In this report (link), we build an analytical approach to frame the key questions around the Trolls 2 PVOD release: 1) will Universal make more money under a PVOD release for Trolls 2 than it would have under a traditional theatrical release and 2) if so, is it replicable? To answer the first question, we build a simple film model to evaluate Trolls 2 profitability under both a traditional theatrical and PVOD release.
Model suggests profit of $54mm under theatrical release: Our film model suggests that Trolls 2 could have generated $267mm in lifetime revenues under a traditional theatrical release and adjusted profit (excluding the Universal distribution fee) of $54mm. The analysis is driven by the assumption of a $130mm domestic box office, which may be too bullish as some industry sources saw weaker tracking.
Conservative PVOD model suggests profit 9% higher than theatrical: Forecasting results for a PVOD-only release is tricky as several key assumptions are exceedingly difficult to quantify given a lack of comps. As a result, we have taken a more conservative approach to the key variables. That said, our model points to Trolls 2 generating $286mm in revenue under the PVOD release and $59mm in profit. The profit estimate is 9% ahead of our theatrical estimate. This is impressive considering our conservative assumptions. Less punitive estimates would have driven significantly more upside.
Unprecedented times likely the driver of Trolls 2 success: If our analysis is correct, it leads to the question: will studios scrap the traditional theatrical release strategy for a PVOD one? We don’t think so and see several factors that make the Trolls 2 PVOD release more of a one-time event, including: 1) parents looking to keep kids entertained at home; 2) not much competition from other new movie releases; and 3) skipping the theater generated a lot of free publicity that we do not think would recur if direct-to-PVOD releases became commonplace.
No evidence of studios giving up on theatrical: More broadly, actions taken by the studios – even Universal – do not suggest they believe that PVOD will replace the theatrical release. Big-budget blockbusters are being rescheduled rather released on PVOD. For lower profile films, several studios are shifting to PVOD releases or selling to SVOD platforms. We suspect these decisions are being driven by a combination of three factors: 1) the film may look like a box office flop; 2) the movie is targeted at kids; and 3) studios want to monetize non-core content to generate cash flow.
Expect minor rather than major changes to release strategies: Blockbusters will likely continue to employ the traditional windowing strategy. However, the positive results for Trolls 2 will likely increase studio appetites for experimenting with novel strategies for lower-profile films, including: 1) offering better film splits for shorter windows and 2) flexible windows in exchange for PVOD-revenue sharing. Studios may also increasingly sell weaker/niche titles to SVOD platforms ahead of theatrical release.
Conclusion: SStudios are not looking to blow up the theatrical model because it is a key, time-tested revenue driver. While release strategy changes may happen on the margins, it is unlikely there will be meaningful changes post-lockdown. At the end of the day, assuming consumer movie going habits return to normal in the post-pandemic world, studios and theaters need to act together to address the bigger, more existential industry-wide issue of the steep decline in per capita theatrical attendance.
Originally published on 05/07/20.
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