Warner Bros. Entertainment Inc.’s announcement in early December that it would send 17 films from its 2021 slate directly to its HBO Max streaming service the same day they debut in theaters shocked the entertainment world. Affected films include anticipated franchise tentpoles like “The Matrix 4,” “Dune” and “Space Jam: A New Legacy.”
Theaters traditionally have had a three-month exclusive “window” to run a film, after which it would be distributed to home video, premium channels, free channels, and then network television. Warner effectively shut the window between when a film is shown in theaters and when it is made available elsewhere.
Many in Hollywood expressed outrage at Warners’ announcement. Filmmaker Christopher Nolan, who has had a professional relationship with Warner since 2002, declared in a statement: “Some of our industry’s biggest filmmakers and most important movie stars went to bed the night before thinking they were working for the greatest movie studio and woke up to find out they were working for the worst streaming service.” Others complained Warner had acted in bad faith and accused the studio of self-dealing. Actors and other talents that are compensated from film profits or residuals were worried the move would reduce their incomes.
Windowing film distribution is a classic example of price discrimination designed to maximize expected revenues from consumers. The theatrical window is opened long enough to extract the maximum revenue from moviegoers, then a new window—say, premium video-on-demand—is opened to maximize revenues from those consumers. The process continues until the maximum expected revenue is captured from each piece of the distribution chain. It is for this reason that many consumers cheered Warner’s plan to shut the window on 2021 releases.
But the concerns of filmmakers, actors, and other stakeholders are real. Many in the film business earn a substantial share of their income from payments based on a film’s profits. Without box office receipts, a film is almost certain to earn less revenue than with a theatrical release. Even worse, it may be near impossible to accurately measure the film’s profits, making it harder to determine whether the talent is being appropriately compensated.
On the one hand, talent should have seen the end of windowing coming. The entrance of Netflix and Amazon into feature film production more than five years ago put enormous competitive pressure on studios to shorten the theatrical release window. Savvy players in the entertainment industry—and there is no shortage of savvy players—could have and should have adjusted contracts to account for the day windowing would end.
But with the pandemic shuttering theaters, that day came sooner than expected and the savvy players were caught in an unexpected shift. In other words, the world changed in ways their contracts did not anticipate and many believe they were short-changed. That is what happens when the world changes in unexpected ways: someone gets short-changed.
Windowing made sense in a different set of circumstances. But it makes less sense now that the pandemic seems to have shifted consumer behavior for at least a few years. Warner’s move can be seen to be about damage control to ensure the industry, and their place in it, continues to exist. If this is the case, closing the release window in 2021 is just one of many ways to balance short-term costs against long-term survival.
At the time of Warner’s announcement, it was predictable that future contracts would account for the possibility of things like a worldwide pandemic that closes theaters for months in a row. I figured it would take about a year for things to shake out.
I was wrong. It took about a month. Warner Bros. is already renegotiating deals with big-name talents that were blindsided by Warners’ decision. For example, Denzel Washington—who stars in Warner’s “The Little Things,” set both to open in theatres and debut on HBO Max Jan. 29—is looking to get a deal that will provide a $20 million fee plus backend, according to The Hollywood Reporter. The paper also reports a draft proposal to offer talent bonuses upon a film’s release and halve the box office thresholds tied to other bonuses.
There is a lesson from this experience. When the world is unexpectedly turned upside down, someone gets the short end of the stick. Eventually, over time, the people who get the short end will adjust their contracts. In some cases, “over time” can be just a matter of weeks.
