Several studios have expressed interest in embarking upon a reduced window for on-demand, whether it be day-and-date with theatrical, or a premium on-demand window. The collective moves are a response to declining theatrical admissions coupled with softening disc sales.

At issue:

• Theatrical admissions have declined at a rate of 0.21 per cent yearly from 2000 to 2010, while box office spending has increased 3.22 per cent yearly, and average ticket price has risen 3.44 per cent yearly
• Home video spending has dropped 4.88 per cent yearly from its 2004 heyday through 2010, from $21.9bn to $16.2bn
• Consumer spending on pay TV on-demand was $1.2bn in 2010, up from $530m in 2000, spending on online movie rental/purchase/subscription was $390m in 2010
• Spending shortfalls in home video are not being made up for by gains in pay TV and online on-demand and EST

It is necessary to understand the context of the market which influenced Universal and Warner to experiment with untested windowing strategies. The moves to reduce or eliminate the theatrical window are being met with significant backlash by theater operators who feel that cutting into the theatrical window will endanger their business. On one hand, their argument makes sense, but on the other, the studios are forced to acknowledge market realities.

As home video declines have whittled away at the profitability of the film business, theatrical admissions have continued to slide. Buoyed by increased ticket prices and the 3D premium, theatrical revenues have managed to rise, but we believe that this is not sustainable. Thus, the burden falls to pay TV and online on-demand, in addition to digital purchase (EST), to make up for the shortfall in home video spending.

Current IHS Screen Digest modeling of the pay TV on-demand business makes the assumption that current windows will remain through 2015. If this assumption is correct, there will is no relief in sight from pay TV on-demand. While online rental/EST/subscription spending will total $746m in 2015, there is still a significant gap left by declining home video sales.

As studios continue to experiment with windowing, there are bound to be significant growing pains for the industry. We believe that there will always be a demand for theatrical exhibitions as they provide an experience that cannot be matched in the living room by any size screen. However, we also believe that concurrent releases to the theatrical window and the on-demand window will likely cause friction in the near term, but serve to support growth in on-demand spending over time.