Regal Entertainment: "Exploring options" in a new world

Yesterday, Regal Entertainment, the largest movie theater chain in the U.S., announced that it's exploring "strategic alternatives," including selling the company. Regal has long been the top buyer of theater chains around the country--it now owns 574 theaters with 7,349 screens. However, when there's a run of unpopular movies, as happened this summer, Regal and other theater operators suffer; the company's revenues and profits from the summer quarter fell sharply year-over-year.

Regal's decision to explore a sale is being driven by several trends:

• Industry revenues from theatrical exhibition have increased modestly over the last decade, but the number of tickets sold has been in a long decline. Theaters and movie studios have maintained their revenues by increasing ticket prices, in part by showing 3D movies at higher prices and by installing IMAX and similar panoramic projection systems. No one really knows at what point higher prices will lead to diminishing returns, but many people in the industry are afraid that ticket prices are close to that "tipping point" already.
• Netflix's recent moves to fund and distribute its own movies are sending shock waves through the industry. Regal and the other three of the four largest U.S. theater chains announced that they would refuse to show any movies distributed by Netflix. However, that didn't stop companies like The Weinstein Company and IMAX, or actor Adam Sandler and his Happy Madison production company, from signing up to produce and distribute movies with Netflix. "Direct-to-home" movies have long been a staple of the home video business, but those titles are usually either not good enough or appeal to too small of a niche audience for theatrical distribution. That's going to change with Netflix, and likely other companies, pumping money into producing theatrical-quality movies for the OTT streaming audience.
• As I've written before, High Dynamic Range video, which is under development by several companies, will provide in-home viewers with a picture that's superior to anything other than IMAX. Currently, the only way to view HDR is with a modified HDTV or Ultra HDTV. In order to view HDR in a movie theater, it's likely that entirely new projectors or huge flat-panel displays will be required, which will require major capital investments less than a decade after theaters replaced their film projectors with digital models.
• Many Chinese and Japanese investors, including Alibaba and Softbank, are exploring investments in the U.S. entertainment industry. AMC Theaters, the second-largest U.S. theater chain, was purchased by China's Dalian Wanda Group last year for $2.6 billion.

Put those four trends together, and it's likely that this is the right time for the big theater chains to consider selling. Ticket prices are about as high as they can go without dragging down top-line revenues, non-theatrical competition hasn't yet made a dent in theatrical revenues, the major capital investments to support HDR are still a few years away, and there's a lot of foreign money looking for a home in the movie business. 

The price of (brain) complexity

Before launching into this post, let me state that I'm not a neurobiologist, psychologist or psychiatrist. I'm writing based on what I've read about neurobiology; I claim no expertise in the subject, other than the fact that I've got a brain.

It's generally believed that the human brain is the most complex object on Earth--certainly more complex than even the most powerful supercomputers. However, we've learned from experience that the more complex a system is, the more there is to go wrong. To keep the brain from failing in myriad ways, evolution has selected for a brain that, through a combination of redundancy and plasticity, is fault-tolerant. In other words, the brain can continue to operate normally (or more precisely, within a range of normality,) even with some damage. That damage may come from genetics, environmental factors such as pollution, or physical injury such as concussions, hemorrhages or tumors.

When the brain sustains damage beyond its capacity to compensate for, the result is mental illness. Given the brain's complexity, most human brains are already operating at or near the limits of normality just from compensating for the normal damage that accumulates throughout life. (In the brain, only the olfactory bulb and the subventricular zone contain nerve cells that regenerate in adults.) That's one reason why some neuroscientists theorize that conditions such as schizophrenia have both a genetic and environmental basis. For example, having a genetic predisposition to schizophrenia is a necessary but insufficient condition for a patient to start showing symptoms; an environmental stressor, or normal age-related changes, appears to be required in order to actually trigger the condition.

