The following is part of a series of posts re-imagining the entertainment industry for a digital age. If it ever becomes a book, the title will be Hollywood 2.0.

A Red Box Movie Rental Kiosk at a 7-11There was a news story this week which made the tiniest little blip amid all the news of the Lions Gate proxy fight and Toy Story 3. But I’m not writing about them, because I think this blip is a glimpse of an epic struggle which will lay waste to the very foundations of for-profit filmmaking:

Setting up opposing camps among the Hollywood studios over $1-per-night kiosk rentals, Paramount Pictures has agreed to provide its movies to Redbox on the same day they go on sale.

The move comes soon after Warner Bros., Universal Pictures and 20th Century Fox all signed deals with Redbox to block rentals of DVDs until 28 days after they are released. The studios have argued that discount kiosk rentals hamper DVD sales and cut into home video revenue.

Sony Pictures previously signed long-term deals to provide its DVDs “day-and-date” to Redbox as well, and Disney offers its movies to Redbox without a formal arrangement. Tuesday’s deal with Paramount means that the six major studios are essentially split evenly in their views on working with Redbox.

LA Times: Paramount to end delay in providing DVDs to Redbox (emphasis added)

Here we have two mutually exclusive viewpoints about how movies will be seen, expressed through what would seem to be a relatively inconsequential detail, whether $1 DVD-renter Redbox gets DVDs the moment they go on sale in stores or has to wait a month. To wit…

Viewpoint #1: Sony, Disney and Paramount
Consumers who want to own a movie and those who just want to watch it once are different sets with minimal overlap. Redbox rentals are a short-term source of revenue until consumers move to streaming and digital download.

Viewpoint #2: Warner Bros., Universal, 20th Century Fox
$1 rentals cannibalize lucrative DVD sales revenue, and full-price rentals which peak in the first month of release. Release “windows” must be preserved to extract maximum profit down the daisy-chain of various format releases, one of which will always be physical disc sales.

First of all, I want to caution that this is a gross simplification, if only because it assumes the incentives from Redbox for each studio are otherwise equal. (Hollywood Reporter says Sony was paid $460M for a five-year deal, and secured a promise discs would not be resold as used when Redbox was finished.) If Redbox is paying extra to get the new releases day-and-date, then the studios in group #1 are winning twice: first, they are getting paid more per disc; second, their movies will likely be rented more frequently, because their appearance in the Redbox kiosk will be closer to the promotional spend.

A Hollywood divided against itself will not stand, and as soon as these contracts are negotiated again, I expect the studios getting screwed in group #2 will line up with their group #1 brethren, even if the fundamental corporate philosophy hasn’t changed. And this is what I call the force of gravity.

The Movie Business Law of Gravitation

As Robert Hooke theorized, directly inspiring Sir Isaac Newton, “all Coelestial Bodies whatsoever, have an attraction or gravitating power towards their own Centers” and “they do also attract all the other Coelestial Bodies that are within the sphere of their activity.” In other words, gravity pulls a football down to earth, even while it keeps the moon orbiting around it.

Just as the same force is at play in physics throughout the cosmos, the movie business has its own force of gravity which applies as much to the Coelestial Bodies that are the Hollywood studios, as to the far-flung constellations of Indie-dom. And that force has lately captured release windows and begun pulling them down.

It’s not only with Redbox. Witness the recent kerfuffle between Disney and British theater owners over Tim Burton’s Alice in Wonderland:

Disney had been at odds with not only Odeon, but several other major U.K. distributors — Vue and Cinemaworld — over its decision to bump up the DVD release date for “Alice” from 17 weeks after theatrical bow to just 12 weeks.

Neither Disney or the exhibitors are disclosing the details of their respective agreements, but it’s believed that the studio managed to convince the exhibitors that it plans to apply the shortened theatrical release window to only select films going forward.

–The Wrap: Disney Resolves Dispute With U.K. Odeon Over ‘Alice’

Disney did not “manage to convince” me this is an anomalous release strategy. Because they’ll have a much harder time convincing their shareholders they shouldn’t do it again, now that the Alice release was a big financial success. (That Alice is a 3D movie incidentally creates a new window, one for a home video release which is also 3D.)

