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January 30, 2023
The dawning of a new year brings to the home entertainment sector, both streaming and transactional, a host of challenges and questions — and a few opportunities.
Challenges include a nation that once again is on the threshold of a recession, prompting a rash of recent layoffs and cutbacks at most of the big studios as well as streamers. Compounding the cloudy economic outlook is the fact that Hollywood is in the midst of serious self-examination, at the center of which is the question of streaming’s sustainability as a business model, given the escalating cost of content and limited returns under cheap all-you-can-watch subscription plans.
Questions include: How will recent moves into even lower-priced advertising-supported subscription plans play out for Netflix and Disney+? What will the merger of HBO Max and Discovery+ look like, particularly given the late-2022 bloodletting of content from Max? Will there be more consolidation among the big streaming services? And what of the shrinking transactional market, in which consumers rent or buy specific movies, TV shows and other content either digitally (known as TVOD, for “transactional video-on-demand”) or on DVD or Blu-ray Disc?
And yet there are still opportunities. In conversations with industry leaders, the word we hear most is synergies, since except for Netflix the leading streamers are all part of big media companies that also include theatrical and traditional, transactional home entertainment businesses.
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Theatrical Pipeline
The theatrical business, which has traditionally been the launching pad for movies, has been torn apart by streamers buying and even producing their own content — and studios owned by media companies giving their streaming sisters preferential treatment.
Gower Street Analytics projects the 2023 worldwide box office will improve to a projected $29 billion in ticket sales from an estimated 2022 total of $25.8 billion, but that’s still a good 30% below pre-pandemic 2019 box office revenue of $42.3 billion. Part of the reason is fewer movies being released to theaters, which then also hurts transactional home entertainment, which used to be the critical “second window” studios looked for to prop up theatrical underperformers while boosting the overall bottom line.
And yet Bob Buchi, president of worldwide home media at Paramount Pictures, is optimistic for the transactional side of the business heading into 2023, citing a rash of high-profile theatrical releases slated for next year while he also maintains that quality is more important than quantity.
“In 2023 the theatrical slate across the industry promises to be even more robust and consistent than it was in 2022, and we at Paramount are especially enthusiastic about the sales and drafting opportunities we’ll have with the return of key franchises like ‘Mission: Impossible,’ ‘Transformers,’ ‘Scream,’ ‘Teenage Mutant Ninja Turtles’ and ‘Paw Patrol,’” Buchi says. “Home entertainment remains very important to collectors and cinephiles who appreciate the best-possible quality audio and video presentation and the compelling bonus features, while general audiences appreciate the broad selection and flexibility to access their favorite films whenever they want.”
Universal Pictures Home Entertainment president Michael Bonner agrees. “The market will likely remain very fragmented with different release strategies across the studios,” he says. “But Universal is very optimistic, given our strategy, and is excited about the opportunity in 2023 to drive further growth across the category with our exceptionally diverse slate, including Fast X, The Super Mario Bros. Movie and Oppenheimer.”
Adam Frank, SVP of global digital sales and distribution at Lionsgate, also takes pride in his studio’s slate of theatrical releases, the success of which he expects to trickle down to traditional home entertainment.
“We have a robust slate in 2023 that includes John Wick: Chapter 4; The Hunger Games: The Ballad of Songbirds and Snakes; Expendables 4; Judy Blume’s timeless Are You There God? It’s Me Margaret; The Blackening; a new installment of the billion dollar ‘Saw’ franchise; and a new Dirty Dancing sequel starring and produced by Jennifer Grey, among many others,” Frank says. “With this lineup, we expect to see continued acceleration in the transactional space.”
Exploring Synergies
Transactional and subscription video-on-demand (SVOD) should not be seen as mutually exclusive, particularly if smart windowing leads to synergies between the two entertainment consumption models, says Jason Spivak, EVP of distribution for North America television and home entertainment at Sony Pictures Entertainment.
