Box Office Reboot: Can Hollywood Revive the Theater Industry?

The savvy audience no doubt figured out David Zaslav’s latest plot twist.

Last month, at CinemaCon in Las Vegas, the Warner Bros. Discovery CEO announced to the hall of show business stakeholders and movie theater executives that the media conglomerate’s film studio is fully re-embracing the theatrical distribution business model. That’s a stark reversal from Warner Bros. late-pandemic strategy to simultaneously release even its biggest films both in theaters and on HBOMax, a plan to both juice the fledgling streamer while reflecting the audience’s growing disinclination to, you know, leave the comfort of their couch.

But, in 2023, Zaslav’s movie theater reclamation project isn’t exactly surprising. The same week, hordes of families and young children stormed movie theaters to turn Universal’s candy-coated “Super Mario Bros” adaptation into one of the highest-grossing movies of all time. 

In fact, box office success, which so often eluded the industry amid the long pandemic and shifting viewer habits it created, has been something of a weekly occurrence so far this year thanks to hits like “M3GAN,” “Scream VI,” “Cocaine Bear,” “Creed III,” and others. So far, 2023 is on track to be the best year at the box office since the start of the pandemic. By far. Streaming disruptors Apple and Amazon have even announced their intentions to embrace a theatrical-first model (Amazon’s “Air,” the story of how Nike launched Air Jordan shoes, just did solid business in its exclusively theatrical run).

So are movie theaters — once proclaimed living corpses during the dog days of covid — coming back to life? Major studios, looking for quick cash to cover a pile of streaming bills, sure seem to hope so.

But this time, it may be too late for happily ever after.

Back in Time

Like all good Hollywood stories, this one’s a bit of a reboot. Despite the apparent centrality of Friday night trips to the multiplex for popcorn and a movie, the box office has long contended with being something of an afterthought for studio accountants, existing as an important but not primary revenue stream in entertainment empires. Let’s flash back a couple of decades, specifically, to 1975, to find out why.

By the end of that year, three different forces would reshape the industry forever:

• In July of 1975, Universal released the film “Jaws” made by a little-known director named Steven Spielberg, which quickly became the highest-grossing movie in domestic box office history off the backs of a $9 million budget. Suddenly, the modern blockbuster was born — and movie theaters, long past their early 20th century heyday, looked once again like big business.
• That same year, Sony would debut the Betamax VCR, revolutionizing the home distribution market.
• Meanwhile, HBO launches a geostationary satellite and becomes the first nationwide movie channel.

In other words, just as the box office was taking off, audiences had more reasons than ever to stay home. Sound familiar?

Back to the Future: By the end of the 80s, Hollywood looked completely different. Studios, taking a note from “Jaws,” ditched the arthouse fare of the 1970s and embraced four-quadrant, universal entertainment with franchisable and marketable films like “Star Wars,” “Indiana Jones,” “Ghostbusters,” and “Back to the Future.”

Meanwhile, cable TV exploded, and suddenly networks like TNT and TCM found themselves so starved for content to fill their airwaves, they were willing to pay just about anything for the syndication rights to beloved Hollywood films.

And, by the decade’s end, home distribution remarkably soared from a niche business of A/V nerds to generating double the revenue of the theatrical box office.

“So in the course of the 1980s, home video goes from zero to 100 miles an hour, while the theatrical market is in a recovery mode, which no one was expecting. Since World War Two, ticket sales have steadily declined, and they actually begin to rebound in the 1980s,” Thomas Schatz, professor at The University of Texas in Austin and one of the preeminent scholars of the entertainment industry, told The Daily Upside. “All while home video is taking off, and while cable’s taking off. So you’ve got this massively resurgent industry.”

Conglomeration Nation: That resurgence gives way to another phenomenon: conglomeration, sparked by Ronal Reagan’s FCC marching orders to deregulate the media industry which culminated in the 1996 Telecommunications Act passed by then-president Bill Clinton. That legislation massively reduced the barriers to owning and expanding media businesses across multiple verticals, such as film, TV, radio, and more.

By the early 2000s, six corporations essentially owned all of mainstream film and television, both cable and terrestrial. And life was good:

• Domestic theatrical ticket sales peaked in 2002. And though they’ve since steadily declined by about 30% over the next two decades, according to Schatz, studios were more than happy to continue pumping theatrical releases because of a massively expanding international audience.
• By 2019, the global box office hit an all-time high of $42.5 billion, thanks to smash hits like “Avengers: Endgame,” “Frozen 2,” and “Joker.”

But then came Covid, and the chicken-and-egg of shifting corporate strategies and shifting audience habits away from theatrical and toward home streaming.

You know what happened next: The global box office plummeted in 2020, to just a little over $12 billion globally. Even in 2021, which brought the vaccine, audiences still largely stayed home — the global box office came in just shy of $22 billion. 

“Sorry, We Aren’t Going Back to the Movies,” tech columnist Kara Swisher proudly proclaimed in The New York Times in July 2021, while extolling the virtues and realities of home streaming. And even last year, despite the massive success of “Top Gun: Maverick” and “Avatar: The Way of Water,” the global box office only earned a little more than $26 billion, still far less than pre-pandemic norms.

