THE impact of COVID-19 on film theatres has accelerated two preexisting trends: More people are staying home to enjoy movies and other entertainment, and more studios and media distributors are developing their own direct-to-consumer streaming services. While theatres have suffered heavily from stay-at-home norms, studios have also been deeply challenged. Productions were halted, some of the most anticipated theatrical premieres were postponed,¹ and more top studios had to forgo theatrical releases altogether and go direct to consumers to generate at least some income.² After the pandemic is over, it is unclear what role film theatres will play in consumer entertainment or to what extent the existing system of releases will have been disrupted.

Studios derive almost half of their revenues from theatrical releases. Although the average number of film tickets purchased by Americans each year has declined from 4.2 in 2009 to 3.4 in 2019,³ studio revenues are driven more by box office tickets now than they were 20 years ago.⁴ If theatres have a diminished role in the windowing system—the time-table of exclusive exhibition periods across theatres, home video, cable and TV, and streaming—it could force changes in how content deals are financed, what the terms for distribution look like, and how studios make money from their productions.

Although streaming may look like the obvious path forward, studios can’t fully monetise all their franchises and derivative content through streaming services, particularly if they don’t control their own distribution channels. For those that do, deploying streaming services is very costly. Many have yet to show much profit, despite their expanding market valuations.⁵ Early experiments with premium video-on-demand (PVoD), where first-run movies are offered directly to consumers on streaming services, have had mixed results during the pandemic. At the same time, if the pandemic were over, 68% of consumers want to watch at least some movies in theatres (figure 1).⁶ Clearly, it is not as simple as just shifting to streaming.

With more people opting for home entertainment experiences and more studios developing their own distribution channels, studios have a chance to reconsider film windowing and income models. Is a film only a “film” if it is first released in a theatre? Should some movies skip the theatre and go directly to consumers via streaming and PVoD? Are there different forms of value that can be unlocked with direct-to-consumer services? These are questions studios should be asking at this unprecedented moment.

The changing landscape of movies

Studios are very reliant on box office sales, which rose from 26% of total global revenues in 2000 to 46% in 2019 (figure 2).⁷ With almost half of their revenues from theatrical releases, studios are understandably concerned about upending a century-old model in favour of digital distribution.

Studios typically release new movies to theatres with an exclusive window: A film cannot be shown on any other channel during the theatrical release. On average, studios share 45% of box office income with the theatre operator. Most movies make about 75% of total US box office income in the first 17 days (including the first three weekends), yet they can stay in theatres for another 60 to 75 days to capture the remaining 25%.⁸ The longer a film runs in theatres, the more the income share shifts in favour of the venues.

Although they are usually the first, film theatres are just one of the windows that studios and distributors use to release films (figure 3). Traditionally, the windowing system has ensured that income generated by each platform is protected by rights to show movies during a particular time frame. For example, the theatrical window ensures movies are only available in cinemas over the first 90 days, followed by the home video and premium TV windows. They are not always distinct, however. Some overlap, while others, such as home video, may extend indefinitely.

Theatrical releases not only drive box office revenues; they also typically determine how income from subsequent windows are negotiated. For example, the licence fee for TV windows is determined by the success of the theatrical release: the higher the box office income, the higher the licence fee paid to studios. If more movies skip theatres or shorten theatrical windows in favour of digital platforms, fewer movies would likely be able to generate required box office results or reach minimums for TV deals. Likewise, movies still account for much of the daily scheduling on premium cable networks. Changes to the theatrical window—such as releasing a film on PVoD instead of in a theatre—could create a domino effect of change across other windows and put more pressure on the success of streaming efforts to compensate.

This shifting landscape puts studios in a difficult position. They may be able to reach more people through streaming services, particularly during the pandemic, but doing so could undermine theatres and the large revenues they generate. It could also affect income from other windows—if they choose to use them. Such considerations impact upfront financing of productions, existing distribution agreements, and licencing terms.

