Four years ago, the global box office was twice the size of streaming. Four years from now, the opposite will be true.

That’s largely because legacy media companies, such as Disney and WarnerMedia, have all begun to drastically shift resources away from traditional platforms like cable TV and theaters and into their own internet-based content services. Marquee shows that only a few years ago would have gone to old-fashioned TV networks are now being sent to streaming as a way to boost the appeal of those fledgling services. Now, studios are starting to apply a similar dynamic to theatrical movies.

The pandemic may have accelerated this pivot, but it was always going to happen. These companies don’t all have the same motivations for doing so: WarnerMedia, which is owned by AT&T, wants to use its new streaming service, HBO Max, to prop up AT&T’s wireless business. AT&T thinks it can make up for any lost box office revenue by growing streaming subscriptions and, subsequently, keeping more wireless customers. It’s far too early to tell if this gambit will work, but it underscores how pivots to streaming are not always actually about streaming.

Disney, meanwhile, has Baby Yoda toys to sell (and theme parks to run, once it’s safe to do so again). It’s decided that expanding its global streaming reach is the best way to serve its entertainment empire. The Mouse House has made it clear it will still funnel content to theaters, which remain a proven method to launch a massive media franchise, but only as one part of a larger strategy focused on streaming.

“There’s no going back from the transition Disney and WarnerMedia made on a corporate level,” Jeff Bock, senior box office analyst for Exhibitor Relations, said. “That’s what theaters are going to have a difficult time dealing with. The providers of content have pivoted, and that isn’t going to go back the way it was.”

Image for article titled Why Hollywood’s road to streaming will be a bumpy ride

How Hollywood decides where to put its movies

In the future, consumers may have to check if an upcoming film will be released in theaters or not.

Some types of movies will always get the splashy premiere: The majority of big-budget blockbuster franchises will still go to theaters. The allure of a $1 billion hit is still too strong, even with the pivot to streaming.

But low- to medium-budget films will either go to streaming immediately, or soon after a brief stop in theaters. For studios, it’s all about figuring out the best returns on investment for each specific film. Big-budget movies have little chance of earning back their massive filmmaking and marketing costs as on-demand or streaming releases, but cheaper movies can.

Studios have to consider how the film was financed as well. Did they foot the entire bill, or did they have other investors? What does the director want? Is having a relationship with that director valuable to the company long-term? Is it testing well with audiences? Analysts say these are still important questions, but ultimately studios need to have a better idea of how the film will be released long before it’s actually made.

“They need to make movies specifically for theatrical or specifically for streaming, and market, plan, and budget appropriately for those platforms,” Eric Wold, a senior analyst at B. Riley, said.

Optimizing for platform is meant to minimize the number of failures. But the calculus is different for major studios like Disney compared to smaller ones, like Lionsgate or MGM. Smaller studios have even more options: put movies in theaters; release it straight to on-demand or streaming; or flat-out sell a finished film to an existing service like Netflix to guarantee a small profit, and let another company deal with the marketing costs and release strategies. The drawback on that last strategy is those profits are usually quite small: There’s less risk, but much less upside.

“Part of the equation is hardcore numbers-driven, the other part is the perception of the piece of content and how audiences will feel,” Paul Dergarabedian, senior media analyst at Comscore, said. “A lot is emotion-based. That’s what’s playing out in the board rooms of these companies. [A movie is] not a widget made by a machine with no soul. They are works of art created by human beings, with longterm business relationships based off of them.”

Image for article titled Why Hollywood’s road to streaming will be a bumpy ride

The Disney Dilemma

In October, Disney announced a strategic reorganization designed to bolster its streaming operations and optimize how the company decides to release its content. Insiders say they don’t know exactly what will be different internally at Disney. (They’re not sure Disney knows that yet, either.) But they do know why the company is reorganizing. Disney did not respond to a request for comment.

“Disney is producing so much content, it needs more avenues to distribute that,” said Shawn Robbins, the chief analyst at Boxoffice Pro. “That’s why they have Disney+. It’s not feasible to release it all in theaters.” In Dec. 2020, Disney announced more than 100 new combined movies and TV shows. Of those, 80% will go straight to streaming.

Disney’s next Pixar animated film, Soul, will be released on Disney+ at no additional charge to subscribers. If the company likes the results, Disney+ will stream more of these kinds of films: family-oriented, upbeat, familiar properties—but not necessarily all the huge titles that demand a big-screen experience, such as Star Wars or Marvel productions.

Finding the right balance could take Disney years. The company is still digesting its acquisition of the 20th Century Fox film studio (now called 20th Century Studios). And it needs to continue evaluating release models in non-pandemic environments, since consumers may not behave in the same way once life returns to a semblance of normal.

Disney’s strategy highlights how streaming and theaters are not always enemies of one another. In Disney’s case, each needs the other to thrive. The company’s hit streaming show, The Mandalorian, is only what it is because theaters enabled the Star Wars franchise to become so popular. Likewise, the next Star Wars theatrical movie will probably benefit from the popularity of The Mandalorian—especially if it ties into the TV series. Disney’s Star Wars content exists in the same cinematic universe, so it’s quite likely stories will soon span the different media, and consumers will have to both subscribe to Disney+ and visit the theater in order to see them unfold.

It could be awhile before consumers feel comfortable again about how they can access movies. But at some point in the next few years, there will probably be a moment—without you realizing it—when you instinctively know where a certain movie is premiering without having to look it up. When that happens, you’ll know Hollywood has cracked the streaming code.

📬 Sign up for the Daily Brief

Our free, fast, and fun briefing on the global economy, delivered every weekday morning.