MoviePass Surge Pricing Disrupts Decades of Uniformed Movie Pricing

Have you ever wondered why a movie ticket to a major blockbuster event movie is the exact same price as a niche documentary film?   On any given night across the country, multiplexes are playing major event films like Black Panther, or Incredibles 2, and charging the exact same amount of money for those films as they are charging for little known or little-followed indie films or niche documentaries.   The reason ticket prices are essentially the same for low demand films as they are for high demand films stems from the bizarre cabal like history of Hollywood, where major studios were vertically integrated film businesses that controlled the entire end to end ecosystem of films from production all the way through to the theaters.     These big oligopolies were broken up through a series of federal lawsuits dating back more than 75 years ago.   A landmark piece of legislation called the “Paramount Case” ended the practice of vertically integrated film businesses, and set up the bizarre uniformed pricing system we have today.

Today’s announcement of surge pricing by MoviePass just turned all of this history on its head.  

I am a little short on time today, as I have a debate with super bear Mark Gomes later this afternoon.  That I hope you will all have a chance to watch.  So I am going to keep this a little bit short.

The Paramount case began in 1928 but took  14 years to finally settle the case.   The end result was these three new legal rules governed the industry: (i) no direct or indirect intervention in box-office pricing by producers and distributors; (ii) no licensing negotiations except on theater-by-theater and movie-by-movie bases; and (iii) no vertical integration between the Paramount defendants and exhibitors. The courts intended these rules to open the market to independent producers and distributors, to allow exhibitors to select which movies they would show, and to remove artificial constraints on ticket pricing.   The decision forced the studios to sell off their ownership in theaters around the country, changing forever how the theater business supply chain worked for Hollywood.

Unfortunately for consumers, the rules ended up with a bunch of unintended consequences.   Including making popcorn insanely expensive at theaters.

“This Supreme Court decision still controls movie distribution and exhibition in the U.S., and today, studios split gross profits with theaters. But how they do it is pretty interesting.

During the first few weeks of a movie’s run, the studio receives the bulk of gross ticket sales. While the details vary based on deals between the theaters and the distributors, it’s quite common for the theater to fork over 90%-95% of the revenue from the film on week one, perhaps 80% on week two, etc. By the end of the movie’s run, when the fewest people are going to see a film, the theater is taking in the lion’s share of the gross. When averaging the whole run, the theater might only get 20%-30% of the gross ticket sales, with these numbers varying a bit based on a variety of factors.

As one commentator has noted, this system provides a strong incentive for the studios to make “movies with built-in demand – in the form of a superhero in the lead or a plot drawn from a hit book – and the potential to open with a bang.”

Over time, this has developed such that it’s not uncommon today for theaters to take a loss for a given movie based on ticket sales alone, particularly movies from major studios. There’s really little the theaters can do about this, however, as they have extremely limited leverage in negotiations (particularly for small theater chains). They can’t make the movies themselves, and certainly can’t turn away major blockbusters, lest people stop going to their theater(s). In addition, if a given small theater chain is dealing with a major movie studio, the studio may also say something like, “Well, if you don’t put this movie on 1/4 of your screens for this amount of time and give us X% of the gross, you’ll not be seeing any more Warner Bros. films offered to your theaters.” Major theater chains have a little more leverage in these negotiations, particularly when dealing with smaller studios, but still not that much in general.”

Theaters lack any leverage with the Studios based on how the Paramount decree decision was structured.    If you have the time it is worth reading the entire Stanford study on Uniformed Pricing,  if you don’t want to click and read, here’s the important summary on why fixed pricing persisted.

“The practice seems to persist partially due to misconceptions of exhibitors and partially due to distributors’ enforcement of uniform pricing. While distributors are not allowed to intervene in box-office pricing, occasionally they enforce uniform pricing by refusing to deal with exhibitors that wish to switch to variable pricing. Such refusal to deal may be legally questionable, but it is not in violation of the Paramount decrees and, to the best of our knowledge, has never been challenged by private parties or by the antitrust agencies. Presently, the distributors’ interest in uniform pricing seems stronger than that of exhibitors because they could be more affected by demand uncertainty, moviegoers’ unstable demand, and agency problems. In addition, uniform pricing may serve as a second-best solution to double-marginalization problems. Under present law, the first-best solution is not available because of the legal constraints on vertical arrangements.”

Basically the study concludes that the theater owners ended up with almost no leverage in how they could buy films from studios.   If a theater attempted to rock the boat with studios and do some form of variable or demand-based pricing, they could face being blackballed with the next big event film from that studio came out.    It also concluded that it may be a sort of “gentelman’s” agreement that has held together for many years, as the studios could actually charge more for high demand films, and the theaters could also technically charge more in certain markets where they had monopoly pricing power.   This is the argument of double marginalization.   It is reasoned that by sticking to uniformed pricing, both parties avoid a sort of price war in their respective areas of power.   Other arguments for uniformed pricing have historically been that it is too hard to predict demand.   That argument seems to be now obviously flawed.   It is pretty obvious these days when a major film like Black Panther, or Incredibles 2 hit the theaters that they are going to be very high demand films.

For investors of HMNY and MoviePass, today’s announcement is very important.  This is an act of total disruption to the theater industry.  Change is hard, particularly for those in Hollywood who are used to having things their way for many decades.   Introduction of surge pricing actaully helps theater owners tremendously, and it is something they could not do without risking being punished by the studios.   Studio chiefs and distributors will likely come out swinging at MoviePass even more than they previously have.   They simply do not like having a third party getting in between what has been a cozy and easy to manage relationship with the theaters.

There are a lot more implications here that I will write about soon.   Mark Gomes and I will be discussing many of these topics later today.

Tune in here!