Arguably, exhibition windows have primarily been actuarial—a launch plan negotiated to anchor financing of productions and then monetise their steady release to different consumer segments. As on-demand streaming services have expanded, they have put more pressure on the traditional post-theatre windows, such as premium and basic pay TV. In addition, consumers have come to demand instant access to services of all stripes. When convenience and immediacy are paramount, the time delays that consumers face with the windowing system may feel like unnecessary friction.

Enter premium video on-demand

The pandemic seems to be forcing the hand of major studios. They either lose money by delaying theatrical releases or launch first-run films directly to consumers over streaming services. According to Deloitte’s Digital media trends 14th edition autumn pulse survey, only 18% of US consumers have attended a film in a theatre since the COVID-19 pandemic began.⁹ Even if they had the option, only 29% of consumers would feel comfortable going to a theatre within the next month.¹⁰ Prolonged closures, and the reluctance of moviegoers to return to theatres when they reopen, have put theatre chains under tremendous financial pressure.¹¹

During the crisis, PVoD has emerged as a viable way for studios to reach film fans, while also posing a challenge to the traditional windowing system. PVoD movies are available on subscription streaming services where consumers can view them at launch for an additional price of around US$20— often double the average theatre ticket price¹² but significantly less than the US$35 a typical family might pay at the box office.¹³

During the early phase of COVID-19 stay-at-home orders, Deloitte found that 22% of consumers had paid to let or watch a PVoD film, and 90% of those said they would do so again.¹⁴ As the pandemic has continued, studios have released more movies via PVoD, and viewership has grown. As of October 2020, 35% of consumers say they’ve watched a PVoD release.¹⁵

This growth is promising, but convincing the majority of consumers to pay a premium to stream a film at home may take time. Among consumers who have not paid to watch a PVoD film, cost was the top factor.¹⁶ This challenge could be greater when streaming services charge for PVoD movies on top of monthly subscription fees. However, consumer interest in PVoD could wane once the COVID-19 pandemic has retreated and film theatres are considered a viable—and safe—option.

Perhaps the biggest question is whether studios can get the same revenues from PVoD they do from theatres. One benefit of PVoD is that studios can get a larger share of income. When movies are released in theatres, studios keep 55% of the box office income. With PVoD, that share is close to 80%. Studios could reduce the cost of theatrical distribution by shortening those windows to favour a PVoD release. A recent agreement between a major theatre chain and a studio reduced the theatrical window to 17 days, after which movies would be available on PVoD.¹⁷ With theatres under pressure, studios could negotiate lower income share or lower guarantees.

PVoD could help studios make their streaming services more valuable to subscribers, satisfy consumer desire for new content, and make them feel like a VIP. A direct-to-consumer release could frontload the cost of preparing a film for streaming distribution, both as a PVoD release and an ongoing part of the streaming catalogue—a growing requirement for streaming video services. Studios could even consider developing windowing within their streaming services, staging releases across PVoD, basic subscribers, and ad-supported streaming audiences. For studios that have their own video streaming services, offering subscribers exclusive access to PVoD when a film is released in theatres could be the kind of perk that could prevent churn (figure 4).

Going direct: From income per window to income per user

The combined drivers of flattening theatrical revenues, rising in-home entertainment, and the shift to streaming distribution are putting greater pressure on the windowing system. For studios and distributors, direct-to-consumer distribution channels may require a strategic reassessment of monetisation—and a willingness to shift their perspective. For example, streaming revenues may never directly replace those from theatrical and linear TV.¹⁸ So, what new kinds of value can a direct-to-consumer solution enable? How can studios and distributors move from income per window to income per user?

Just as streaming lowers the friction for audiences, it can also make it easier for studios and distributors to get more relevant content and advertising in front of the right audiences. Typically, digital services can generate much more data about engagement than theatres can provide, such as data based on content interests, demographics, and location. Leveraging data-driven insights can potentially reduce risks in content development and financing while enabling more effective targeting for ad-supported services. Studios could also use data to identify valuable segments such as “super users.” Deloitte has found that consumers who watched a film via PVoD are more likely to have subscribed to additional paid services such as streaming video, streaming music, and gaming.¹⁹ This could lead to greater acquisition and retention for studios that offer broader entertainment packages.

