Studios Debate When to Sell Movies to Streaming Services During Coronavirus

The Lovebirds Netflix
Courtesy of Netflix

Sony had a decision to make.

Due to COVID-19, it was unclear when “Greyhound,” a World War II epic starring Tom Hanks, would ride into theaters. Widespread closures had upended the release schedule for films that were due to debut in cinemas for the next few months, and pushed “Greyhound” from its planned June 2020 date. The studio considered moving the film to 2021, expecting the pandemic to have dissipated by then, but it faced the prospect of competing with a glut of blockbusters that also had been pushed back. In response, Sony opted to solicit bids from streaming services, attracting multiple offers before selling the film to Apple.

The problem Sony faced isn’t unique. Studios are increasingly concerned about the logjam of films expected in 2021. All that competition will cut into potential profit margins, and it’s making it difficult to find attractive slots on the calendar to launch a film. “We are like those oil tankers off Long Beach with all this oil and nowhere to offload it,” says one top studio chief.

With theaters closed, studios are looking for cash. That has made selling a film to a Netflix or an Amazon, as Paramount and STX did, respectively, with “The Lovebirds” and “My Spy,” an appealing proposition.

“They had low expectations for most of these films,” notes Eric Handler, an analyst at MKM Partners. “Selling them gave studios a chance to recover their budgets sooner rather than later.”

On “The Lovebirds,” a romantic comedy with Issa Rae and Kumail Nanjiani, Paramount executives believed that as a midrange project, the film had limited commercial prospects. In contrast, Netflix liked that the movie had well-known stars. Since the streaming company makes money on subscriptions, it didn’t have to worry about box office sales. It’s not clear how much Netflix paid for the film, but insiders say that Paramount was able to recoup its $16 million budget as well as most of the money it had spent on advertising.

Studios that are bypassing theaters aren’t just selling off their films. In some cases, they’re keeping them but opting to release them on premium video-on-demand platforms, where they can collect a higher percentage of sales fees. Universal has leaned most heavily on that strategy. The studio debuted its family film “Trolls World Tour” on home entertainment platforms in April, reportedly racking up nearly $100 million in rental fees in the movie’s first three weeks of release (the budget for the film was $125 million). It’s planning to go the same route with the Judd Apatow and Pete Davidson comedy “King of Staten Island” later this month. The economics of the approach is one motivating factor. With theatrical releases, studios essentially split profits with exhibitors. For on-demand titles, they get roughly 80% of revenues.

There are advantages associated with this blueprint. Selling a film to a streamer gives studios an immediate cash infusion, whereas renting the film takes longer to recoup costs — the money comes in incrementally with every rental.

A third option is to push movies once geared toward theaters onto streaming services that are owned and operated by the studios themselves. That’s an approach being taken by Disney, which moved “Hamilton” and “Artemis Fowl” to Disney Plus. However, in those cases, studios are jettisoning a big payday for the potential to become a home entertainment juggernaut.

As studios get creative with their release plans, movie stars and filmmakers are pushing their agents to change negotiating tactics. Many expect to get more money if films reach certain box office benchmarks. If studios opt for a streaming release, that’s no longer possible. Going forward, insiders say, reps will ask for two different scales in backend deals for their clients — one if the film is released theatrically, another if it goes to on demand or sells to a streaming service.

Theater owners erupted when Universal opted to debut “Trolls World Tour” on demand. AMC threatened to stop playing the studio’s films — and John Fithian, head of the National Assn. of Theatre Owners, threatened that “exhibitors will not forget this.” Studios have mostly tried to pass off the wave of streaming sales and on-demand releases as one-off moves brought about by extraordinary circumstances. After all, with cinemas closed, these movies can’t enjoy much of a theatrical rollout.

Yet analysts think that this may signal a more systemic change. They believe the ground is shifting under exhibition’s foundation, and that when theaters reemerge from this crisis, there will be fewer midrange pictures like “The Lovebirds” and “Greyhound” for them to play.

“These changes were happening, but the pandemic accelerated them,” says Peter Csathy, founder of Creatv Media. “These smaller films will be squeezed out of theaters, and all we’ll be left with will be event films and Marvel movies.”