Today’s Cinema Industry Realities (plus some Crystal-Ball Gazing)

Presented by John Fithian, NATO President – David Hancock, IHS Markit Research Director, Film/Cinema & President, EDCF

In opening the 2020 edition of the ICTA’s Los Angeles Seminar Series (LASS), outgoing president Alan Roe emphasized that the rapidly-changing cinema industry landscape is, in fact, a positive, as it represents multiple experiments in concepts and business models, which are emerging to fit the diverse needs of varied customer bases and regions. His optimism led off two-days of informative and intriguing business sessions, alongside networking and socializing, which has earned the LASS its deserved reputation as an annual ‘must-attend’ for those interested in cinema technology and services.

The audience at the Universal City Hilton met scant days after a pessimistic view of the industry’s fortunes for 2020 and beyond appeared in the Financial Times (“Hollywood holds ‘vigil’ as cinema feels the squeeze” – January 18, by Anna Nicolaou). So it was fitting that first up among a distinguished speakers was John Fithian, NATO president, who skilfully dissected the Times’ meanderings with insights and data in his “The Present and Future of Cinema” keynote address, drawing from his legal background and 20-plus years of cinema-industry experience.

“I started with cinema 20 years ago and at least four or five times throughout, the industry has been pronounced ‘dead’ and its epitaphs written, including the Times’ article, where an unnamed, former studio head was quoted as saying the exhibition industry had two years of life left. I just have to laugh,” said Fithian.

He noted that it was a familiar pattern, birthed by every wave of new technology that was supposed to sound the death knell for a cinema industry that is old – yes, 100 years and counting – and supposedly boring and done. “Every time there’s a new way of watching content, witness DVDs, BluRay, and now streaming services, we’re supposedly done. But what happens is that every time that there are new ways to watch content, there are more reasons to produce more content for all ways to watch it.”

Fithian observed that streaming services are providing a new home for content producers, who also own that content for the big screen. Citing the resurgence of documentary-production and viewing, led by Netflix, “…the audience for documentaries has grown, and watch in both theatres and in the home.” More content yields more theatre-goers. And in fact streaming and exhibition attendance are not exclusive and “…our 3^rd-annual Ernst & Young survey shows that, consistently, the more people watch content in their homes, the more they go to the movies.” Fithian said that’s true across every demographic, emphasizing that “People who love movies, love movies, and want to watch them everywhere!” His conclusion: the advent of streaming should be seen as encouraging, not discouraging.

Granting that how movies are being distributed is still a bit of a battle, witness the NATO dialogue with Netflix, he noted that Disney+, HBO Max and KeyTalk (??) and others need to feed two platforms, and, citing Disney’s leadership, they were very, very clear that they believe in the theatrical window and “how important it is to create content for the theatre as well as the home.” The overlapping releases of Star Wars: Episode IX-The Rise of Skywalker [in theatres] and The Mandalorian on Disney+ [for mobile devices and TV] are examples of Disney’s distribution philosophy.

“The point is that the existence of streaming as a platform is not cannibalistic toward our business.” Fithian then went on to review the numbers of “this supposedly-dying business” of cinema.

Admittedly, Fithian admitted, 2019 got off to a “horrible start,” with several flops appearing in Q1. “But lo-and-behold the industry came roaring back as the year went on… and in recording $11.4 billion domestically, which is the second-highest box office total in history,” the naysayers were proved wrong. Globally, the industry had the best-year ever, with the box office hitting “…more than $30 billion for the first-time ever, so over $42 billion in total, for an industry that some former studio executive [in the Times’ article] inexplicably believes is going to be dead in two years.”

Fithian noted the diversity of the movie-genres that did well last year. “Some people said that with the advent of streaming, [theatrical success] will be all about the blockbusters…all you’ll get is Marvel movies. Well, notwithstanding that we love Marvel movies and they make a lot of money…if you look at the gross for movies that made over $100 million, it stayed pretty positive year-over-year” at around 60-63 percent of the total. And on the other side of the coin, movies that made less than $100 million each still contributed to more than $4 billion in sales, consistently, for the past few years, including 2019.