As we put more of a cognitive load on ourselves, we may very well be pushing our brains beyond their ability to compensate:

• Only twenty years ago, we were able to cope with the flow of incoming information, but today, we're continuously bombarded with text messages, emails, tweets, alerts and social media posts via our smartphones, tablets and PCs.
• We have to decide what to pay attention to, what to ignore, and what to postpone. For the messages we pay attention to, we have to understand them and decide how to respond.
• Despite the long-term recovery in the U.S. economy, employment opportunities remain diminished for recent college graduates and middle-aged workers. In addition, with the shift from permanent to contract jobs, even people who are employed need to be constantly searching for new jobs in preparation for when their contract expires or is terminated.
• The sharing economy (for example, companies like Uber and Lyft) is changing the nature of work from fairly regular schedules with reliable incomes to demand-driven work with both unpredictable schedules and income.

Technology can help with some of the added stressors: For example, automatic filters can screen out spam and organize incoming messages by priority, and newer cars have multiple sensors that can help prevent accidents. However, technology is doing far more to add to the cognitive load than it's doing to relieve it. In addition, the change in the nature of work from semi-permanent to temporary and demand-driven is unlikely to be reversed. Therefore, the amount of environmental stress will continue to rise.

My hypothesis is that we're likely to see a rise in mental illness as a result of these stressors--most likely in the forms of depression, anxiety disorders, domestic violence and violent crimes outside the home, inability to hold onto jobs not caused by the inherent transitional nature of temporary work, and suicide. Interruption-free weekends or smartphone-free vacations, which are still seen as unusual, are likely to become commonplace self-therapies to deal with the consequences of ever-increasing cognitive loads. In short, we need to become aware of the increasing cognitive stress that we're subject to, and come up with strategies for coping with the stress.

Broadcasters to FCC: No, we won't tell you the details of our retransmission deals

The Wrap reports that the Federal Communications Commission has put its review of the Comcast-Time Warner Cable merger on hold for the second time. This time, the delay is due to the refusal by ABC, CBS, NBC, Fox, Viacom and Discovery to supply the agency with details of their retransmission agreements with cable, satellite and IPTV operators. The reason that the FCC wants the retransmission information in the first place is that opponents of the merger have charged that the combined company would have too much power over program suppliers (including the broadcast and cable networks.) The networks have agreed to provide the U.S. Justice Department with the data because it will be kept confidential, but FCC rules require that the data be made available to both supporters and opponents of the Comcast-TWC deal, so that they can use it in their briefs. Only the general public is prohibited from seeing the data.

The six networks have very good reasons for wanting to keep their contracts secret, because once buyers of their content learn how much other companies are paying, they'll want to renegotiate their contracts down to the lowest price. On the other hand, four of the six companies (ABC, CBS, Fox and NBC) are granted licenses by the FCC to broadcast over-the-air. Unlike mobile carriers such as AT&T, Sprint, T-Mobile and Verizon, television broadcasters get their spectrum for free. So, they are in essence underwritten by U.S. taxpayers for the multi-billion dollar value of their airspace. (Update, November 5, 2014: The FCC has released a "price list" in conjunction with its plan to get broadcasters to relinquish their spectrum so that it can be used for other applications. The FCC values the nationwide recovery of as much as 126 MHz of spectrum at a maximum of $38 billion dollars.) In addition, whenever a retransmission dispute between a broadcaster and a cable, satellite or IPTV operator results in the broadcaster removing their signals from the video operator, the public is stuck in the middle. Therefore, I believe that there's a strong argument for public disclosure of broadcast retransmission deals, above and beyond the Comcast-Time Warner Cable case.

My suggestion is that, if broadcasters want to prohibit anyone outside a handful of government employees from seeing their retransmission deals, they should be forced to pay the full market value for their bandwidth, just as mobile operators do. If they don't want to do that, they always have the option of relinquishing their frequencies and feeding their programs directly to service providers and to consumers over the Internet. CBS threatened to do exactly that if the Supreme Court ruled against it in the Aereo case, so it's clearly an option that's been considered by broadcast networks. If they want to operate in secret using the public's airwaves, they should pay for the privilege.