For major studios with their own streaming services, PVoD can be a lever to attract new subscribers and retain existing ones with exclusive releases. The trend to develop original content as a lure for streaming subscribers will likely only continue, but providers may need to experiment with pricing and even ad-supported options to reach more segments. They may need better insight into which content attracts subscribers and keeps them on the service and which content doesn’t. Armed with this knowledge, studios can focus their dollars on content that contributes to profits.

Although only the largest studios control a streaming service, they also see the need for original hit content—a need they may struggle to fill. Smaller studios may be able to negotiate better terms with streaming services if they offer PVoD exclusivity though, again, they should weigh the costs against the benefits. Ultimately, trends in media consumption in an increasingly competitive landscape underscore the need for studios of all sizes to reconsider windowing. Studios now have an opportunity to take a more nuanced and measured approach to how different types of content may perform on different distribution channels.

A portfolio of content and distribution channels

Although studios receive 45% of their overall release revenues from film theatres, not all movies are theatrical successes. Relative to their marketing costs, action movies, science fiction and fantasy, and animated features show the strongest returns from film-going audiences (figure 5).²⁰ Comedies, dramas, and thrillers more often see negative returns on advertising dollars; they cost more to market than they earn in cinemas.

Given the variable performance of different genres, studios could use genre and film budget to determine the length and feasibility of theatrical runs. Some movies may be well-suited to big theatrical windows while others may have a shorter time at the box office—or none at all. The term “direct to video” has often had negative connotations, signalling a production not good enough for theatrical distribution. With Emmys and audiences piling up for streaming services, the same may not be true for “direct to streaming.”

The industry could benefit from reconceiving storytelling and cinema. By moving past the TV-or-cinema dichotomy, studios could pursue a more diverse array of storytelling vehicles. For example, they could increase development of shorter and less cost-intensive content types, attracting younger audiences and talent while leveraging social media and video-sharing platforms for distribution and promotion. Such pathways can reinforce larger franchises and promote or resurface more expensive original content such as features, films, and series. Studios should consider a franchise strategy that consistently engages fans with new content on multiple platforms, rather than waiting until a new film is released.

The challenge for studios and distributors is to better understand which channel is appropriate for which kind of content, and how to match that with the right audiences. Data can help, but it may be more interesting to redefine content to focus on storytelling, entertainment, and audience engagement and retention, rather than on where it fits into exhibition windows or whether it debuted on TV or in film theatres. This could enable studios and media companies to become more flexible and meet the evolving preferences of viewers.

Different strokes for different studios

The calculus will likely vary widely depending on the type, size, and reach of a given studio. Major studios and distributors with their own direct-to-consumer streaming services have greater capacity to change, but also carry higher risk and drag. Some are clearly focussed on streaming subscriptions; others have retained elements of linear TV with ad-based models. All are weighing the costs of producing original content, licencing back catalogues, and adjusting consumer pricing. Although many young video streaming services are focussed on subscriber acquisition, the looming battle is in retention.

To be successful, studios may need to move closer to their audiences and work to continuously provide greater customer value. Complicating matters, they are competing with tech and telecom giants that don’t need their media arms to turn a profit, because their main businesses lie elsewhere. The deep pockets and market power of these companies can put studios in a bind, whether they’re buying content, selling it,²¹ or producing originals.

Smaller studios looking for the best and most profitable distribution channels to reach target audiences have more flexibility to experiment but may need to clearly articulate their value to digital distribution owners. In some cases, they may sell content. In others, they may be brought on as production partners. Small studios could also benefit from moving past the TV-or-cinema dichotomy. They could consider ways to extend their stories and characters across video gaming, for example, or other immersive experiences, integrating multiple mediums and channels to tell stories and engage audiences. Their flexibility with how, where, and when movies are released can support greater options for their distributors. In addition, small studios could gain access to more cinema slots if large studios reduce their theatrical releases.