So where is true disruption happening, as it’s certainly not hurting the cinema business, asked Fithian? The answer is to be found at home, where “Transactional videos in the home are indeed down, not in the theatres.” As proof, in 2004 those transactions ran at $24 billion a year but by 2018, the take had dropped 58 percent, to around $10 billion. In stark contrast, “in our business, in 2004 our domestic box office recorded $9.3 billion, and in 2018, it was up to $11.9 billion – or a 28 percent growth rate! Yes, disruption happens, but, with apologies to the Financial Times, it’s not happening [in the pocket-book] to us.”

Looking forward, the 2020 slate is an unknown, but with lots of other stuff coming on which could help the industry succeed. “Both in diversity of content and the sheer number of offerings scheduled, with more movies set for 2020 than there were for 2019,” stressed Fithian. “We have jumped into the year with a film with ‘1917,’ a film with unconventional content that is doing strongly and already winning multiple awards. And ‘Bad Boys For Life’ does twice the revenues that were expected of it, to emphasize my point,” said Fithian, who added that he is confident that 2020 box office will surprise a lot of naysayers. “And the slate in 2021 is packed, and it’s actually huge, and we’re confident in all this.”

History has its impact and it is history that led to Fithian’s second keynote subject, on NATO’s Digital Cinema Picture Level (DCPL) project, announced in late 2019. It stems from two of the goals of NATO’s members, which is first to provide cinema patrons with the best-possible visual image possible, giving people a reason to get off their couches. “Technology is hugely important to our business,” emphasized Fithian. Complementing that goal is a second, to fill more seats and/or to merit charging more for a particular experience, made possible by technological advances. “Otherwise, what’s the point?”

Fithian recounted how creatives, distributors, exhibitors and equipment vendors all joined in the digital-cinema rollout, which was the biggest technological change in the industry since the intro of sound, from their own unique perspectives. Each saw advantages, albeit with some of the business models needing to evolve, beginning with the Star Wars’ franchise. NATO asked global exhibitors early on in this rollout, in 2001-02, what was necessary to make digital cinema succeed and were told that common standards, compatibility and business models that made sense were necessary.

“DCI was formed as a result, around 2002, and as a consortium of the major studios, the goal was to design technical specifications to organize the transition from film to digital, and the other goal was to advance business models for the industry that worked. The second part of that mandate never happened,” said Fithian. “There were political, legal, and people complications that resulted in that not happening…so DCI spent a lot of time developing security and image specifications in the meantime, and the entire industry owes those execs and movers a tremendous amount of gratitude, because that’s what enabled the digital cinema industry. But it was a closed loop of major studios, putting out their slant on technical specifications for what they wanted to see in equipment to be installed in our [NATO’s] member theatres. And at the time, that system was accepted and supported by the exhibition community, because the studios were helping to pay for the equipment,” noted Fithian.

Fithian said that today the transition point in the industry is not specifically a technological one; it’s in the economic models for exhibition. “VPNs are coming to an end…so we at NATO went to the senior business people at the studios and asked if a VPN 2.0 was possible…and we were shown the door. So the half of the equation re: the business-model costs now sit exclusively with exhibitors” who are now responsible for technology cycles and implementation.

Although DCI did a “fantastic job at developing specifications, it’s now up to us to take the lead and set the specifications for the equipment coming into our theatres, because we end up paying for that technology,” while security specifications remain with DCI.

Fithian conceded that creatives and studios have a major interest on what technologies are used to create movies, master movies, distribute movies, but in playing movies, that’s exhibition’s arena. Hence the creation of the Digital Cinema Picture Level (DCPL) project. “It’s basically a testing project, one which begins with what exists and is used in the field today, in an open process, wherein exhibitors and distributors, equipment companies and creatives will all have a say. It will mainly be image-quality issues centric, including dynamic range, brightness and other things that I don’t understand but which NATO advisor Jerry Pierce does and will expand on.”