The Transition State

Countries go through transition periods where political, economic and technological developments combine to cause sweeping societal changes. One such transition period in U.S. history was from the very end of the 19th Century to the start of the Great Depression. Here's a list of some of the key events in the transition:

• A massive influx of refugees, primarily from Eastern Europe and Russia, which initially was an enormous social burden but laid the groundwork for the U.S. to become the world's leading manufacturer and the center of science and technology.
• A vast movement of population from farms to cities, which again initially put huge burdens on the cities but ultimately provided the talent for them to become economic powerhouses.
• The invention and adoption of cars and trucks, which replaced horse-drawn vehicles and expanded the distances that workers could commute and that goods and services could be delivered.
• The start of the era of mass media, where radio could reach an entire city instantly with the same entertainment, news and sports, and where the transition from news once or twice a day from local newspapers to continuously-updated news began.
• Mass production techniques, which were pioneered earlier in the 19th Century, became widely adopted and enabled manufacturers to manufacture goods more quickly and cheaply, with better quality.
• The labor movement started as a response to long working hours, low pay and poor working conditions.
• Fossil fuels became the primary energy source for the country, replacing wood, whale oil and other renewable fuels. The availability of cheap coal and petroleum-based fuels supercharged manufacturing and transportation, and helped to make electricity both practical and economical.
• Electrical distribution, which began in a handful of big cities in the late 19th Century, swept across the country, making gas lighting obsolete, replacing steam- or water-powered engines with electric motors for manufacturing, and facilitating hundreds of new industries.
• The first heavier-than-air aircraft flew, and while it would take decades for airplanes to become an essential transportation and shipment technology, they made long-distance travel much more practical for the people who could afford to use them.
• Telephones became commonplace, replacing telegraphs and making instantaneous person-to-person communications possible for most people living in cities.

The bottom line is that, if you took someone living in 1880 and magically transported them to 1930, they would recognize very little. An enormous amount of good came out of this transition, but so did the Great Depression and two World Wars. I believe that we're going through a similar transition, which probably started around 1990 and is likely to change society just as thoroughly:

• Climate change driven by global warming is likely to shift areas of food production further north and south in the respective hemispheres, and will raise sea levels, requiring massive capital investments to protect coastal cities and the abandonment of some coastal areas and islands.
• We've begun replacing fossil fuels with renewable energy sources, both as a response to global warming and in order to protect ourselves from supply disruptions.
• Internal combustion engines in cars and trucks are being supplemented or replaced by electric motors powered by batteries and fuel cells.
• The Internet has erased geographic boundaries and made commerce, information and entertainment available everywhere.
• Mobile devices, especially smartphones, have made the Internet and all of its capabilities available to people all over the world, including third-world countries.
• The combination of the Internet with vast and comparatively cheap IT systems is changing the nature of work and the types of work that are done by people vs. computers. Increasingly, work previously done by untrained, high school educated people is being done by computers and humans overseas, and the boundary between work suited to automation and work suited to humans continues to rise.
• After a 50-year period when people moved from cities to suburbs, the population flow has reversed, and cities are once again desirable places to live, not just work.
• The combination of greater urban population density, new transportation options like car- and ride-sharing, and the advent of autonomous cars, signals the beginning of a long decline in the automobile industry, as cars are increasingly seen as utilities to be used as needed rather than essential property.
• We're only a few years from being a majority minority country, which will have dramatic political and economic consequences.
• The application of computers to medicine is driving advances in genomics, proteomics and pharmaceutical development that are resulting in new ways to detect, diagnose and treat diseases, as well as ways to extend both the length and quality of life. That too has dramatic societal, economic and political implications.
• A similar application of computers to materials science has led to the development of new engineered materials that are better suited to their purpose and cheaper than previous materials, or that can do things that no material could previously do.
• At the same time, income disparity between the rich and everyone else continues to grow, and that disparity is reflected in the fact that children from high-income families have much better educational opportunities throughout their school years than children from middle- and low-income families.