“Transactional and streaming can and do happily co-exist and service consumers in different ways at different moments,” Spivak says. “As such, we do not look at it as an either/or type of choice for our audiences. For our films, transactional enables consumers to enjoy the benefits of collection building while streaming appeals to consumers when they may be more casual in their interests.
“On the TV series side, we have seen streaming become a primary platform for audiences to enjoy our new and classic shows, offering convenience for consumers to discover and binge.
“With that said, for certain shows transactional remains a great way to access and collect the latest seasons and episodes, as evidenced by the performance of ‘Better Call Saul,’ which is our best-performing season ever in terms of digital sales in the first six months of release.”
It should be noted that Sony Pictures is the only major studio without a branded streaming service of its own. In 2021, Sony signed separate deals worth a reported $3 billion with Netflix and Disney+ for exclusive Pay 1 TV (streaming) access to its theatrical releases. Those movies used to go to Starz, HBO, Epix, FX and Showtime, among others. Netflix paid big for the first rights to Sony movies. Disney+ only gets access to the titles after Netflix’s 12- to 18-month window. “This … establishes a new source of first-run films for Netflix movie lovers,” says Scott Stubler, Netflix’s head of original films.
Paramount’s Buchi agrees with Spivak’s assertion that the streaming and transactional home entertainment businesses can “happily co-exist.”
“The industry will continue to experiment market by market with windowing, pricing and release strategies,” he says. “At Paramount, we are working more collaboratively than ever with our colleagues in theatrical and at Paramount+ to leverage our joint consumer messaging and maximize our marketing spend in the most-effective way possible.”
In 2022, he says, “We launched Orphan: First Kill simultaneously in a limited theatrical run, on PVOD/PEST, and on Paramount+, allowing consumers to decide their viewing preference. We found that the combined messaging and collective effort caused all boats to rise and the film was successful across all platforms.
“That strategy is contrasted with Top Gun: Maverick, which obviously had one of the most unprecedented theatrical runs in recent history. After generating nearly $1.5 billion at the global box office, the film became a massive success across home entertainment platforms and the No. 1 best-selling digital release of all time, all based on a more-traditional windowing pattern.
“Every film requires careful consideration to determine the best release strategy to serve the consumer and maximize revenue across all platforms.”
Partnering with retailers also is key, Buchi says. “I admire how our leading retailers continue to strive for innovation, new growth opportunities, efficiencies, and paradigm shifts, all of which can lead to exciting developments we’ll see tested in 2023 and beyond,” he says. “We plan to explore a reimagining of headless commerce (a separation of the front end and back end of an e-commerce application) for both physical and digital retailers, the evolution of NFT-bundling with premium products and experience for the super fan, and podcast product extensions for our beloved franchises.”
Retailers believe consumers will become increasingly value-conscious amid the cloudy economic forecast.
“There will continue to be multiple modes of entertainment consumption in 2023,” says Cameron Douglas, VP of home entertainment for Vudu and Fandango. “However, we expect that consumers will be more value-conscious. Do we still need this subscription service, or should I upgrade/downgrade/eliminate? Can we tolerate a few ads in this casual viewing experience? Should we buy this, or should we just rent it? Should we splurge on a family night out at the movie theater or wait and watch the film at home in the premium window? Tools like Rotten Tomatoes will become even more valuable, not only to validate fans’ entertainment choices, but to help people find value in what to watch next.”
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Independent Film Distributors
Garson Foos, CEO of Shout! Factory, a leading independent film distributor, says 2023 “looks to continue Shout’s growth in the transactional space with theatrical new releases, major new anime features and name-brand catalog coming to market. We’re extremely happy that the transactional business has remained so strong. We continue to make numerous deals for physical and TVOD rights — physical with studios and indies, and TVOD with indies. The 4K format is creating a lot of opportunity as we continue to find new ways to engage passionate fans. As there are more strong titles available to stream, it puts pressure on the transactional business. But there’s always the customer that will pay to have the best version of something, and to stream it without commercials, or own it digitally.”
The gift market remains a particularly bright spot for independents, almost exclusively on the physical side of the business.
