Exhibitors clash with movie studios: Is this a war nobody can win?

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After talking with a host of exhibitors and studio executives in the wake of Universal Pictures’ abortive attempt to make “Tower Heist” available via video on demand three weeks after its release in cinemas, I think it’s clear that theater owners and studios are no more likely to settle their differences than the Israelis and Palestinians. In fact, the two sides have even mastered the Middle East art of using inflammatory rhetoric to widen the gulf between their positions.

To hear one theater owner tell it, Universal’s experiment was “the equivalent of testing out what was the best method of killing someone on death row — the gas chamber or the electric chair.” From the studio side, one top executive warned that if theater owners continue their scorched-earth tactics, “they’re going to have an endless amount of empty theaters because we’re simply not going to be putting as much product in them.”

After vociferous boycott threats, Universal abandoned its effort to make the Eddie Murphy-Ben Stiller film available on demand for $59.99 in two markets — Portland, Ore., and Atlanta — 21 days after opening it at multiplexes.

For years, studio bosses and theater owners have looked at each other as partners. Sometimes the partnership was cozy, sometimes it was contentious, but it remained a partnership, with the ultimate goal being to encourage as much theater traffic as possible. This compact survived all sorts of bumps in the road, notably the arrival of DVDs, which for a number of years provided studios with windfall profits.

Cooperation has continued in recent years, with studios even sharing the cost of converting theaters to digital projection, which helped usher in the 3-D movie revival. That allowed exhibitors to charge an extra $3 for 3-D movies, a new revenue stream that they split with the studios.

But today’s younger consumers are increasingly oriented to watching films on a variety of portable devices, while many older moviegoers have lost interest in seeing movies in a theater. Domestic movie attendance has essentially been flat over the past decade. Pushed along by a precipitous drop in DVD revenue in the past several years, studios have been exploring new ways to make money. Earlier this year, four studios announced a deal with DirecTV to allow consumers to watch certain movies at home 60 days after their theatrical bow — for $30. Even though hardly anyone sampled the offerings, exhibitors acted like the sky was falling, making a variety of veiled threats about their future willingness to play the participating studios’ choice films.

The threats weren’t so veiled this time, with a number of exhibitors, led by Cinemark, one of the Big Three theater chains, saying it wouldn’t play “Tower Heist” in any of its theaters. In the face of a rising tide of boycott threats, Universal abruptly abandoned the plan.

So why are exhibitors and studios engaged in such a bare-knuckled public brawl? In short, because the warring parties now have radically different business models. The studios are focused on sucking as much money as possible out of the back end of their business. But exhibitors don’t get a cut of movies’ video or TV revenue; they live — or die — by how well films do in theaters.

After seeing record stores disappear and retail book chains put on life support, exhibitors are in no mood to be open-minded about studio VOD experiments, especially one from Universal, whose parent company, Comcast, is clearly looking for ways to woo more cable TV subscribers. As one theater owner put it: “I can see how this helps them. But how exactly does it help us?” The honest answer: Not much. Theater owners believe that even if Universal’s “Tower Heist” scheme had failed, another studio would simply try another experiment until it found the right price point — one that would move VOD closer to the price of a movie ticket in a theater.

“The margins in our business are so thin that any significant cut in our revenues could really hurt,” said Lyndon Golin, president of the Southern California-based Regency Theaters chain. “The theater industry needs to take a position that would allow for some compromise. We can’t just refuse everything, because some form of VOD is coming, whether we like it or not. But we need something in return — we will be in real trouble if we bleed off more box office.”

In my heart, I sympathize with the exhibitors. My grandfather owned a chain of theaters in Miami, and I probably wouldn’t be doing what I’m doing now — writing about movies — if it wasn’t for the experiences I had as a kid working in his theaters. I’m with James Cameron and the other filmmakers who publicly denounced the DirecTV VOD deal. There’s no better way to see movies than in a darkened theater. It’s a communal experience that has indelibly shaped our culture.

But if I listen to my head, I find myself siding with the studios. New technology is called disruptive for good reason — it puts extraordinary stress on old business models. Just ask the record industry titans who refused to give customers an easy way to legally download music or the barons of the newspaper business who dawdled as readers migrated to the Internet. When it comes to new technology, it’s change or die, baby.

No studio wants to put exhibitors out of business. On the other hand, they’ve shown little willingness to offer exhibitors a piece of the VOD action in return for having the freedom to figure out an appropriate price point and release framework. But premium VOD is on its way, largely because it’s obvious that there are several movie audiences out there.

The same movies that kick butt on VOD as the same ones that sell well on DVD. It’s hard to argue that VOD would cannibalize the theatrical business — just look at sports: Millions of fans pay top dollar to attend pro basketball and baseball games even though the same games are nearly all on TV for next to nothing.

Privately, exhibitors must see the writing on the wall. If they don’t negotiate a compromise, enough homes will have access to high-end digital delivery systems by 2013 that a studio with the right kind of clout — maybe Disney with “Iron Man 3” or Warners with “The Hobbit: There and Back Again” — will simply say: “We’re putting a movie on premium VOD a month after its release.” I can’t imagine theater owners boycotting such crowd-pleasers.

If you think things are ugly now, wait till you see how ugly they get after that. If I were king, I’d broker a compromise in which exhibitors would get a better percentage of the split on films that were part of the studios’ new premium VOD window, with a minimum guarantee thrown in just in case a sizable number of moviegoers decide to stay home.

But I see no sign of deal-making in the air. As with the Israelis and the Palestinians, the exhibitors and the studios are bent on proving that they’ll never miss an opportunity to miss an opportunity.

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Universal drops early video-on-demand plan for ‘Tower Heist’

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--Patrick Goldstein