If I were to summarize what's driving our current transition, I'd say that by far the two most important developments were Moore's Law and the Internet. Both of them predate the transition, but they've resulted in the ability to put intelligence into just about everything at an incredibly low cost, and the ability to connect everything, no matter where it is.

Are we going to have the same kind of global disasters that occurred during and after the 19th/20th Century transition? Not necessarily. We had a transition of a similar magnitude after World War II, and while we had the Cold War and many proxy wars, there was nothing approaching either World War and, in general, improved financial conditions. However, we still don't all the ramifications of global warming and may not know for decades, and the same technologies that improve communications and health care can be used to impose a surveillance state and create organisms deadlier than anything that's naturally evolved on Earth. So, we'll continue to be faced with a nasty assortment of unintended consequences. The outcome of this transition will depend on how many of those consequences we avoid, and how we deal with the ones we can't avoid.

Over-The-Top video: HBO and CBS crack open the door

Yesterday, HBO announced that it plans to launch an over-the-top (OTT) Internet video service next year that will be available to anyone with a high-speed Internet connection, even if they don't subscribe to cable, satellite or IPTV services. HBO didn't announce any specifics about which shows will be available, if there will be live streaming or Video-on-Demand (VOD) only, and how much the service will cost. Then, today, CBS announced CBS All Access, which will provide nationwide VOD access to current CBS shows and classic shows from the libraries of CBS, Paramount and Desilu, for $5.99/month. Subscribers living in 14 major cities will also get live streaming from their local station 24 hours a day.

In the course of 24 hours, the competitive landscape for OTT video in the U.S. changed from Netflix and a bunch of smaller content companies to a field including the #1 pay television service and #1 broadcast network. Both HBO and CBS will be "canaries in the coal mine" for the other broadcast and cable networks. The right price points and assortments of live and VOD content are experiments in progress, and we're likely to see lots of different combinations as other companies enter the market. These announcements are also likely to impact existing OTT services--especially Hulu. Fox, Disney and Comcast own Hulu, but Comcast is not allowed to exercise any control due to restrictions that it agreed to in order to get regulatory permission to acquire NBC Universal. Fox in particular has put severe restrictions on when its shows are made available to Hulu and for how long. With CBS effectively opening the floodgates, Fox may either have to loosen the restrictions on Hulu, or as I suspect, launch its own Fox-branded OTT service that's much closer to CBS All Access. Disney, which already has an extensive web and mobile app presence, is likely to do the same, but with several services:

• Sports, which will offer ESPN's channels
• Family, which will offer Disney's family and children's channels, and possibly ABC Family
• ABC, which will offer ABC's channels

Other cable networks and groups that are candidates to offer their own OTT services include:

• Starz, which has already announced an OTT service for international markets
• Time Warner, which in addition to HBO could offer services based on CNN and its Turner cable networks (it already offers a large collection of classic movies and TV series through its Warner Archive service)
• Fox, which in addition to its television network, can offer services based on FX, Fox Sports, Fox News and the National Geographic channels
• Discovery, which in addition to its namesake networks could stream Animal Planet, OWN, Science Channel, TLC, Velocity and others
• A+E Networks, jointly owned by Disney and Hearst, which could stream such channels as A&E, History and Lifetime
• Viacom, which could stream movies and TV shows from Paramount Pictures and cable channels including BET, Comedy Central, MTV, Nickelodeon and TV Land
• AMC Networks, which owns AMC, IFC, Sundance TV and WE TV

Comcast may be forced to make NBC Universal's broadcast and cable networks available for OTT as a condition of its merger with Time Warner Cable, but I think that it's unlikely that the company will offer its channels for streaming to non-cable subscribers any time soon.