“Our impression is that it’s largely physical,” Foos says. “We don’t have a lot of evidence that the gift purchase has transitioned to digital. We still see good sales from holiday gift-card giving in late December and early January. And our complete-series TV sets, deluxe film sets like ‘Friday the 13th,’ ‘Halloween’ and our deluxe Steelbook packages always see big spikes around the holidays. Nothing says Happy Hanukkah like our new Carrie 4K UHD Steelbook release.”
“People like tangible gifts, and discs are still a great tangible gift,” adds Ed Seaman, chief operating officer of the MVD Entertainment Group, another leading indie.
“Similar to the vinyl collector’s marketplace, deluxe Blu-rays and UHDs are coveted, and not just for the superior quality,” he continues. “Nobody predicted that vinyl would continue to grow since its resurgence 15 years ago, yet each year it is reaching new heights. The video market shall likely follow for the collector’s market. Digital gift giving seems less and less relevant with the market trending more and more to AVOD (ad-supported streaming).”
Overall, though, “for independent product and catalog, transactional can be challenging,” Seaman maintains.
“Getting placement on the biggest and best platforms can be a struggle, but when something does get placed the results are still very good,” he says. “Inclusive digital platforms for film remains the biggest challenge — and opportunity — in our industry. There is no consistent place to find virtually any film you’d like to see. Everyone is fatigued by the need to subscribe to multiple services to see what you want to see. Compared to the music industry, there is no Spotify in the video business where you can reliably find virtually anything you’d like to watch.
“There is an opportunity to build or aggregate the various sources of entertainment into one easy-to-use, all-you-can-eat service. The fragmentation and frustration in finding what you want is also an opportunity for disc sales, which is now the most reliable way to find what you want.”
More Turbulence for Streaming
The subscription streaming side of the business, which according to the latest estimates from DEG: The Digital Entertainment Group now accounts for nearly 85% of consumer home entertainment spending, is expected to see continued turbulence in 2023, thanks to such obstacles as high content prices, fierce competition among services, a maturing market and, until just recently, a reliance solely on consumer subscriptions for revenue.
“SVOD will continue its challenges as consumers cancel subscriptions or move to lower-cost ad-supported tiers, which may exacerbate the hemorrhaging of cash,” says Bill Rouhana, CEO of Chicken Soup for the Soul Entertainment. “You’ll see a consolidation of the industry as smaller SVOD players fade, and even larger players begin looking to be sold or merged.”
Veteran ad-supported streaming services such as Chicken Soup, Rouhana maintains, are in the right place at the right time.
“AVOD is soaring because consumers are growing tired of paying for so many SVODs,” he says. “Given the state of the economy and uncertain times, they are cutting back. To supplement their streaming diet, they’re seeking free options, and AVOD services are benefiting from this. I think you’ll see even greater growth in 2023.”
As for his own company, Rouhana says Chicken Soup for the Soul Entertainment “will continue to scale across AVOD, FAST, and our Screen Media original content studio. It will be a big year for AVOD and FAST as consumers continue to discover the amazing content available for free — especially as the economy continues in a recession.
“I also see more companies getting into AVOD — which further reinforces our strategy and what we already know. As Netflix and Disney ramp up their ad-supported tiers, they will begin charging higher CPMs which will benefit us. That will also help our ad rep business as we help smaller AVODs sell their ad inventory — something they can’t do on their own at the same level of success.”
Stefan Van Engen, SVOD of content programming and partnerships at Xumo, a premium FAST (free ad-supported streaming television) service, shares Rouhana’s optimism.
“For Xumo, we will continue to scale and deliver premium experiences across our FAST platform, Xumo Play, and the roll out of new Xumo devices,” he says. “The industry as a whole will continue to innovate around engagement, programming and more-personalized experiences.
“I believe entertainment is supposed to be easy. With the amount of amazing choices across SVOD services, the fatigue is not in streaming, it’s in choosing and cost. AVOD and FAST continues to soar because it takes the economic risk out of just watching something, without having to think about where and what you are choosing to watch.”