This year, the box office will still likely just reach $9 billion domestically, Shawn Robbins, chief analyst at Boxoffice Pro, told The Daily Upside. That’s around $2 billion shy of pre-pandemic norms.

Disney’s Iron Fist: But that doesn’t necessarily mean things are in a healthy spot. Even in 2019 when the box office hit record highs globally and Covid was little more than a one-off headline tucked away in newspaper science sections, there was plenty of reason for skepticism. Encroaching tech industry aside, Hollywood, arguably, was doing itself no favors.

Studios, and Disney especially, got hooked on big-budget franchises that could be easily exported the world over — why hope for a $100 million hit off a $40 million budget when you can score over $1 billion on a $200 million budget?

“Overseas audiences love this blockbuster s—. They can’t get enough. So the studios can reduce the number of films they produce, they can raise the budgets. They can, you know, go with this blockbuster franchise mentality. And it’s paying off with the international marketplace,” Schatz told TDU. “Disney in 2019 had a 33% market share, basically on nine movies that made $11 billion. And it’s basically all from four franchises.”

Big movies doing big business helped squash the so-called middle movie: dramas, romantic epics, comedies, as studios feared programming anything against the latest superhero smash. The box office — and theater chains — became reliant on tentpole releases, allowing Disney and other big players to flex their might.

Example: in 2017, ahead of the release of “Star Wars: The Last Jedi,” Disney demanded that theatrical exhibitors turn over an all-time high 65% cut of ticket sales and hold the film for four weeks in each venue’s largest auditorium, lest they suffer a 5% box office penalty, according to reporting from The Wall Street Journal. With theaters especially reliant on blockbusters like Star Wars, they were essentially held hostage.

“They’re in the most powerful position any studio has ever been in, maybe since MGM in the 1930s,” one film buyer told the WSJ at the time.

And relying on quarterly blockbusters instead of a steady drip of modest hits was not exactly a healthy business model for theater chains, even when topline numbers were soaring.

“There has always kind of been a pushback against box office grosses. Some takeaways [of the late 2010s] were either ‘that was a down year, or that it was a strong year, but it was driven by IP’,” Robbins told TDU, later adding “Theaters definitely want consistency.”

So What Happens Now? The good news, perhaps, for the industry, is that the superhero-franchise-IP industrial complex fever may be starting to break. Those massive tentpole releases are attracting an increasingly small-tent audience. Disney’s Marvel Studios, long the titan of the box office, is clearly on the decline if underwhelming returns from its two releases so far this year —  “Ant-Man and the Wasp Quantamania” and “Guardians of the Galaxy Vol. 3” — are to be believed. That’s giving way to a healthier, steadier release schedule of smaller but still substantial hits.

The bad news? Movie theater chains are still largely in the tank.

“Right now as we look at the major movie theater chains, AMC, Cineworld and Regal, Cineplex, a lot of them are having their issues,” Jamie Lumley, Sector Analyst at Third Bridge Group Limited, told The Daily Upside. “Cineworld, certainly with their bankruptcy. AMC is trying to manage its incredibly heavy debt load, while also still seeing overall revenue below pre pandemic levels… A lot of these chains have still struggled to weather the past couple of years. And so there’s still some work to do if they do want to see the same glory days of a few years ago.”

Still, this year’s string of box office hits offers some hope.

“There’s definitely a reason for these [theater chains] to stay open. And that tail should last long enough that these companies can still be around in a few years,” Lumley said. “But at the same time, there may need to be some tougher questions around either how to really manage that debt load, what assets are worth holding on to, and if they can really be a better company with these can be better companies with just a smaller footprint?”

Could a tech giant swoop in and buy a chain like Regal themselves? “Unlikely,” according to Lumley. These aren’t exactly attractive M&A targets.

What About Hollywood? Meanwhile, the studios are experiencing a similar crunch on the other side of the equation. Last week, Paramount’s share price experienced its worst drop off on record due to a weak earnings report and the reveal that it has net debt leverage of nearly 7 times EBITDA. The struggling legacy studio may just be the next domino to fall in ongoing industry consolidation.

“What I suspect is going to happen, and it’s already happening, is that we’re going to see a situation where there’s going to be a new oligopoly,” Schatz told TDU. “It’s already forming, and not all the legacy studios are going to survive. It’s increasingly clear to me that Apple and Amazon as well as Netflix are going to go theatrical. And they’re going to come up with some kind of a combination that involves something like what we’re seeing now with ‘Air,’ but more significantly, I think, with what we saw with ‘Matilda [the Musical]’” — which Netflix released to much success in theaters last fall, particularly in the UK where the live theater production proved a smash hit on the West End, before plopping it on its streaming service.

That’s not exactly the scrappy comeback story Hollywood is used to telling. But, historically speaking, it’s exactly the boom-and-bust story Hollywood as an industry has always known.