That brings up a possible "unintended consequence" of HBO's and CBS's announcements: They'll make it much more likely that the FCC will allow OTT services to be classified as Multichannel Video Programming Distributors (MVPDs), the same as cable, satellite and IPTV operators. After all, if content providers can offer exactly the same programming over the Internet that they offer through MVPDs, why shouldn't an Internet-based program distributor be allowed to do the same thing?

Getting Ebola under control

The Ebola virus is in the U.S.--specifically, two nurses who treated a patient who returned to the U.S. with an Ebola infection are themselves now being treated for the virus. The U.S. is doing what it usually does when confronted with a health or security emergency--panicking. The panic, which is far more communicable than the virus, is being spread by news organizations that are desperate for ratings, and it's not being helped by the Centers for Disease Control (CDC,) which seems to be a couple of steps behind the situation on the ground.

From what I've seen and read, there are a few common-sense steps that we can take to limit exposure and get ahead of the virus:

• We need to quickly set up more high-containment medical wards. At the time that the first Ebola patient in the U.S. was identified, there were only five high-containment wards that were fully equipped for treatment of Ebola and other viruses. In addition to improving containment in existing public hospitals, we should also consider basing some of the new facilities in isolated domestic military bases with their own airfields in order to limit the risks of infection spreading in cities.
• It's clear that Texas Health Presbyterian Hospital Dallas was unprepared to treat Ebola patients, and the Washington Post reports that the hospital kept adding more protective equipment as the first patient deteriorated. The two nurses who were infected may have gotten their infections early in the process, before sufficient isolation was established. A standard protocol has to be distributed to every hospital and health care facility in the country that might have to treat a patient with Ebola, even if the procedure is only to isolate the patient and prepare them for transport to a more suitable facility. Standard protocols are also necessary for the destruction of the bodies of people who die from Ebola, because their bodies remain highly infectious after death.
• Voluntary quarantine doesn't work, especially when even trained medical professionals ignore the rules. NBC's medical correspondent Dr. Nancy Snyderman broke quarantine, and Amber Vinson, the second nurse infected in Dallas, flew to Cleveland and then back to Dallas, where she checked herself into the hospital yesterday, even though she was under observation. Quarantine has to be mandatory, and if rules for compensation don't exist, we need some way for the U.S. Government or states to provide some income to people who will lose their only source of income while in quarantine. That will relieve pressure on many people who would otherwise be tempted to hide their exposure or break their quarantine.
• The U.S. Government and other countries must continue to send trained health and safety professionals to West Africa, both for humanitarian reasons and to stop the spread of Ebola to other countries.
• We need to establish monitoring at every Customs/Immigration checkpoint in the U.S., focusing on all flights originating from West Africa and all passengers who came from or spent time in West Africa.

Liability and its impact on the adoption of technology

Thursday night, Tesla unveiled its dual-motor variation of the Model S sedan, and it also revealed several technologies that move part way down the road to self-driving cars. One system uses cameras to read street signs and set the car's speed to the posted speed limit. Another system keeps track of lines on the road and can steer the car between the lines without human intervention. A third system brings the car to a stop if it senses an obstacle in front of the car. These capabilities were implemented in other cars before Tesla, but in every case, they're intended to be used with a driver actually driving the car. Even though Elon Musk and other Tesla representatives took their hands off the wheel and their feet off the pedals to show how the systems work, they can't tell, advise or even suggest that Tesla owners do the same, for now.

Elon Musk was quoted as saying that he believes that a commercially-priced self-driving car is possible within five years, and I believe him. However, it may be 20 years before we start seeing fully self-driving cars in commercial use. The reason isn't technology or cost. All the pieces are there, and the prices of even the most expensive items like LIDAR systems are dropping dramatically. The real problem is liability: If a self-driving car is involved in an accident, who's responsible? With today's cars, one or more of the drivers involved in the accident is usually found to be responsible for the accident and liable for damages. There are cases where an automobile or parts manufacturer is found liable, as in some of the accidents caused by faulty Firestone tires on Ford Explorers, and the stuck accelerator problem on some Toyotas. However, manufacturers are very rarely successfully implicated in car accidents.