For independent film distributors, the rise of AVOD presents another potentially lucrative sales opportunity, coming at a time when sales to SVOD providers are increasingly hit-or-miss as the subscription streamers vacillate between producing their own content or buying it from third parties.
“AVOD has become a fantastic category for us — both our own FAST channels, and distribution on myriad platforms,” says Shout! Factory’s Garson Foos. “We see that continuing to grow. It’s the emergence of the long-tail into visual content — as we’ve seen with streaming services for music.”
Amy Jo Smith, president and CEO of trade association DEG: The Digital Entertainment Group, says that in the coming year, “it will be more apparent than ever how much consumers value choice and a seamless user experience.
“Viewers will continue to seek a wider breadth of content, including sports and live events, delivered through major and specialty services, and they will look for cost-efficient, customized, and easily navigable bundles of entertainment options, including experiences that are transactional, subscription, ad-supported and possibly even theatrical, social and immersive.”
“Short lived will be the days where consumer entertainment is primarily developed and distributed by a community of monolithic giants centered in Hollywood run and operated by people who look like me,” adds Mark Fisher, president and CEO of OTT.X, the streaming trade association. “We will continue to move forward toward a more egalitarian, global, and diverse ecosystem.”
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Looking Back at 2022
As the nation slowly emerged from the COVID-19 pandemic, home entertainment faced a whole new set of challenges and concerns in 2022.
Subscription streaming, the golden child of the pandemic era, began showing cracks, beginning with Netflix posting significant subscriber losses in the first half of the year, which sent the streamer’s stock price tumbling. Then came the Walt Disney Co.’s sacking of Bob Chapek from the CEO slot, in part due to the high costs of Disney+, a key factor in the company’s sinking stock price. And HBO Max, after an April merger between Warner Bros. and Discovery, ended the year with a rash of film and series getting dumped to cut costs and prep the service for a union in 2023 with Discovery+.
“2022 definitely felt like a roller coaster of recalibrated expectations for our business on Wall Street, with M&A, growth amid higher churn for direct-to-consumer subscription services, and escalating costs for content production and acquisition,” the DEG’s Smith observes.
The OTT.X’s Fisher says that, for the overall OTT business, “2022 was another growth year, with SVOD still the leading revenue contributor, but with AVOD and FAST growing rapidly and TVOD remaining the primary way that consumers conveniently accessed new releases and catalog content, much of which is only available via VOD.”
Turning to Ads
Subscription streaming in 2022 may have continued its run as the dominant way in which consumers enjoy entertainment at home or on the go. But the King Midas touch first felt during the heyday of the pandemic, when theaters were closed and people were asked to stay home, is clearly gone — as evidenced by the launch late in 2022 of cheaper, advertising-supported subscription plans by both Disney+ and Netflix in an effort to boost revenues.
The jury is still out on whether the gambit will succeed, although early reports suggest Netflix, at least, is running into a little trouble. Research house Antenna in December reported that the $6.99 “Basic With Ads” plan nabbed just 9% of new Netflix domestic subscription sign-ups during its first month of availability, while only 0.1% of Netflix’s existing U.S. subscribers switched to the ad-supported option. At the same time, Reelgood found hundreds of movies and TV shows are missing on the ad-supported tier.
“For SVOD services, the major development for 2022 was the sobering reality that their business models, as currently constructed, are not sustainable — as subscriber growth has slowed and content costs have continued to escalate,” observes Chicken Soup’s Rouhana. “SVODs were spending heavily on original content to differentiate their services and ultimately ran up huge debts. That, combined with an economy that’s in a recession, and consumers cutting back on paying for multiple SVOD services, makes for a challenging future, with maybe one or two winners.”
Not surprisingly, then, the biggest success story for home entertainment in 2022 was the proliferation of ad-supported platforms offering completely free streaming content, both on-demand (AVOD) and linear (FAST).
In this part of the business, one of the biggest developments of 2022 was the August acquisition of Redbox by Chicken Soup for the Soul Entertainment, which gave the combined company more than 145 FAST channels on top of its already strong presence in the AVOD market with Crackle and other services.
