I have started a new email newsletter, Plugging the Gap, that looks at economics and Covid-19. Here is today’s post which overlaps with usual Digitopoly fodder. You can subscribe here.
In an unprecedented move, Disney has decided to release the live-action, Mulan, (previously slated to be a big summer blockbuster) online using its Disney+ streaming platform for a price of $30 per household. This is an experiment that Covid-19 forced on it but may mean a long-term change in movie distribution practices. Today’s post looks at these issues.
It is almost the weekend. You know, that time of the week where you used to not have to go to school or the office and were more likely to be home than not? Try and you’ll remember it. One of the reasons you would be at home is that you actually had some excellent leisure options there. But that is a relatively recent phenomenon. The technologies that now make being at home a good place to relax — television and then the Internet — are themselves relatively recent. And the have an important quality: they are quite cheap.
To consume television or streaming video as we now call it, you don’t have to pay very much. Compared to, say, going out to a restaurant, bar, sporting event or concert, it is many orders of magnitude cheaper per hour than those leisure activities. Moreover — and this was quite the surprise to those who remember the past enough to be surprised — the quality of this content we can receive at home is stunningly good these days. It would be called the Golden Age of Television if television had anything to do with it. (There is actually evidence of this).
Ultimately, I think that to properly understand the economic impact of Covid-19, we will need to come to grips with leisure as an economic activity. But rather than going there today, I am going to focus on this week’s news: Disney is releasing their live-action movie, Mulan, on Disney+ rather than, as was previously intended, in theatres. This is happening off the back of doing the same for Hamilton although one suspects that was always a different ball game. So what is going on here and what does it portend? (Spoiler alert: the take-a-way fits in the category of what changes might be permanent from Covid-19).
Despite some predictions 20+ years ago, movie theatres are still with us. Pre-Covid, I still went to them every month or so but it was marginal and usually because I wanted to bribe my teenage children to hang out with me. But it was costly. In US dollar terms, tickets were $9 a person plus there was parking and then another $30 on the concessions part of the bribery offerings. Even bribing just one child would set me back $60 or so. And that use case aside, the movie theatres were not empty and sometimes quite full.
Why they still existed was because the industry chose to be that way. Movies would be released first in theatres and then, after 3 to 6 months, would be available online. This is about the same cadence as occurred in the old video store days. It also provided a useful way for economists to teach price discrimination but that can be classified as, surely, an external benefit.
The economics were odd; something that I would often think about during the 20 minutes of ads before movies. Physical distribution of movies was costly for both movie studios, who had to pay for those costs one way or another, and consumers, who had to pay for the inconvenience and other things like sitting through advertising and worrying about bathroom breaks. The gains to online-only formats seemed to be compelling unless you really valued that big-screen experience. To be sure, in the early days of the Internet, piracy was a concern. But near as I can tell, it is no longer that big a deal (and maybe never was) as it is often harder for consumers to pirate than to just pony up whatever price is being charged online.
When you see seemingly odd behaviour, it is natural to look for other explanations. One issue is that movie theatres likely have all manner of long-term contracts to stop studios from going online. But two decades is a long time for those contracts to be locked in place.
Experiments are costly
Instead, my guess would be that the constraint is a risk equation. When you drop $200 million on a movie, it is tough to take risks and change things up. What you might do is try things out with cheaper movies but then you don’t quite get to see what your main revenue drivers might look like with a new pricing and release schedule. When one of the likely downside states is simply to lose all of the box office revenue you might have expected which, in itself, might have covered production costs, that is a gamble a studio will be reluctant to take. More so because the outcome of the experiment will be public and so will be to the benefit of rival studios. Free-riding alone can prevent that from happening especially when even to experiment might upset your movie theatre ‘partners.’
Experiments can be costly and in the movie business especially so. But when Covid-19 took out a distribution channel, the cost of running those experiments changed. To be sure, a movie is a movie and you would have to be pretty short-sighted not to believe that Mulan released a year from now is almost as financially rewarding as Mulan released today. It is an asset with considerable flexibility regarding when it is deployed. For this reason, some movies with lower box office expectations were released online.
That said, there is only so long you might want to wait. And Disney, which has pretty much owned the blockbuster movie stakes during the recent pre-Covid era, has a big interest in working out what the likely options are going forward. It was with this in mind that it announced this week that it would release Mulan worldwide on September 4th. Where Disney+ (its streaming service) is available (mainly North America), the movie would be available to stream to subscribers for $29.99. Elsewhere, notably China, it would be available in movie theatres as per the original plan. Disney claimed that this would be a ‘once-off’ but, if it is successful, that is unlikely to hold.
So what would success look like? Mulan was promoted as a potential blockbuster; especially in China. Of course, there, apart from the potential for piracy from elsewhere, there is no experiment being run. That makes it the experiment’s control. But in the world of these live-action remakes, perhaps the right benchmark is Beauty and the Beast. That had a $170 million budget and, in 2017, netted $500 million domestically at the box office. That said, the benchmark would be conditioned on how the movie does in China (going up if it was a success there and down otherwise).
Disney, of course, didn’t get all of those revenues. Some went to movie theatres. It appears that, for a potential hit movie, Disney may receive 80% of more of the initial revenues. (Warning: I am going tenuous back of the envelope calculating here!) Thus, the benchmark target for the US would be $400 million. At $30 each, that adds up to 13.33 million households. Is that a sensible target? First of all, the benchmark box office earnings likely were generated by 50 million people give or take. If an average party to a movie such of this was about 4, then that would comport with the 13.33 million target for households. (Actually, it is so close that my confidence in these calculations is increasing as I write).
Second, Disney+ subscribers, who are the base for this experiment, has over 60 million subscribers worldwide (which is about 5 years ahead of where it thought it would be pre-Covid). It is not clear how many of those are in the US, however. An educated guess is that there are 50 million in the US alone. Thus, for the Mulan experiment to be a success, 1 in 4 or so of existing subscribers would need to pay for the movie online plus some additional subscribers who are added because of the movie itself. Whether that might happen or not is hard to say, which, of course, is the whole point.
What happens if this experiment is a large success? In that case, it will reveal to Disney and others that they can charge a healthy amount for movie releases online and earn more from doing it. Does this mean the end for movie theatres?
It certainly isn’t good news. A success will mean that studios may release movies online as a matter of course. But what types of movies is another matter. Remember, by releasing movies “only in theatres,” studios were “crimping the product.” There were always people who didn’t want to go to theatres. Some of them went anyway. Some of them didn’t go at all. Having an online option right away is a better product and will be better for consumer choice. (Of course, some possibilities may go too far). The issue is whether doing that will wipe out the theatre option which, presumably, there are consumers out there who might want it — especially for movies where the big screen might matter. If I had to guess, and why should I stop now, a successful experiment may cause a dramatic scaling back of movie theatres. They might become experiences with higher prices doubling down on screen quality, food, comfortable seating etc.
As for the online options, will we still see people paying $30 for each new release outing? Possibly. But more likely is that studios may see it as a way to have more stable revenues that were less related to the success of any single movie. Maybe that would offer a premium subscription service that gave people a pass for a certain number of new releases each month. A Moviepass if you will. (I should trademark that.)
In the end, Covid-19 is forcing us into a number of experiments whose signal would otherwise have been very costly to extract. New release blockbuster movies are just the latest in a long line. But the take-a-way from this is that what might be a permanent change post-Covid, are the things that we never learned were actually better options pre-Covid.