Self-driving cars change the liability argument dramatically. It's extremely likely that self-driving cars will be safer than cars driven by humans: Cars don't get distracted, they don't drive drunk, they don't get into arguments with passengers, and they don't experience road rage. Their sensors and computers should respond more quickly to changing conditions than humans can. They won't drive over the posted speed limit, and they won't follow other cars too closely. A working self-driving system should be much safer than a human driver. However, technology can fail. An excellent example from 2005 is a test performed by Stern TV on three S-Class Mercedes with an early version of self-braking. Three cars plowed into each other because the system wouldn't work in a steel-framed garage. Presumably, that problem has been long since fixed, but electronic systems in cars do fail, especially when they're still new.

If a self-driving car is in an accident, who's to blame? For simplicity, let's assume that any other cars involved in the accident weren't at fault (although they might at least share the blame in a real-world accident.) If the person in the driver's seat wasn't actually driving, something in the car might have failed. But what if something did fail, the car alerted the passengers, and they ignored the warning? That might save the car manufacturer from liability, but the manufacturer would almost certainly be sued because it has the "deepest pockets." Or, what if the person in the driver's seat turned off the self-driving system before the accident? Then, the driver would most likely be at fault.

We won't see fully self-driving cars until their technology is sufficiently mature that the reliability of critical systems is around the "five-nines" level (99.999%,) or around one failure in every 100,000 hours of operation. In addition, car manufacturers are likely to push legislation that limits their liability in accidents involving their self-driving cars--the trade-off for the greater overall safety in self-driving cars is a limitation on liability if an accident does happen. Finally, we're likely to see legislation that requires one of the passengers in self-driving cars to be a licensed driver and to be able to take control of the car at any time. These conditions will probably dampen demand for self-driving cars, because of the cost of highly reliable systems, and because companies like Uber and Lyft may still have to employ human drivers.

For these reasons, fully self-driving cars may be technically feasible, and even practical from a cost standpoint, well before they're commercially available.

Film is dead--and a few big-budget movies won't save it

Last July, after lobbying by directors including J.J. Abrams, Christopher Nolan and Quentin Tarantino, the major U.S. movie studios signed a deal with Kodak to continue to purchase motion picture film for several years, whether or not they actually use the film. Kodak, which emerged from bankruptcy in September 2013, had planned to shut down its (and the industry's) last remaining motion picture film manufacturing facility. Between the virtually total replacement of film cameras with digital and the almost complete transition of U.S. theatrical projectors to digital from film, Kodak's shipments of motion picture film fell 96% between 2006 and 2014.

Why do this relative handful of directors continue to insist on shooting film? There are two primary reasons:

1. Film can capture a bigger range of colors than digital camera--the equivalent of 16 bits of resolution. By comparison, Arri's Alexa, the most popular camera for high-end cinematography, captures color information with 15 bits of resolution, but then may lose bits of resolution when it converts the video to a color space for editing and viewing.
2. Under ideal conditions, 35mm film has an image resolution of around 5300 x 4000 pixels, while the Digital Cinema standard for 4K acquisition and projection is 4096 x 2160 pixels. However, many movie theaters are still using 2K projectors, which limits the resolution to 2048 x 1080. Compared to either digital standard, film (hypothetically, at least) provides far more image detail.