Not only is the calculus variable for studios, the maths may be changing. Measuring box office tickets against streaming or PVoD revenues is not an apples-to-apples comparison. Direct revenues from streaming may be lower but they may be less volatile, replaced by more stable monthly subscriptions, similar to how boxed software suites have shifted to subscription services. Migrating to more streaming can offset other costs such as marketing for multiple release windows. Digital distribution can use data to better understand churn, incentivise retention, and make advertising more targeted and effective. Deploying a portfolio approach to content and distribution could allow bets to be spread better. For example, it could enable greater retention of niche audiences with more low-cost productions, rather than leaning so heavily into blockbuster box office hits. Each of these options can add more value to offset theatrical losses. Ultimately, studios and distributors have an opportunity to shift their objectives from maximising the income of windows to maximising the income of users—a key step in getting closer to their customers and delivering greater value.

When the pandemic lifts, there will still likely be a role for theatres. As more streaming services vie for compelling original content, many of the showrunners, screenwriters, and actors creating it are still drawn to the prestige of cinema. When people feel safe to assemble again, theatres could see a strong rebound. Studios will continue to deliver big theatrical experiences, but how theatres adapt and demonstrate value against a growing at-home market may likely determine their longevity. They should bear in mind that the overwhelming consumer trend of the digital era is about removing friction and enabling greater convenience. The windowing system should evolve, as it has with previous shifts in media and distribution. Studios and distributors, who see the value of controlling and capitalising on the customer experience, can help drive that evolution. How quickly media and entertainment companies address their existing dependencies will likely play out in the shifting competition for audiences and entertainment.

Moving forward: Key considerations for studio executives

The pandemic has challenged many industries to rethink their business and operating models. Here are questions studios and film distributors can work through to determine how distribution and income models may need to change going forward:

• If more studios can distribute directly to audiences, what is the unique role of the theatrical release? How can theatres offer a differentiated experience from the modern living room—and a differentiated window for studios?
• How could changes to film income models influence how studios approach licencing strategies over a film’s lifetime? How would these changes align with broader direct-to-consumer strategies?
• How can studios take a portfolio approach to film distribution? In which instances are streaming and PVoD the best solution, and what are the trade-offs against other windows that may be profitable but declining?
• Will streaming and PVoD be able to fully replace theatrical revenues and will they cannibalise future income streams? Or is there a more nuanced and strategic way to think about the value of each?
• Amid almost universal streaming penetration, what is the role of the pay TV audience and the high margins they deliver to the industry?
• How can studios take a franchise-maximising view that creates different forms of derivative content exclusive to theatrical releases while also creating other content to attract and retain subscribers to their fledgling streaming services?
• How can studios and distributors attract more creatives who may be interested in storytelling beyond the traditional TV-or-film options?

While the pandemic has hit the film industry hard, it also offers an opportunity for the business models of a time-honoured tradition to loosen up and better meet the challenges of the digital world. Streaming is becoming a necessity, following fundamental shifts in content distribution and on-demand audiences. Navigating these shifts can require time and patience, and may challenge traditional ways of developing, distributing, and monetising content. Media and entertainment companies able to see the opportunities in change and the value of thinking differently can be empowered to help define the fast-approaching future.

The Deloitte Center for Technology, Media & Telecommunications

The Deloitte Center for Technology, Media & Telecommunications (TMT Centre) conducts research and develops insights to help business leaders see their options more clearly. Beneath the surface of new technologies and trends, the Centre's research will help executives simplify complex business issues and frame clever questions that can help companies compete—and win—both today and in the near future. The Centre can serve as a trusted advisor to help executives better discern risk and reward, capture opportunities, and solve tough challenges amid the rapidly evolving TMT landscape.