The battle over Netflix’s bid to buy Warner Bros. has triggered fears that it will mean the end of the movie theater. The reaction is based on nostalgic feelings people have for the movie theater experience growing up, which ignores the bad and focuses only on the good.
First, the good. I have funny memories of going to the movie theater. I once convinced my mother to drop my brother Doug and me off at a local movie theater to see what I thought was a Flash Gordon sci-fi action movie. I was wrong. It was an R-rated sci-fi sex comedy called Flesh Gordon (1974), and somehow we got in. We realized something was wrong when Flash (or Flesh) fought large monsters that resembled a well-known male body part. We laughed through the movie and never told our mother about our R-rated experience.
I once took a date to see The Exorcist, famous for its terrifying scenes. The theater was located in the Marble Hill section of the Bronx. The smart-ass neighborhood kids would loiter outside by the venue’s metal fire exit door. On cue, precisely timed to coincide with a terrifying scene, they would bang on the metal door, producing a thunderous sound that made everyone leap out of their seats in terror. I never went to another scary movie after that.
After completing a stressful work project, I left work early and needed something mindless to do, so I bought a ticket to an afternoon showing of Rambo: First Blood Part II (1985) at a sketchy midtown Times Square theater near work. The sparse crowd included prostitutes, drunks, and me. I guess everyone needs downtime. Several minutes into the movie, Rambo began killing people, and the crowd started to count out after each kill loudly: ONE, TWO, THREE, FOUR, and eventually TWENTY TWO, TWENTY THREE, and so on. After the villain killed Rambo’s love interest, one drunk patron stood up and yelled, “NOW YOU’RE GOING TO GET IT SUCKER!!” and the counting continued NINETY SIX, NINETY SEVEN, with each Russian soldier fatality until the end of the movie when the crowd stood and broke into applause.
My funniest movie theater moment happened at a screening of The Mambo Kings (1992), based on the Pulitzer Prize-winning novel. It starred a handsome Armand Assante and young Antonio Banderas, who played Cesar and Nestor Castello, Cuban musician brothers trying to break into the music business.
The theater was dead silent until Armand Assante made a stunning, sexy, cinematic entrance onto the big screen, provoking a primal sound from my wife seated next to me. Spontaneously, she had yelled out, “OH MY,” upon seeing him. Everyone in the audience laughed, especially the other women, who had a similar feeling but managed to keep their hot flash moment to themselves. I quickly turned to my wife and said, “Mary Beth, I am sitting right here,” to which she amusingly responded, “Oops!” My wife is hilarious.
Setting aside these funny, nostalgic memories, the hard truth is that the movie theater business has been dead for a very long time. It just does not know it. There was a time when theaters were the only way to see movies. A recent WSJ article mused that in 1929, “an average of 95 million people, or nearly four-fifths of the U.S. population, saw a film every week, how things have changed. In 2019, the year before the Pandemic, ticket sales numbered 1.2 billion, and last year only 760 million. Ticket prices have gone up over the years to offset lower attendance. Studios increasingly rely on international theatrical revenue, which accounts for over 50 percent of ticket sales.
There was a time when studios owned the content, the movie theaters, and had actors, writers, and directors as contract employees under the studio’s dominant control. In 1948, the government sued the studios in a landmark antitrust case. The Supreme Court ended the studios’ monopolistic control over the industry, forcing them to sell off their movie theaters.
What is killing theaters is that the business model and the consumer experience stinks (except for IMAX). Studios control the content, and when the product is bad, fewer people show up to buy tickets and food. Studios also take 90 percent of a blockbuster film’s ticket revenue for a set period at the beginning of its theatrical run, when it is heavily promoted and in high demand. Therefore, theaters must rely on concession sales to make a buck. This is why popcorn costs $20, candy $15, and you’re forced to sit through 30 minutes of annoying paid advertising before the movie begins. When studios have a few bad years at the box office in a row, it can nudge theater chains into bankruptcy.
New technologies have been a persistent competitive challenge for theater owners. It began with the introduction of TV, then cable & satellite TV, home video, video-on-demand, Pay TV, the internet, and now premium streaming services. Theater owners have always reacted slowly to combat new technology. Theater chains have spruced up some venues, adding assigned seating, better food options, liquor, and comfy reclining chairs, but it’s too little, too late.
For decades, studios managed new technology by controlling a film’s release schedule across distribution platforms, a practice called windowing. The first window, movie theaters, set the film’s value based on its box office performance; several months later, after milking theatrical, the film would sequentially move to video rentals, then video on demand, pay TV (HBO), and finally to cable channels, and so on. This disciplined control was disrupted when studios, now part of large, vertically integrated media giants, entered the direct-to-consumer streaming business as traditional middlemen distributors like cable TV faded. To attract subscribers, studios funneled their hit movies to their exclusive streaming platforms. They also spent billions producing exclusive original content that bypassed theaters or had only a brief theatrical run to qualify for awards. Studios were now competing directly with their theater distributors for consumer attention and dollars.
Blockbuster Marvel superhero films were a shot in the arm for theater owners, driving millions of fans into their multiplex venues. It kicked off with Iron Man (2008), leading to multiple franchises and the Avengers, which dominated the box office for years. However, these films became increasingly expensive to make, requiring stronger box-office performance. Unfortunately, the superhero genre became oversaturated, and quality suffered as a result.
This turned off consumers who could skip the movie theater altogether and wait for films to hit their streaming services, then watch them at home on their big-screen TVs—no babysitters, parking, bad food, dirty theaters, or long bathroom lines.
I admit I have not had as many funny moments watching popular streaming movies at home, mainly because my wife and her best friend, Sue, like to talk during the film, a violation of one of my core movie-viewing rules, which they ignore. Movie theaters will hang on for a while as a way for parents to entertain young kids on a rainy day, as an occasional date night activity, and as a place where teenagers can hang out and canoodle away from the prying eyes of protective parents.
Eventually, the movie theater business will shrink further and become a boutique, nostalgic experience, much like shopping for records at a vinyl record store.
Hugh Panero, a tech and media entrepreneur, was the founder and former CEO of XM Satellite Radio. He has worked with leading tech venture capital firms and was an adjunct media professor at George Washington University. He writes about Tech, Media, and other stuff for the Spy.
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