Netflix has just inked a four-movie deal with Adam Sandler that threatens to shake up the big theater chains by radically altering the way movies are distributed and viewed. It will allow Netflix to produce movies and to stream them directly to customers’ home entertainment centers and computers, completely bypassing exhibit houses. The online Washington Post put this ominous headline on the story: “Why the Adam Sandler deal with Netflix could doom theaters…” Exhibitors, especially big chains like Regal Cinemas, Cinemark and AMC, are understandably upset. But they needn’t be. When they come to their senses, they’ll realize not only that they have the means to compete with online movie producer/distributors such as Netflix , but to do so in a way that promises to usher in a golden era for the film medium itself.
Let me explain. At first glance, it would appear that Netflix has an insurmountable cost advantage over theaters in delivering content to movie-watchers. Mainly, it takes lots of bandwidth to provide movies-on-demand to subscribers. And although Netflix pays a very significant premium to carriers to ensure that its subscribers enjoy smooth downloads, the expense of this, even after adding in licensing fees paid to film distributors, is much lower than the cost of building and operating brick-and-mortar theaters across the United States. Regal Cinemas, for one, has 7341 screens in 573 theaters — a big nut to crack, especially with distributors raking as much as 90% off the top in the first two weeks of a movie’s run. As a result, the theaters have adapted their business model so that their profits come mostly from the concession stand. Lately, as you may have noticed, they’ve upgraded the fare so that movie-watchers can enjoy not just popcorn, Mild Duds and Twizzlers, but a martini and a flank-steak dinner.
A Digital Future
But it is their huge investment in digital projection systems that will give the exhibitors the ability to transform the movie business even more radically than Netflix has transformed it already. At a cost of about $65,000 per projector, movie houses have installed digital systems that have all but eliminated Kodak prints. The savings to distributors have been enormous – on the order of a billion dollars a year in mailing and insurance costs alone. Now, instead of making and shipping 1,200 prints to open a blockbuster movie “wide,” the studios send out ultra-high-definition discs that cost just a few dollars to create and ship. Digital projection systems have also allowed theaters to broadcast special “live” events, such as performances by the Bolshoi Ballet, the London Philharmonic Orchestra and the New York Metropolitan Opera. The theaters have a big advantage over home systems here, since such performances benefit greatly from giant screens (including IMAX) and spectacular sound systems that far outclass even the best home entertainment systems. And there’s yet one more very important factor that will continue to favor theaters over home entertainment systems: the eagerness of all but die-hard couch potatoes to get out of the house on a Friday or Saturday night.
Growing the Film Pipeline
But the area where exhibitors stand to benefit most is in using the digital projection systems to expand their movie offerings well beyond the mostly dismal fare produced by Hollywood’s big studios. And let’s face it, most of the films that play in suburban multiplexes these days are rubbish, Adam Sandler movies being a prime example. As an alternative, digitally wired theaters will be able to offer cheap, easy distribution to indie film makers whose creativity and ability to “think small” has the potential to attract hordes of moviegoers who have all but given up on Hollywood films. Of course, blockbuster films will retain their appeal and continue to rake in hundreds of millions of dollars globally when they connect with thrill-seekers. But exhibitors will no longer have to depend on blockbusters to fill seats, nor on deals with distributors that exact a very high price for the privilege of showing the most heavily hyped releases.
Theaters will also have an opportunity to show films digitally produced by amateurs. Imagine a local film festival in, say, New York City, that attracts hundreds of entrants, if not thousands. The quality of the top selections would be very high – high enough, presumably, for entrepreneurs to distribute the films to the big theater chains as well to neighborhood movie houses with digital projectors. The theaters could even re-distribute “product” themselves to local cable TV and/or other digital media, since the technology now exists to make movies “fungible” over a wide variety of viewable devices.
Great things lies ahead for theater operators who follow innovative pathways. Instead of worrying about Netflix’s deal with an actor who has come to be known more for his innumerable flops than his relatively few hits, they should seize the initiative by opening their projection booths to a nation of would-be auteurs. Meanwhile, a bonanza awaits entrepreneurs who find ways to encourage and reward small-time film-makers with a shot at big-time distribution.
A few days back Bloomberg treated us to the amazing story of how one of the most famous men in the world, and the one who literally controlled the monetary spigots of America for the past many years, was unable to remortgage his own Washington home. Read the following brief snippet from that article titled “Tightest Credit Market in 16 Years Rejects Bernanke’s Bid”
” standards in the U.S. are so high and inflexible that former Federal Reserve Chairman Ben S. Bernanke, now a Brookings Institute fellow-in-residence with a net worth of at least $1.1 million, said at a conference last week that he couldn’t refinance his house in Washington”.
Wow! That is quite a major story. It is preposterous too.
So I have a serious question for readers of this site and it is this: Do you actually believe it? Well I sure don’t and let me explain why with the benefit of a paragraph from a second article. This one from Reuters of March 4th this year puts the income of the past Fed chair in better perspective.
From Reuters: Bernanke enjoys ‘fruits of free market’ with first post-Fed speech.
“Ben Bernanke earned more in 40 minutes on Tuesday than he made all of last year as head of the U.S. Federal Reserve. Bernanke was paid at least $250,000 for his first public speaking engagement, in Abu Dhabi, since stepping down in January, according to sources familiar with the matter. That compares to his 2013 paycheck of $199,700, and the appearance was only the first of three around the world this week”.
Now does that sound like the story of a guy who has run out of luck where income is concerned? Hopefully that fact alone puts to rest the niggling doubts anyone here might have had that poor Mr Bernanke is unable to raise the cash necessary to refinance a home worth a modest 965,000 (according to Zillow).
Nor should we doubt that his ongoing income from speaking engagements, book sales, consulting services or potential contracts with other branches of government have left him high and dry unable to pay the monthly nut.
So what really gives here?
The home Ben is trying to refinance was purchased in 2004 for $839,000 with a 20% down. We cannot know the outstanding balance of course but lets just say for arguments sake it is the residual difference of 670,000. That is the value of a good condo in many urban centers these days.
Some of you here will already have cottoned on to what my point is here. Basically, the story that was so widely reported in the popular media about Mr Bernanke’s troubles with his mortgage has nothing to do with his personal debt at all and everything to do with a message that the Federal Reserve itself is trying to send.
The past Fed chair is clearly still in the signaling and information business because what he just indicated is not that he cannot get credit (that is merely a foil and it is irrelevant) but rather that credit itself is about to be tightened.
I further believe it may also be indicating that there WILL NOT BE further rounds of Quantitative Easing and so called easy money policies to create the seeds needed for greater credit expansion.
So this is a hidden nod to the market makers who still know how to add up the differences between income and expenses of America’s most famous Monetarist. It is therefore time to get prepared for a change in direction. The unseen message is that rates will indeed be rising this year despite the cacophony of voices insisting that just ain’t possible.
I would advise anyone who still has his thinking cap firmly planted on his head to think seriously about the above story in light of the facts and to draw your own conclusions.
There is hardly a more forceful way to make an obvious point about a policy shift without actually stating it point blank than to deliver it in the guise of a recent Federal Reserve Chairman who cannot get a bank to sign off on a loan this size!