a theater.

All of these problems are what we call, in blue ocean strategy terms, blocks to utility. They’re annoying to customers. Many are avoidable at minimum cost. Saddling audiences with them shows a lack of concern and respect buyers do notice.

Where home theater systems coupled with cheap broadband disrupted the movie-going experience in the Clay Christensen sense, COVID disrupted it in the traditional meaning of the word. Merriam-Webster defines disruption as “a break or interruption in the normal course or continuation of some activity” and COVID, vis-a-vis movie-going, certainly counts.

For the sake of a community experience, people (present company included) put up with the downside of going to the theater. Ticket prices were more expensive than renting the movie at-home but still affordable and, besides, we got an emotional boost knowing we were financially rewarding the movie-makers while enjoying their art. However, these benefits are outweighed by the prospect of catching a deadly or debilitating disease.

There are two general types of movie studios, post-Marvel and pre-Marvel.

Post-Marvel studios. Marvel pioneered a new moviemaking business method that’s caught on in the industry. Simplifying, Marvel eliminated and reduced key factors that do not make a better movie. For example, Marvel (at least before Disney) had small offices above a car dealership whereas palatial offices were the norm at traditional studios. Marvel skimped on office supplies and didn’t offer free coffee whereas other studios were building stars private basketball courts and even faux Italian villas. Studios hired and stars and paid them lavishly; Marvel hired top-quality actors and paid them reasonably. If stars wanted to make Marvel movies, which many did for non-financial reasons, they were well compensated though nowhere near as much as other studios offer.

Pre-Marvel studios. Before Marvel, movie stars were … well, stars. They’d be offered private jets, receive enormous pay packages; they were the prima donnas who attracted fans to the box office. Stars could and did command pretty much whatever they wanted.

Paramount is famous for rejecting the Marvel way. At least until December 2020, Paramount still treated movie stars and directors like they’d been accustomed to. Both the pay packages and the perks were present as if Marvel’s Ike Perlmutter and David Maisel had never created their new type of studio. And, somehow, Paramount made it work. Granted, their old-school studio is not nearly as profitable or predictable but Paramount still made money.

One way studios manage risk is to offer stars reduced pay up-front in exchange for a portion of box office proceeds. This can lead to enormous paydays. Studios prefer not to pay the money up-front and stars preferred to receive more on the back-end so, for the most part, this arrangement worked for both. That is until the movie theaters shuttered and box office receipts vanished.

Although movie streaming services can offer handsome paydays they’re seldom as large as box office receipts. Netflix may pay dozens of millions of dollars for a film. That sounds like a lot until we realize that even a mediocre film can earn hundreds of millions in worldwide box office revenues. Therefore, a share of streaming fees is seldom anywhere close to box office revenue. Furthermore, streaming films are oftentimes “shared” by pirates allowing thieves to steal the movies and pay nothing. This is the same problem suffered by music studios starting in the 90s except that today ubiquitous broadband connections and larger hard drives also make stealing large movie files easier.

To get around the predictable and entirely reasonable pushback from talent, and be able to release Wonder Woman 1984 directly to streaming service HBO Max simultaneously with mostly empty theaters, Warner Bros. agreed to enormous compensation packages. The buyouts were large enough they earned the nickname “Wonder Woman Money” by Hollywood insiders.

Following suit, the normally star-friendly Paramount announced they would release all their 2021 movies simultaneously to both theaters and HBO. Putting it mildly, the movie industry freaked out. “We’re all scared that everything’s going to change now,” said Academy-Award Winner Aaron Sorkin. “That movie theaters are basically going to become, like, art houses, and that the films that you and I make will only be seen on streaming services.” Sorkin’s own movie, Chicago 7, was bumped from theaters to Netflix due to COVID earlier in 2020.

There is little question that Paramount faced limited options. Due to COVID, it’s unlikely there will be enough moviegoers in theaters in 2021 to justify the cost of wide theater-only releases. The lost revenue industry insiders worry about is money unlikely to be earned in any event. That’s not due to malice, incompetence, or greed but simply the latest COVID casualty. In many ways, the fallback solution — selling the films to streaming services and sharing that revenue — is a far more satisfactory and equitable solution than that suffered by countless other businesses outright shuttered by the pandemic.

Still, it remains to be seen whether this is the beginning of wholesale change to the movie industry or a temporary speedbump. Will movies ever come back to theaters with exclusive runs before being sent to streaming services? Will the revenue from streaming services ever replace box office revenue? Is the desire to have a film projected to a large group on a big screen an artistic choice or is it Hollywood snobbery against television distribution, even if those TVs rival the movie theater viewing experience?

Only time will tell. One thing is clear though, Sorkin’s biopic Chicago 7 was seen by far more viewers than would ever see it in movie theaters. If studios can figure out a way to convert these otherwise blue ocean noncustomers into customers, to squeeze a few more dollars out in exchange for higher quality entertainment, the industry might not only survive but even thrive in this new environment. There is a chance that Paramount may have been involuntarily shoved into a blue ocean of opportunity.