New Distribution Methods Could Threaten Movie Theater Survival

The release of a new movie often generates quite a “buzz.” However, behind the excitement is a less publicized debate between studios and theater owners. At issue is profitability and how best to distribute new releases.

Academic researchers from Germany, the United Kingdom and the United States recently examined the growing problem in a global study, “The Last Picture Show? Timing and Order of Movie Distribution Channels,” which will be published in the October issue of the Journal of Marketing. They discovered studios could increase revenues significantly by changing how movies are distributed – a move that theater/cinema owners fear most, said Thorsten Hennig-Thurau, professor of marketing and media research at Bauhaus University of Weimar (Germany) and professor of movie marketing at Cass Business School (London).

Collaborating on the study were Victor Henning, doctoral student at Bauhaus; Henrik Sattler, professor of marketing and branding at the University of Hamburg (Germany); Felix Eggers, doctoral student at Hamburg; and Mark Houston, associate professor of marketing in the College of Business at the University of Missouri-Columbia, who said the goal was to offer a scientific and objective look at how proposed changes would impact the industry.

The researchers focused on four key channels of movie distribution: theaters, DVD rental, retail DVD and video-on-demand (VOD). Through a sophisticated experimental approach, they looked at distribution and revenue changes by analyzing data from 1,770 consumers in the United States, Japan and Germany. Collectively, the three countries represent 56 percent of the global film market.

Findings revealed that:

– In the United States, film studios could increase revenues by 16 percent if films were simultaneously released in theater, on rental DVD and VOD, with a three-month window to DVD retail. However, theater revenues could drop by 40 percent and cause many to “radically scale down their operations or close their businesses completely,” Hennig-Thurau said.

– In both Germany and Japan, studios would need to release DVDs for retail three months after theater distribution, and DVD rentals and VOD one year after screenings to maximize profits. Revenue would increase by 14 percent in Germany and 12 percent in Japan. Unlike in the United States, theaters also would benefit from such changes (with revenue increases of 15 and six percent, respectively); however, the video rental business would drop significantly.

“We’re not advocating changes,” Houston said. “We simply examined what would happen if there were changes to the distribution process by looking at it from the studio’s perspective because the studios are the risk takers.”

The researchers also looked for a win-win situation and found a modified solution for the United States that provided more modest gains for studios without reducing theater revenues. Houston said in the United States, the win-win scenario would require a three-month, theatrical-to-video retail window with slightly higher DVD prices, followed by rental and VOD releases another three months later.

Additional information from the study suggests that it might make sense for movie studios to take a sensible path and realign with the theater owners to avoid turmoil.

“Unilateral changes to the distribution chain by the studios will provoke battles that are costly both in financial terms and in terms of public goodwill,” Hennig-Thurau said.

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