Warner Bros vs Theatres: In a TV near you

Warner Bros’ announcement that it will release all 2021 movies straight to HBO Max is the punch that might lead to the cinema industry’s K.O.

Movie theatres are hurting.

Like many other sectors, the movie theatre industry has been shaken over the past year. Even before the global pandemic started, admissions to movie theaters in North America were in decline and companies were only able to continue generating profits by raising ticket prices — an unsustainable business model. This is in no small part due to the rise of streaming services such as Netflix, Prime Video, Hulu and Disney Plus quickly driving demand away from the traditional movie viewing experience . Nonetheless, this shift has been accelerated by the pandemic because of the cinema’s COVID-19 spreading environment. According to PwC , “cinema has taken a big hit this year, and we’re not forecasting revenues to recover to pre-pandemic levels until post-2024”.

This led us to wonder if movie theatre chains would be able to survive the beating they have received by the COVID-19 virus. It seems Warner Bros may have just provided us with an answer to this question, throwing yet another punch towards the already battered movie theatre industry.

Back on December 3rd, 2020, Warner Bros, one of the largest film studios in the World, announced it will release all seventeen movies of its 2021 film slate in theatres and on its streaming service HBO Max simultaneously for a one-month period in the U.S., shattering movie-release norms. This move would imply that a consumer wanting to see the new Matrix 4 movie would have the option of either subscribing to HBO Max for a monthly fee of $15 USD or going to watch it in theatres.

While this decision may mean the end of the cinematic experience as we know it, it was made with a very clear strategic intent by Warner Bros, whose business is in a good position to strive right through the pandemic.

More specifically, three segments of the studio’s business are likely to be impacted the most.

Partnerships with movie theatres

With the new hybrid model in place, “ the choice is simple : either find a babysitter, leave the house, travel to the theater, pay for parking, pay for tickets, and pay for snacks — or just watch that same movie from your couch”. Even worse for movie theatres, consumers currently do not have a choice as cinemas are on lockdown worldwide. That is partly why “ Warner Bros does not believe that moviegoing in the United States will recover until at least next Fall”, pressing them to make the decision to release movies directly to consumers to continue generating revenues via streaming services.

Thus, it comes as no surprise that the news sent shares of AMC, Cinemark and IMAX down 14%, 17%, and 7%, respectively . Subsequently, movie theatre chains were not happy with this decision, resulting in the rupture of a partnership that has been mutually beneficial between studios and cinemas. The chief executive of AMC Entertainment, Adam Aron, went on the record to say that “Warner Bros intends to sacrifice a considerable portion of the profitability of its movie studio division […] to subsidize its HBO Max start-up. As for AMC, we will do all in our power to ensure that Warner does not do so at our expense.” Chairman of Warner Bros, Toby Emmerich, replied by ensuring that this scenario offers a win-win scenario for consumers and theatres as he believes that many will still choose the cinematic experience and that theatre owners will still be able to rely on a stable supply of movies.

However, one must wonder if the firm is truly trying to create this win-win scenario, or if it is simply trying to give a shot in the arm of HBO Max, which is currently losing the streaming wars . Theatre chains should also remain skeptical in light of the vision of Warner Bros’s new CEO, who is also the founder of Hulu, another streaming service, and has quickly initiated an executive shakeup .

Value proposition

Warner Bros’ new vertically integrated and service dominant business model enables it to offer a better customer experience through direct interactions with users and by collecting data on their behaviours. First, “81% of Americans have not gone to a movie theatre since before March, even if theatres have reopened in their area [and] 56% of respondents said they are concerned about getting COVID-19.” Thus, the firm is able to provide a safer and more enjoyable viewing experience to its customers through this new offering. Second, for years, Netflix has been able to give itself a clear advantage over movie studios using traditional approaches by leveraging a data driven strategy to inform its content production. This has resulted in tangible benefits for the company, such as dominating Golden Globes and Oscars nominations. Warner Bros can now imitate this strategy to improve its movie production business by leveraging data that was previously not accessible through the traditional movie viewing experience.

Revenue streams

The most impactful consequence of the strategic decision is the shift to a recurring revenue model. According to Scott Galloway , best-selling author and professor at NYU Stern, “the most accretive action taken by any $10 billion or larger business is to move from a transactional model to recurring revenue.” This was supposedly one of the main motivations for the company. It is “almost assuredly giving up hundreds of millions in box office revenue […] but AT&T (Warner Bros’ parent company) is mostly interested in the financial windfall that it stands to make in the longer term by turning HBO Max into a success.”

Warner Bros has set itself up for success, but it’s not enough. The studio should abandon the hybrid model entirely and only release its movies on HBO Max. It should embrace its new vertical supply chain and service dominant logic by positioning itself as an industry leader. It’s partnership with movie theatres has been more beneficial for the latter recently, and the financial upside of assuming a fully recurring revenue business model is large enough to mitigate the short-term loss. Winston Churchill is famous for saying “never let a good crisis go to waste” — Warner Bros has the chance to live up to these words by taking advantage of the opportunity the pandemic has presented and leaving its traditional ways in the past once and for all.

This article started by saying that movie theatres might be on their last breath. While they probably won’t all go bankrupt tomorrow, Warner Bros just threw a punch at them. If the other movie studios follow, a total knockout may follow. Movie theatre chains better keep their hands up.