“Chicken Soup for the Soul Entertainment massively scaled for the future in 2022 with the acquisition of Redbox,” Rouhana says. “We’ve been working to integrate the companies and are close to finishing that.”
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Second-Window Blues
Meanwhile, the fallout from Hollywood’s “streaming über alles” philosophy had a pronounced effect on studio business plans, as the financial realities of producing content for primary consumption on all-you-can-watch streaming services led to a dearth of theatrical feature films, particularly after the year’s midpoint. According to Comscore, just 22 films opened theatrically over the summer, half as many as in 2019, the last pre-pandemic year. Not surprisingly, box office revenues for 2022 clocked in up 21% from 2021, which was still down significantly from before the pandemic, according to Gower Analytics.
Further impacting Hollywood’s bottom line in 2022 was the continued erosion of what was once the biggest post-theatrical revenue-generator, disc (DVD and Blu-ray) and, to a lesser extent, a la carte digital sales and rentals (TVOD).
“In the rush to feed the big streaming services, many of them under the same corporate ownership, the big studios have effectively turned their back on what has traditionally been their biggest post-theatrical revenue generator,” says one veteran industry observer. “Without this critical component of the movie food chain, billions of dollars are being flushed away.”
Indeed — movies rarely generate enough money from the box office to turn a profit. In the not-too-distant past, even films that lost money at the box office more than made up the difference through robust packaged-media sales, which for a time even exceeded theatrical revenues, as well as foreign licensing rights. Projected disc sales even became a factor in studio decisions on whether to greenlight movies or not.
But as subscription streaming became the dominant form of home entertainment consumption, Hollywood seemed to lose interest in this once-crucial second window. Sure, the studios tried getting people to buy movies digitally, but consumers weren’t biting, particularly since they could get a whole month’s worth of entertainment from Netflix and the other streamers at roughly the same cost of a single digital movie. Discs, meanwhile, were all of a sudden seen as yesterday’s technology. In 2006, the year Blu-ray Disc was launched, disc sales brought in nearly $17 billion in consumer spending. In 2022 the total was just 10% of that, around $1.7 billion, according to Media Play News research estimates.
The physical media side of the business received a jolt in the fall when Walmart, still the No. 1 retailer of DVDs and Blu-ray Discs, seemingly implemented a 20% reduction in floor space in its electronics department for discs.
Even so, Paramount’s Buchi says his studio in 2022 “enjoyed a 200%-plus spike in the theatrical new-release business thanks particularly to Top Gun: Maverick and its record-setting digital sales at over 4.5 million transactions inception-to-date in the domestic market alone and equally impressive results from around the world.”
“Meanwhile,” he continues, “consumers continue to show up for both digital and physical releases of special catalog titles. Our 50th anniversary celebration of The Godfather generated over $25 million in consumer spend. We’ve also seen a strong consumer response to 4K debuts of titles like Planes, Trains, and Automobiles and Pulp Fiction. In television, the ‘Yellowstone’ franchise continues to dominate, generating more than $125 million in consumer spend, which has helped spur the expansion of the Taylor Sheridan universe to ‘1883,’ ‘1923’ and ‘Tulsa King.’”
Universal’s Bonner says his studio also had a very good year. “From premium windows through to catalog, Universal’s transactional business remained very strong, with robust consumer demand for content across windows and formats,” he says. “Our premium window continued to generate meaningful engagement with audiences and material value to our home entertainment business with titles like Sing 2, Jurassic World Dominion and Black Phone leading the way. Providing consumers with broader choice and flexibility in how and where they see our movies is working to further fuel adoption and engagement.”
Adam Frank, SVP of global digital sales and distribution at Lionsgate, says digital movie sales were one of the company’s bright spots in 2022.
“We have seen new releases continue to perform extremely well via electronic sellthrough, in some cases ahead of pre-COVID levels across the entire box office spectrum,” he says. “Consumers are eager for new content no matter how they access it — transactionally or via SVOD or AVOD — with theatrical-first product proving to be the most valuable from a downstream monetization standpoint.”
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