The project is intended to produce a co-operative, agreed-upon understanding of the state of the current theatrical field as it stands today, and, equally important according to Fithian, “…a co-operative understanding of what the next-generation of displays will have as their performance specs and [accompanying] deliverables.” But a full set of specifications and standards is not the goal of NATO, which is not a standards-setting body (“and shouldn’t be”). “So if the testing process reveals that new specifications and standards are necessary, our project will probably make representations to SIMPTE (The Society of Motion Picture and Television Engineers®) as to what they should be,” added Fithian.

Fithian ended with reinforcing that DCI and NATO are committed to working together “…with both our technologists and executives, and we support each other,” while reminding attendees that Jerry Pierce would explain DCPL in greater depth in his ISDCF (Inter-Society Digital Cinema Forum) update, later in the event.

In his session on “The Role of Cinema in the Experiential Economy,” David Hancock, IHS Markit Research Director, Film/Cinema &and current president of the European Digital Cinema Forum – EDCF complemented Fithian’s presentations with his own observations.

Echoing Fithian’s thoughts, Hancock agreed that over the past 25 years that he has been in the business, cinema’s death has been assumed to be around the corner. What we’re witnessing today is another occasion of cinema justifying its existence in the face of multiple entertainment choices, consistent with technological changes in the way people buy tickets, socialize their cinema experience and bring on new audio and visual technologies, said Hancock.

In terms of new screens being added, there is still good growth beyond the now-mature markets of North America and Western Europe, which bodes well for the industry. Hancock sees the screen-count breaking the 200,000-mark in 2020, spread across 198 territories, with Asia-Pacific dominating the global box office, regionally (and Disney having a bigger chunk among content providers). He predicted that in three to four years, nearly half of the world’s box office revenues will come from Asia and that growth pattern in turn will impact the types of films and the actors used accordingly.

For example, ‘simpler-themed films’ that are easier to mass-market and distribute across territories bodes well for the success of franchise films, and 28 of the top 50 box office hits were franchise-movies in 2019 and half provided consistently over half of the annual revenue earned by the Top 50 movies over the past six years, rising to two-thirds in 2018 and 19. China is still building approximately 10,000 new screens per year, having 70,000 of the world’s 200,000 screens currently.

Another change is that “…where once cinemas were a standardized, big-screen experience, now the PLF (premium large format) experience is diverse, and where there were seven of these formats in 2018, that jumped to 12 major-branded PLF formats at end of 2019,” Hancock revealed. “Numbers of exhibitor-branded PLF screens and IMAX experiences are about even, but they still represent a minority – some 4,000 screens of 200,000 total screens worldwide,” cautioned Hancock, who predicted that 4DX Extreme and other motion-technologies that add to the PLF experience will experience relatively slow but steady growth over the next few years.

Whither 3D? The trend for rising 3D revenues is behind us, and even if Hancock’s research points to half of the world’s screens being at least 3D-ready, they are not showing a proportionate number of 3D films and revenues are declining in many cases. In contrast, barely eight percent of the domestic US box office in 2018 was in 3D films.

Laser-illuminated projection has done well, rapidly.  30,000 of the global screen-count are now laser-light source based, including RGB and laser phosphor variants, although many of these are in China. In contrast, direct-view LED cinema screens are installed or planned for only 65 sites to date. 3D movies benefit from the greater clarity, color renditions and light output provided by laser-illuminated projection, which, potentially, could lead to a 3D-revival in movie making, opined Hancock.

Netflix notwithstanding, “the best place to see a movie is still in a cinema” maintained Hancock. The cinema remains the ultimate social environment to see films in, and Hancock’s research mirrors NATO’s, in that the biggest consumers of multi-format content also have high-attendance marks at our cinemas.