The 87th annual Academy Awards will be presented by the Academy of Motion Picture Arts and Sciences on Feb. 22 at the Dolby Theatre in Hollywood. That’s a long and impressive history of celebrating achievements in film.
But L.A.’s crowning jewel – the venerable motion picture industry – is at great risk if it does not recognize that consumer power, fueled by rapid technological and societal change, is increasingly a game-changer for many traditional industries.
As exemplified by the recent meteoric rise of ridesharing businesses such as Uber and Lyft and room-rental service Airbnb, online platforms have allowed consumers to exercise their power in novel ways – including in the motion picture industry. If the traditional incumbents do not strategically respond to these trends, they risk being run over by the consumer train, rather than driving it. (No pun intended, taxi drivers.)
Over the last few years, the distribution of motion pictures has gone through a fundamental transformation. The primary channel has historically been the movie theater, and for the last few decades DVD distribution has been a profitable secondary channel. However, with the widespread availability of high-bandwidth Internet connectivity, today a consumer can easily download movies via services such as iTunes and Amazon Prime, and watch them on an ever-broadening range of media players and mobile devices.
Other factors – including a new crop of critically acclaimed TV shows, the rise of Redbox, and the high cost of a night at the movies – are also driving consumers out of movie theaters and into the privacy of their homes. The Hollywood Reporter said: “The number of people going to the movies in 2014 in North America slipped to its lowest level in two decades. According to preliminary estimates, roughly 1.26 billion consumers purchased cinema tickets between Jan. 1 and Dec. 31. That’s the lowest number since 1.21 billion in 1995 and not that far ahead of 1994 (1.24 billion).” These are signs that theaters, the bread and butter of movie distribution, are being dangerously encroached on by digital distribution channels.
To examine how the physical distribution of movies is giving way to digital distribution, my colleagues from Pepperdine University’s Graziadio School of Business and Management and I conducted research that tracked movie release dates; prices for DVDs; and three download services, iTunes, Amazon and YouTube, for a sample of 91 movies released in theaters from 2012 to 2014. We found that during this period, the digital download release window – the time between theatrical release and availability for download – went down from about 255 to 114 days, converging with DVD release at the end of 2014.
In other words, legitimate digital versions of motion pictures are now available for download about three and a half months after their theatrical release date, roughly at the same time as DVDs. To put this phenomenon into perspective, see the graph: It took 10 years for DVD release windows to shrink by almost half, yet it only took three years for the digital download window to shrink by almost two-thirds.
What do these trends suggest about the near future? Notice that the DVD release window has stabilized at three and a half months since 2012. It appears that the industry has been able to put a hold on DVD releases to protect a three-month theater window. But looking at the pace of the consumer-driven, digital bullet train, it appears certain that the digital download window will continue to shrink. The less certain outcome is whether DVD distribution will join the fast train ride into theater territory. If it doesn’t, will DVD distribution become increasingly irrelevant?
There are signs that theaters understand the situation they face. Inspired by the retail and travel industries, in which luxury high-end malls and high-end experiential travel resorts are booming even as mall shopping and travel are declining, some theaters are trying to offer an “experience.” In some theaters, consumers can now reserve seats at the time of online ticket purchase. Theaters like AMC Marina 6 Dine-In offer dinner and drinks.
But those innovations do not fully address the vulnerability of traditional distribution channels. Digital channels will continue to encroach on the theater window and threaten to take over the secondary channel role, at the expense of DVDs. Incumbent firms must continue to embrace new business models. How about simultaneous theater-Web releases, as in Netflix’s upcoming release of “Crouching Tiger Hidden Dragon 2”? Or more compact release windows across channels, as in Amazon’s recently announced intent to produce movies for digital viewing just one month after theater release?
There’s no question that the convergence of digital technology and traditional industries has created unrest. Will the movie industry embrace shifting preferences toward digital consumption? Will theaters morph and adapt? Well, history shows that technology doesn’t fully trump traditional channels. CDs still account for a sizable share of music distribution, LP records are experiencing a revival and live music events are still pretty cool. But to best confront an industry transformation, one must accept that the digital train is fast approaching.
Nelson F. Granados, Ph.D., is an associate professor of information systems at Pepperdine University Graziadio School of Business and Management. His research focuses on strategic and economic consequences of digital innovation and the impact of the Internet on the travel, media and entertainment industries.