And, I would argue, the theatrical release itself is increasingly ‘windowed’ from the book, TV series, comic book or video game, theme park ride or board game which inspired it. If you want the story of Harry Potter and the Order of the Phoenix immediately, you read the book. If you like that, maybe you also see the movie. If you like that, maybe you also buy it. Or just rent it or watch it on demand. And by the time each format has had a short window, there’s another Harry Potter coming down the pike.

Rocket blasting off like an indie filmmakerEscape Velocity

There’s a term in economics called ‘elasticity of pricing’ – which is all about a company stretching prices for a product to try to hoover up as much money as they can. Hollywood does this with the various formats and windows. While each ticket in a theater is the same price (with the new and notable exceptions of online ticket fees and the 3D surcharge), that price is not the same as a rental, which is not the same as a DVD. And that’s probably the main reason that piracy drives them crazy. It’s a big splatter of bird dookie on Hollywood’s tidy little windows.

Meanwhile, the formula which Hollywood has been following got a lot more complicated in recent years.

Old Distribution Windows
Theatrical Release
|
(3 or more months)
|
V
Premium Cable and Home Video
|
(2 or more years)
|
V
Network Television

New Distribution Windows
Theatrical Release
|
(12-18 weeks)
|
V
Pay-per-view (Cable On Demand)
|
V
Home Video Sales / Digital Downloads
|
V
Home Video Rentals / Streaming (Internet On Demand)
|
V
Basic Cable
|
V
Collector’s Edition Home Video
|
V
Network Television

While in theory you can extract more value with each window, you also lose value as a movie is perceived as being less ‘fresh’ and there are often ‘economies of scale’ involved in having multiple platforms release at the same time or near the same time. For example, a single TV ad can sell the DVD, the BluRay and the Digital Download all at once, or you could window all those formats out and spend triple the ad money.

The big ad spend is up front, for the theatrical release. Movies which don’t open wide with a big advertising campaign have a tough time getting audiences energized enough to buy downstream, and this is a major competitive disadvantage for independent filmmakers. Contracts like the ones for cable and network tv deals are often based on theatrical box office.

You would expect the windows to create a funnel, with the biggest earners getting first crack at consumers, then the second-biggest, and so on on down. In fact, there has been a major imbalance between theatrical revenue and home video revenue. Until recently, it was DVD sales which was keeping Hollywood afloat.

According to the MPAA, box office has recently climbed year-over-year, with 2009 representing a nearly 30% increase compared to 2005, when DVD was still king. As Wall Street Journal reported, 2009 was the first year since 2002 in which box office receipts beat out DVD sales. So, in a way, this decline in home video sales is just restoring the natural V shape of the system, although the transition to BluRay and Digital Download muddies the picture.

A perfectly efficient machine would be one that charges each individual based upon how much he or she wants to see the movie. In the perfect system, everyone who wants to see the movie at theatrical prices pays theatrical prices, everyone who wants to pay rental prices does so and so on, all instantly at the same exact moment. If the windows on Hollywood’s rickety contraption are collapsing, that’s because Hollywood is always trying to approximate this imaginary, super-elastic wallet vacuum that leaves no money on the table.

Indies are pulled down by the same gravity, but there’s no reason they couldn’t reach escape velocity, and rocket to a new galaxy of distribution. If your movie will make the most money from selling with shorter windows, or even in a different order, I say, “Blast Off!”

UPDATE 7/7/10: Netflix jumps the pay-TV window with Relativity Media deal
MORE: Thoughts on the rise in importance of digital streaming rights
UPDATE 9/16/10: Another data point: Warner Bros. has concluded that having a window between Netflix and Redbox increases DVD sales.

Red Box Kiosk by Flickr user AlishaV, altered under Creative Commons Attribution 2.0. Shattered 5 by Flickr user philip.bitnar used under Creative Commons Attribution 2.0. Redline by Flickr user jurvetson used under Creative Commons Attribution 2.0.