Why the Studios Are Risking Everything

An extended strike could kill off movie theaters.

Labor stoppages are, first and foremost, about money, and the concurrent Screen Actors Guild and Writers Guild of America strikes are no exception. The actors and the writers want more of it, as well as limits on the use of AI. The studios say they don’t have nearly as much to distribute as the actors and the writers would like given the massive expenses they’ve incurred while standing up their streaming services. They find themselves at an impasse that threatens to reduce the overall pot even further by putting in jeopardy one of the industry’s greatest assets: movie theaters.

Hollywood has a history of treating evolving consumer habits first as a threat to theatrical dollars and then as a tool to be co-opted in the pursuit of earning ever-greater profits. Studios were first hesitant to license their films to television networks and then realized the small screen was an untapped market. Hollywood fought tooth and nail against VHS—fearing both illegal piracy and customers legally taping the movies that studios had licensed to TV and cable networks—until it realized home-video rentals and sales were a gold mine. VHS’s successor, DVD, peaked at $16.3 billion in annual sales in 2005, or nearly two times the domestic box office, before declining in the face of streaming. In some ways, theatrical became almost a loss leader for home-video sales; as Matt Damon has said, home-video sales helped prop up virtually the whole marketplace for “the kinds of movies that I loved,” movies for adults.

The birth of streaming—specifically, the rise of Netflix’s online component—coincided with a decline in DVD sales that created an opportunity for Netflix’s honchos. “Once it added new ways for viewers to watch movies and TV shows [online] from the couch in their living rooms … subscriptions skyrocketed 63 percent,” Dade Hayes and Dawn Chmielewski write in their book, Binge Times: Inside Hollywood’s Furious Billion-Dollar Battle to Take Down Netflix. “The budding streaming service grew at Hollywood’s expense. [The CEO Reed] Hastings and company deftly exploited the studios’ compensation structure, which paid rich bonuses when executive hit their financial targets.”

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Its first-mover advantage, enormous movie libraries acquired from shortsighted Hollywood execs, and buzzy original series such as House of Cards, Orange Is the New Black, and Stranger Things helped Netflix become a company that could generate more than $31 billion in revenue worldwide last year, roughly three-quarters the size of the combined take at the worldwide box office of every movie studio in 2019, the last pre-COVID year. It’s why the company has a market cap of $190 billion or so.

The studios and their corporate overlords look at Netflix’s stock price and revenues and wonder why they can’t print money too. This is why the studios were all planning their own jumps to streaming even before the pandemic began. After the pandemic started, they jumped in feet first—and promptly found themselves drowning.

As Matthew Ball notes in his authoritative look at the streaming wars so far, studios’ move to streaming has been fraught and results have been mixed. Consider NBCUniversal’s entrant in the contest, Peacock, which is tentatively on track to hit both subscriber and revenue numbers yet is still hemorrhaging cash. “Comcast had originally said that from 2020 through 2024, Peacock would never lose more than $1B in a single year, cumulative losses would peak at $2B, and breakeven would be achieved in 2024. Yet Peacock lost $663MM in 2020, $1.7B in 2021, and $2.5B in 2022. Cumulative losses now exceed $5B,” Ball writes. Aside from those about Netflix, most positive headlines about streaming services boil down to “Well, They Lost a Little Less This Quarter Than Analysts Thought They Would.”

The issue for most of these companies isn’t revenue; it’s spending. Until recently, more money was being spent on more television shows and movies than ever before; as the Motion Picture Association noted in its 2021 report on the state of showbiz, 1,826 original series were produced across streaming, cable, and broadcast in 2021. The number of television shows released on streaming channels roughly doubled from 2019 to 2021.

The studios looked at this and said, “More writers and more actors are getting more work. What else do you want from us?” As the screenwriter Zack Stentz noted in The New York Times, the number of WGA members reporting earnings “during the streaming-driven boom years” bumped up “from 4,500 to more than 6,000.” And the WGA reported collecting more fees than ever before in 2022, which the anonymous streaming insider Entertainment Strategy Guy suggests means that it’s likely that WGA writers collected more total pay than ever before. This is one reason why Disney’s CEO, Bob Iger, feels comfortable going on TV saying writers and actors are being unrealistic, arguing that “they are adding to the set of the challenges that this business is already facing that is, quite frankly, very disruptive.”

That disruption is upon us as studios have begun to take movies off the release calendar. Challengers, the Zendaya-led MGM picture in the new genre of “tennis threesome movie,” had been set to open this year’s Venice film festival; it has been pushed back to 2024 in the hopes that the actor will be available to walk the red carpet then. Searchlight Pictures is pushing the new Yorgos Lanthimos picture, Poor Things, back from September to December. Ethan Coen’s Drive-Away Dolls might miss the fall festival circuit. A24 also pulled Problemista from its August release date. And Warner Bros. might just pull Dune: Part Two from its November release date. That would leave the box office relatively barren.

As someone who spent all of 2020 watching studios repeatedly push movies back three (or six, or nine) months in the hopes of releasing after the pandemic had abated, I’m sorry to say that this is starting to feel suspiciously like COVID Redux. To be clear, pushing release dates is a totally logical move on the part of the studios as long as the strike persists: No stars means no promo. But I worry that a paucity of movies in theaters so hot on the heels of a previous extended absence of movies in theaters could mean no more theaters, period.

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This is, perhaps, hyperbole, but only slightly. The number of screens in the United States declined by 5 percent during pandemic shutdowns; the only reason the damage wasn’t more severe was AMC’s unlikely emergence as a meme stock in 2021, which helped the company pay down $600 million in debt. But box-office earnings remain nearly 20 percent below 2019 and nearly 25 percent below 2018, year to date. Audiences were relatively understanding about pandemic-related theater closures and have started coming back, but getting them out of the moviegoing habit again just as things have been getting back on track could have dire consequences.

And these consequences would be dire for everyone in the industry. Theatrical releases remain the best and most consistent individual way to monetize any one movie. They’re the top of the revenue waterfall for films. Although some movies (particularly low-to-mid-budget pictures) may earn more in aggregate from nontheatrical than theatrical revenue, theatrical releases are still the biggest piece of the puzzle when it comes to completing the profitability picture. Even successful experiments in home distribution like Universal’s premium video-on-demand window—in which the studio charges extra for big releases still in theaters—depend on the prestige bump that theatrical exhibition bestows. The theatrical release is why customers are willing to spend $20 to rent a movie.

All of which is to say that Iger is right in one very narrow sense: This is a disruptive time for the entertainment industry, and a prolonged shutdown could be disastrous, leading to less money for everyone. But the disruption, accelerated by COVID, is a direct result of the studios’ own desire to replicate the Netflix model and treat the load-bearing wall that is theatrical release as a decorative trifle, easily demolished to complete some garish open floor plan of the sort preferred on the home-improvement shows broadcast by Warner Bros. Discovery CEO David Zaslav’s beloved HGTV.