Putting the Box Office in HBO MAX
Warner's new release strategy, Hollywood backlash, and our streaming future
Late last week, Warner Media announced it would simultaneously release its 2021 film slate on both HBO Max and in theaters. Directors, producers, and talent, such as Christopher Nolan, came out against the decision. Many cultural critics, technology executives, and internet thought leaders railed against these “backward” views and came out strongly in support of the “pro-consumer” choice. Both perspectives are right. It was a smart, consumer-friendly decision by Warner, if not an inevitable one. But talent is right to be upset. And in the grand scheme of things, I am not sure this will end up being as much of a watershed as people want to believe, even if it will absolutely set a new high watermark.
With respect to Warner, HBO Max growth has been anemic. At the same time, during COVID, theatrical releases such as that for Tenet, which only brought in ~$60mm domestically on a $200mm budget, have been flops. Given the uncertainty around the vaccine and the timing for herd immunity, it’s not clear that Warner Media chief Jason Kilar had much of a choice but to lean into streaming. By shifting to simultaneous release, he gives Max a chance in a crowded field, continues to orient the company around the streaming future, and protects downstream windows by releasing the movies in the first place.
But unlike some claim, Kilar is not playing 4-D chess. He isn’t using this opportunity to kill the theatrical business. While he does stand to gain reputationally from being yet again on the side of Hollywood disruption, Warner would clearly prefer a healthy theatrical window to a decrepit one, let alone a dead one. And so would he. You just can’t convince me that he and Warner would prefer to forgo billions in Box Office, not to mention the downstream benefits of subsequent release windows. Yes, you never let a good crisis go to waste; but, you also don’t cut off your arm just because you learned to walk and no longer only crawl.
So what about the talent backlash? Just as I argued above, I think simultaneous release was the right call. But I very much believe talent and other Hollywood entities are right to be upset about the situation. First and foremost, these criticisms come at a time when Warner is in the middle of tense negotiations with talent, production, and financing partners. There’s a ton of incentives on both sides to ratchet up the heat and paint the other side as hysteric. Second, it’s reasonable to be upset if you created a project and it’s not being shown as intended. It’s even more reasonable to be upset if you created the project under the assumption you would be compensated in a certain manner and are now unsure of how you will be made whole. Most of the people and entities involved in creating these projects specifically negotiated for upside, in effect taking risk that audiences would demand their projects. Moreover, many of these projects could have been made for streaming from day 1. That they weren’t sold as streaming projects to Amazon or Netflix or even Warner itself was a deliberate choice. Lastly, it’s very reasonable to be upset if you were informed of the decision to change the plan and impact your economics and your creative vision with basically no notice, as was reportedly the case. I’m not sure Warner could have told partners much in advance, it would have created a potentially unmanageable negotiating process, but I have sympathy for the talent finding out last minute nonetheless.
It’s also important to put Warner’s decision and Hollywood’s backlash to it in the context of Warner’s content production model. It has long been known as a studio built upon talent, not necessarily franchises. As such, unlike at Disney, talent has maintained the expectation of significant potential upside in the form of backend and creative control. At Disney, you come to produce or star in an established IP backed by the might and structure of the House of Mouse. You get paid upfront and handsomely to do it. But increasingly, you aren’t there to take risks in the pursuit of significant upside potential, nor to create a project based on your singular vision and talent. You are there to be a part of the Disney machine. At Warner, that simply has not been the case. So you should excuse folks for being upset to find out they aren’t part of the decision-making process let alone the center of the model anymore.
More broadly, unlike Disney, Warner doesn’t even wholly own all of the IP it distributes. For example, it does not fully own nor unilaterally control Godzilla, or even the entirety of the Harry Potter universe. For the 2021 slate, Legendary financed 75% of both Godzilla vs. Kong and Dune, which both have budgets over $150mm. Legendary explicitly chose to take on the risk of theatrical release in the hopes of significant upside performance even though Dune director Dennis Villeneuve’s last big IP project, Blade Runner 2049, reportedly lost money. Warner will pay an imputed license fee, but it seems fair for Legendary and other organizations involved in financing these films to be upset about the change, especially having not been told much in advance of the announcement. Especially, when Warner turned down a $250mm fee from Netflix earlier this year for the latest monster bash. When you make unilateral decisions for partners but have less skin in the game than they do, you have to expect and probably deserve some backlash.
So where does this leave us? I suspect projections of doom and gloom for Warner are overrated and that declarations that the simultaneous release future is now permanently and fully upon us are premature. Talent will be upset, theater owners will complain, and financing partners/rights holders will threaten suits, but ultimately they will come to a deal. There will of course be ramifications, some talent will leave, and some theaters will balk, and future financing terms may be less favorable. But soon there will be fewer and fewer shops around town not pursuing the streaming model as a primary directive. There won’t be much choice for talent nor for theaters nor for financiers/rights holders. On the studio side, the pandemic shifted the relative value of streaming upwards and shifted the opportunity cost of theatrical windows downwards. But post-vaccine, Warner will likely adjust again as the equilibrium resets a bit back in favor of theatrical windows. That’s not to say that Warner’s simultaneous release strategy will die post-pandemic. But post-crisis, I don’t think we will be seeing Warner release all of its biggest films simultaneously, at least not most of them, and not for several years. We will have made progress towards our inevitable future, but it will likely remain a bit over the horizon.
P.S.
If you are trying to decide if Disney will follow suit and announce simultaneous release at its investor day on the 11th, I think the answer is yes. The House of Mouse doesn’t have some of the same talent issues, owns its IP outright, fully finances its films, is already being rewarded by investors for its focus/early success on streaming, and has far more leverage with theater owners than any other distributor. If Warner can do it, so can Disney. Though I would not be surprised to see some hedging around releases scheduled for late next year. After all, no one has more to gain from the revival of the theatrical window, than its perennial champion.