So, those directors who still want to use film have a solid rationale for doing so, even if most of the increased resolution and color space are lost once they're projected on digital projectors or watched on HD, or even Ultra HD TVs. However, the vast majority of directors and cinematographers have switched to digital for several reasons:

1. Digital cameras have dramatically more dynamic range (the ability to capture bright and dark subjects at the same time) than does film. Typically, the dynamic range of movie film is 1,000: 1 (approximately 10 bits or 10 f-stops.) Even video cameras costing a few thousand dollars can capture 10 f-stops or more, and the Arri Alexa has a range of more than 14 f-stops, or better than 16,384:1.
2. Digital media is much less expensive than film over time, because it can be reused. Movie productions typically offload recorded flash media to hard and flash drives during the day, then erase and reuse the flash media. Digital's much lower costs also enable directors to get coverage from a variety of angles and framings.
3. 35mm film magazines usually only allow a maximum of 1000 feet of film to be loaded, due to size and weight. That means that magazines have to be changed every 11 minutes of filming (at 24 frames per second.) Depending on the image resolution, dynamic range and color depth, a single piece of digital flash media can hold hours of video. That allows for long continuous shots and far fewer interruptions to change media. 
4. Digital cameras have an enormous range of sizes and weights, many of which are smaller and lighter than any practical motion picture film camera can be. This gives filmmakers enormous flexibility for shooting in tight quarters and in sports and action situations. It also makes lightweight drones feasible for shooting, where previously only helicopters and airplanes were viable platforms for aerial photography.
5. Specialized digital cameras can provide much higher frame rates than are either economically or technically feasible for film cameras. For example, Vision Research's Phantom Flex4K digital camera can shoot Digital Cinema 4K at 1,000 frames per second, or 2K at 1,950 frames per second. By comparison, film cameras usually shoot 24 frames per second.

There's a technology coming down the pike that's likely to make film obsolete, even for the directors who still insist on using it. I wrote about High Dynamic Range (HDR) video two weeks ago, and I won't repeat all the arguments I made in that post. Here's a summary of HDR's advantages:

• Much greater dynamic range; Dolby says that its Dolby Vision HDR system will have as much as a 200,000:1 dynamic range. Many current digital cinema cameras can be adapted to shoot HDR video when there are commercially-available ways to view it.
• Color spaces that are as big or bigger than motion picture film.

However, there are several problems with HDR, beyond what I stated in my post:

• There are no current theater projectors, film or digital, that can project HDR images. Film is only capable of 1,000:1 dynamic range, and film can't project a true black because even the blackest part of an image can't block all the light from the powerful xenon bulb in film projectors. Digital projectors use a similar xenon light and have the same problem. It's possible that laser-based digital projectors could project both the dynamic range and color space of HDR, but to my knowledge it hasn't been demonstrated yet.
• With the exception of the handful of expensive professional Organic LED (OLED) displays in use, today's current HDTVs can't provide either the dynanic range or color space of HDR. However, LCD HD and Ultra HD TVs can be engineered to have a separate LED backlight for every pixel, and most LCD displays are capable of displaying a bigger color space than is currently used. Dolby, Technicolor, Philips and the BBC are all either in talks with or have already licensed technology to consumer electronics manufacturers to implement their HDR formats in future HD and Ultra HD TVs.

I believe that when the aforementioned film-holdout directors see HDR, they're going to want to use it--and that's when film dies, once and for all, for movie production. (Film is already dead in movie theaters, despite some last-gasp attempts to keep it viable.) The problem, of course, is that there's no easy way to implement HDR in movie theaters. However, as I wrote in my previous post, if past experience is a guide, it make take as long as ten years for HDR to become standardized and available to consumers at an affordable price. That will give theater operators and digital projector companies time to figure out a way to make HDR work in theaters.

Netflix jumps into the movie production business

Many people in the movie and television businesses have believed that given Netflix's success with original television series, it was only a matter of time before the company would begin producing movies. Those beliefs have been confirmed in a big way: Last week, Netflix announced that it has partnered with The Weinstein Company and IMAX to produce a sequel to "Crouching Tiger, Hidden Dragon" called "Crouching Tiger, Hidden Dragon: The Green Legend," and today, Netflix announced a four-picture production deal with Adam Sandler and his Happy Madison production company.

