The Future of Theaters Fades, as the Internet Finally Rises Enough

Ticket sales for movie theaters dropped in 2011 the most in 16 years, according to Hollywood.com. Some of the fall-off is due to a dearth of blockbuster films. But the industry also has to face the fact that premium content availability on the internet finally has overwhelmed trips to traditional venues. Studios know the problem. They have been unable to find a solution to it, at least not one that will allow sales to grow. And there is no solution to be had.

Netflix (NASDAQ: NFLX) has nearly fallen apart, according to Wall St. Yet, the service still has 20 million subscribers, which makes it one of the largest “cable companies” in America. Apple (NASDAQ: AAPL) TV and a similar Amazon.com (NASDAQ: AMZN) product have customer bases that could be nearly are nearly as large for platforms for premium video content.

The studios fear they face a business model pioneered by Apple nearly 10 years ago. iTunes became the leader, by a large margin, for distribution of songs. Its subscriber base was so large that it became irresistible to music publishers. That allowed Apple to dictate terms for royalty sharing.

The movie companies learned something from Apple. They have tried, and in some cases succeeded, to get Netflix to pay substantial sums for premium content. As the number of digital outlets grows, particularly on potentially huge networks like those built by Apple and Amazon, the leverage of the studios will fall away. Amazon has too many customers. That has allowed it to mostly tell book publishers what they can get for e-books. Rumored versions of Apple TV will allow it to gain a strong foothold in American living rooms.

Analysts have been quick to point out that the DVD business saved the sales of studios for a long time. Numbers show that the popularity of DVDs has declined sharply. One more outlet that favored the studios financially has begun to disappear.

The damage that digital distribution has done to the studios has been manageable for several years, at least when the financial statements of their parent companies are analyzed. But Apple, Amazon and Netflix reach tens of millions of people among them. They have powerful brands and customer loyalty. Apple and Amazon already have shown they can use their brands to sell multiple products and successfully introduce new ones. The studios will be in a situation like music publishers are, and the process may only take two or three years.

Douglas A. McIntyre