More than ever before, the cinema industry is facing a year of fundamental change. David Hancock, research director at IHS Markit, explores the dynamics — from digital file sizes to consolidation — that will increasingly impact the sector in coming months.
Cinema is in a state of flux, as is the role of film as an entertainment medium. Cinema itself is not under threat — investment in technology, venues, design, service levels, analytics and other things all push it forward as it competes with leisure options and other forms of content. High-end TV provides a compelling argument to stay at home, but the number of films being released in cinemas is still rising in most countries, showing its worth as a value creator at the beginning of the lifecycle for films. Within that context, this year could prove to be a defining one for the future direction of the cinema sector.
During 2019 we should see some movement on the issue of theatrical windows, which is in discussion amongst larger cinema groups and studios, although that movement may well be ‘No change here’. The debate has traditionally been between exhibitors and distributors, initially on the exclusive theatrical window before VHS/DVD but the arrival of VOD and the growth of streaming services accelerated the pressure on the industry to find a mutually acceptable solution. The window has shortened naturally over time anyway, as data from IHS Markit has shown.
A window into a film’s true value
As I have argued before, with others, attempts to cut the period of theatrical exclusivity unilaterally are not in the best interests of maximising a film’s value, with cinema acting as the best value creator for content. This message seems to be getting through and discussions now seem to be softer in tone, even if there is a fundamental disconnect between the window’s existence and the public position of Netflix. The issue will not be resolved by unilateral action or imposition, but more by finding a path forward that benefits all parties.
Consolidation of the big hitters
For larger exhibitors, one of the key themes in 2019 will be consolidation. From 2016 to 2018, market share of the 10 largest cinema operators worldwide has increased from 25% to 36%, mainly via acquisitions. This is not finished yet, and while the sector is still relatively fragmented and will never look the same as highly concentrated sectors such as aerospace, leading exhibitors could conceivably account for 50% of screens within two years. Consolidation is driven by the need for exhibitors to save costs, for scale to drive volume deals on technology and other major costs areas. It also mitigates risk across several countries — a bad annual performance in one country will not necessarily drag a group’s financial results down.
Marketing of your technology such as PLF and HDR is made far easier by cross-country groups, and branding of quality and concepts is an area in which cinema lags behind TV, for example. Consolidation also leaves an opportunity for smaller and independent circuits to carve out a niche, which is partly behind the move to boutique cinema in the UK and the US. Often this has been through film choice but points of difference will become wider and varied.
This process of consolidation is affecting the dynamics of the sector (exhibitor/distributor relationship) as studios are faced with larger and more powerful exhibition entities in negotiations. It is counter-balanced to an extent by a similar process happening in studios. Disney acquiring Fox brings the number down to five (plus Lionsgate as a plausible sixth) and this may be the trigger for more of that this year. The studios as creative hubs are not under pressure in their role of producing global blockbusters; they are the only entities with the global distribution presence in the theatrical arena to achieve this effectively. However, their role as producers is under threat more generally — especially from streaming services pumping money into original programming, including films. Given these pressures, the strategic response may also be to consolidate down to fewer entities.
Studios have had to adjust after the financial crash. Financial backing changed and reduced, shrinking their slates, and the model began to creak. Market share in North America slid, but they have addressed this with fewer, bigger films that take more money. North America market share, and globally, has risen steadily since 2013, driven by franchise films which accounted for three-fifths of the Top 50 films in 2017, and two thirds of the box office revenue generated. I expect to see the continued dominance of this type of film; relatively simple to market by building on success over time.
Not forgetting the technology
At an image level, HDR should make further progress this coming year, both branded HDR ventures, but also HDR-capable projectors. Cinema lags behind TV in consumer understanding of HDR as a concept (see “Investing in 4K, page 70) and must be addressed in 2019. The expense of systems is probably a sticking point, either for laser-based systems or LED. The latter is still restricted to Samsung’s offer which has widened out to new screen sizes.
Immersive sound is also on an upward curve, with 6,000 systems in the market now, and that will continue especially now audio standards (SMPTE ST 2098: 1, 2 and 5) for cinema have been published. Continued take-up of object-based sound suggest it makes a difference to consumers and the number of films receiving immersive mixes is rising steadily.
Experience is the key word now: making the cinema experience more attractive and differentiated from the home. Experiential technologies such as immersive motion seating (D-Box) and 4D (mainly MX4D and 4DX), as well as the multi-screen ScreenX, are being tested by exhibitors and with some success in a younger demographic. For example, CJ 4DPLEX brand 4DX has just had its most successful year, ending 2018 with 475 locations and generating $230m in box office. As for ScreenX, a deal with Cineworld for 100 screens sealed a successful year in which multi-screen rival Escape shut down. This interest in experiential technology will continue as more exhibitors test them out.
The range of technologies in the market (image, audio, experiential) as well as linguistic versioning is putting some pressure on the distribution infrastructure that creates DCPs and gets them to cinemas. File sizes are getting bigger, the number of versions required is ballooning to the point where 500+ is not uncommon. This is as a direct result of new technologies in the market, unquestionably a positive for the sector. To some extent, the industry self-regulates by adopting technologies that can be useful, but there’s a need to avoid obsolescent equipment and wasted investment, which is the reason why cinema has often gone down a standardisation route. There is a further conversation to be had about the balance between standards and innovation and the need to simplify workflows.
Cinema has transformed from an analogue medium to a digital one. Technology, innovation, service and experience are firmly in the driving seat now. It is now a changed sector and one that needs to stay ahead of other digital media as well as a refreshed leisure economy. All in all, I look forward to a busy year ahead in a revitalised cinema sector — and I am sure there will be some surprises in store as well.
Peeking through French windows…
One possible trigger for movement on windows may be adjustments to the chronology that French authorities have just introduced — the result of much discussion there (and in Europe) about where to place streaming, as well as the preservation of cinema’s position at the beginning of the chain. New legislation in France keeps the theatrical window at four months (shorter for films with low levels of admissions) and allows SVOD services to release films 17 months after theatrical release for operators that accept certain industry agreements and investment targets. It’s 30 or 36 months if those aren’t accepted. This creates a benchmark for a wider industry debate, even if it is unlikely to have much bearing on what studios and large circuits will end up doing.
David Hancock is Research Director, Cinema at IHS Markit and President of the European Digital Cinema Forum.