Tuesday, November 17, 2009

Disintermediation, again

Kim Masters was on NPR's "Morning Edition" this morning talking about the concerns that motion picture exhibitors (theater owners) have about the movie studios' plans to change their "release windows". Release windows are the order in which movies are released to different channels, and how long each channel has exclusivity. The issue is a seemingly innocuous request made by the studios to the FCC for "selectable output control" on set-top boxes, Blu-Ray players and other devices. Selectable output control would allow the studios to control whether, when and how much a movie or other video program could be played on a compatible device.
Consumer groups and consumer electronics vendors oppose selectable output control because the studios could use it to prevent their content from being recorded on DVRs and other devices. Now, the National Association of Theater Owners (NATO) has filed opposition to the studios' request because they fear that the studios will use selectable output control to make movies available in the home at the same time that they're in theaters.

I don't support selectable output control because it takes away consumer choice and negates thirty years of progress in consumer electronics since the Betamax decision, but the theater owners' opposition to the studios is more an effort to hold back the ocean than a friendly, consumer-oriented action. Extremely few movies make money in theaters today; theatrical distribution is most valuable for promoting films for future sale as DVDs and Blu-Ray discs. As the sales of DVDs erode and Blu-Ray fails to pick up the slack, the studios are forced to look at online digital distribution as a viable alternative. However, for digital distribution to generate the kind of revenue that physical media does, the movies have to be available much sooner, and that means cutting into the theaters' release window.

Whether or not the studios get selectable output control, theaters' release windows are going to erode; it's just a matter of when and how. When theater patrons are forced to go through metal detectors and hand over their cellphones before going in to watch a movie (as shown on a recent edition of CBS's "60 Minutes") in order to prevent piracy, theaters are not long for this world.

The studios are looking for any and every way to increase revenues, including cutting out the middleman, even if the middlemen are movie theaters. The same thing is happening with broadcast television. Comcast is close to buying 51% of NBC Universal from General Electric, which will give it control of the company. NBC has done such a superb job of running its broadcast network into the ground that it may become the first broadcast network to become a cable network. CBS and ABC are beginning to demand a cut of the retransmission payments that cable operators have to pay broadcast stations for the right to transmit their programming. Those retransmission payments have become the only thing keeping some stations on the air in this recession. Add to that the practice of some networks demanding "reverse compensation" from stations: Instead of paying stations to carry the networks' programming, the networks demand that the stations pay for the right to carry the programming.

Network television affiliates are an endangered species, because the networks can make more money, at lower cost, by dealing directly with the cable and satellite operators. For Comcast, the deal becomes almost a no-brainer, since it would control both the network and the cable systems. It will have to sell off the NBC owned-and-operated stations in cities where it has cable systems; the next step would be to take NBC to cable in city after city as network affiliate agreements expire.

Fifteen years ago, we were talking about disintermediation in retail and wholesale distribution brought about by the Internet; now we're talking about it again, this time in media. The future of theatrical motion picture exhibition and free broadcast television hang in the balance.

Update, December 5, 2009: According to the December 2nd edition of the Chicago Sun-Times, a patron at the Muvico Theater in Rosemont, IL was arrested and spent two nights in jail for videotaping four minutes of "Twilight: New Moon." She claims that she was actually videotaping her sister's birthday party at the theater, and the video on her camera (a still camera that records video segments) supports her contention. Nevertheless, the theater's managers pressed charges against her under a little-used law designed to punish film bootlegging. She faces up to three years in prison. I've lost whatever sympathy I still had for theater operators after this mind-boggling incident.

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