The terms of the deals aren't public knowledge, but some of the plans have been revealed: In the "Green Legend" deal, IMAX was brought in to distribute the film to IMAX theaters. IMAX develops the cameras, projectors, screens and processing software for its various formats, but its theaters are actually owned and operated by other parties, and a number of those parties in the U.S. are very unhappy. The four largest theater circuits in the U.S., Regal, AMC, Carmike and Cinemark, have said that they won't show the sequel. Cineplex in Canada and Cineworld in Europe have also refused to show it. That doesn't completely eliminate IMAX as a viable outlet for the movie, because there are many IMAX theaters operated by museums and public institutions, and smaller theater chains with IMAX theaters may decide to show it.

It's not clear whether Netflix changed its strategy overnight or whether it had already expected the theater chains to react the way they did, but in today's announcement, Netflix said that none of the four movies to be produced by Adam Sandler will be shown in theaters. In addition, they also made clear that none of the movies that Adam Sandler or Happy Madison are already committed to for other producers or distributors are included in the four films.

No one should be surprised that big theater chains won't show Netflix's films--they've pushed back against major studio day-and-date Video-on-Demand (VOD) tests (the movie is released in theaters and on VOD on the same day,) starting with Universal's "Tower Heist" in 2011. By and large, the big studios have backed off of day-and-date VOD, but they're aggressively testing shorter windows between some movies' theatrical release and their availability on VOD. Smaller independent studios such as Magnolia Pictures have adopted day-and-date VOD releases. 2929, parent company of Magnolia, also owns Landmark Theaters, which has 50 theaters in 21 markets, so Magnolia is guaranteed of theatrical distribution in many major cities, no matter what other theater chains decide.

It's likely that Netflix is structuring its movie production deals with the expectation of no domestic theatrical revenues. Whatever theatrical distribution Netflix gets will be promotional, not a significant revenue generator. Over time, if Netflix's movies prove very popular, the big theater chains may be forced to start bidding for the right to show them in their markets. However, for now, the safest move for Netflix is to budget movie production in line with VOD revenues.

Earlier today, The Verge reported on Adam Sandler's deal with Netflix, and wrote:

Under the deal, Sandler removes the burden of risk. Netflix will solely fund the films, taking full responsibility for providing investment — and securing additional investment — off Sandler's Happy Madison Productions. Though Netflix will be the sole financier, the films will still have their $40 million to $80 million budgets. Sandler's payments are a large chunk of his films' budgets. He reportedly receives $15 million and over per film as an actor, and can make an additional $5 million as the producer, which explains how Grown Ups 2, a comedy with a handful of special effects, reportedly cost $80 million. On top of all that cash, it's likely Sandler and his production company will make an additional, undisclosed lump sum of money simply by signing the deal. Netflix decline to provide comment to The New York Times on the specifics of the agreement.

It's inconceivable to me that they would agree to pay production costs anywhere near $40 to $80 million or $15 million per picture for Sandler's acting, especially since Sandler's last several movies have bombed in the U.S. Netflix probably has a "back-end" deal with Sandler that pays him additional compensation if the movies reach or exceed performance targets, such as the number or percentage of subscribers who watch them. As the Verge article points out, Sandler laces his films with product placements, which can defray some production costs, or put money into his pocket. That might be enough to enable Sandler to, say, produce a film for $25 million, get $10 million in product placement funds, deliver the movie to Netflix for $20 million and put $5 million before tax into his pocket.

Netflix may be the first VOD company that will underwrite major motion pictures for its own distribution, but it almost certainly won't be the last. I expect Amazon to follow suit, and possibly Redbox. (Update, October 4, 2014: TechCrunch reported today that Redbox will shut down its streaming service on Tuesday, October 7.  That makes it much less likely that the company will get into original production.) SoftBank, the owner of Sprint in the U.S, SoftBank Mobile in Japan and the single largest shareholder of China's Alibaba, just invested $250 million for 10% of Legendary Entertainment, with options to invest a total of $750 million more between now and the end of 2018. Legendary, whose movies are co-financed, marketed and distributed by Universal, could produce movies for SoftBank and Alibaba should either company decide to distribute its own original titles.