Why Warner Brothers Has Gone New Hollywood

You could have seen this coming.

On December 3, Warner Brothers announced that it will release its entire 2021 slate of films simultaneously in movie theaters and on HBO Max, the streaming service owned by Warner Brothers parent WarnerMedia. HBO Max will become an essential distribution arm for 17 titles such as Dune, In the Heights, The Matrix 4, and The Suicide Squad. 

The announcement sent shock waves across the movie industry. In the pre-pandemic days, the Old Hollywood studios relied on movie theaters to distribute their titles. The New Hollywood streaming services were competitors to that system, and such a move would have been unthinkable. 

But that was then. This is now.

Old Hollywood Is in Trouble

Old Hollywood studios are in a terrible bind. Going into 2020, they’d scheduled their big-budget blockbusters for global release in theaters around the world. Those titles included tentpole films such as Warner Brothers’s Wonder Woman 1984 (WW84) and MGM’s No Time to Die, the latest James Bond thriller. Those two movies alone cost a combine $500 million to make. 

The studios were banking on saturating movie theaters, the dependable cash-cow distribution system for Old Hollywood. True, going into 2020, movie theaters comprised a distribution system that was showing cracks in the seams, but it was still effective and dominant. Then the COVID-19 pandemic disrupted everything.

As I wrote recently on Hacker Noon, movie theaters around the world are teetering on the edge of collapse because of declining attendance and closures during lockdowns. To give you a sense of perspective:

• Cinemark, one of the world’s largest movie chains, reported third-quarter 2020 attendance of 1.9 million patrons – compared to 73.3 million for the third quarter of 2019. Revenue for the same period fell from $821 million to $35 million.

• Rival chain AMC Theatres reported that attendance had dropped from 87.1 million in the third quarter of 2019 to 6.5 million in the third quarter of 2020. Revenue fell from $1.3 billion to $119.5 million.

As a result, studios are denied an essential revenue stream to recoup the cost of making films that they’d already teed up for release in 2020 and 2021.

Meanwhile, the New Hollywood entertainment companies, such as Amazon Video, Hulu, and Netflix, have been gaining considerable power by creating their own original content, winning Academy Awards, attracting visionary talent, and gaining subscribers – especially in the era of social distancing as more people go online while spending more time at home.

Hard Choices for Old Hollywood

In this context, most studios are forced to either delay the theatrical release of their films and hope for a rebound in theater attendance; or recoup some of their losses by selling the movie distribution rights to the New Hollywood streaming platforms.

Neither option is attractive. On the one hand, no one really knows when people will feel safe returning to theaters. But on the other hand, selling distribution rights to streaming entertainment companies feels like cutting your losses as the deck keeps getting stacked against you. And a deal is not guaranteed, as MGM learned when MGM shopped No Time to Die to streaming platforms but could not come to terms. 

Increasingly, studios are choosing to cut their losses. For example, Apple TV+ scooped up the worldwide rights to the Tom Hanks movie Greyhound, a Playtone Production from Sony Pictures/Stage Six Films, following COVID-19 theater closures. Netflix picked up distribution rights from Paramount for the Aaron Sorkin movie The Trial of the Chicago 7. Paramount sold distribution rights for Coming 2 America to Amazon Prime Video. (Read about more examples here.)

The Disney and Warner Alternative

However, two Old Hollywood Studios, Disney and Warner Brothers, have another option: rely on their own streaming platforms. That’s because these two companies joined New Hollywood. 

Disney took an ownership stake in Hulu and launched its own vaunted streaming service, Disney+, in 2019, two moves that might have saved the company. WarnerMedia, through its ownership of HBO, launched HBO Max in 2020, thus creating a streaming outlet for the movie catalog from Warner Brothers. 

Disney acted just in time. In 2020, as people got used to staying home more during the pandemic, subscriber totals for streaming services skyrocketed, including an astounding 73 million for Disney+ in less than a year. When the pandemic worsened, Disney turned to Disney+. Disney released Mulan on Disney+ in September, which turned out to be a smart strategy, financially speaking. Then Disney reorganized its operations around Disney+. Now Disney will distribute its latest Pixar film, Soul, on December 25. 

Warner Brothers’s answer to Disney+ is HBO Max. WarnerMedia, through its ownership of HBO, launched HBO Max in 2020, thus creating a streaming outlet for the movie catalog from Warner Brothers. But HBO Max’s 8.6 million subscriber count pales in comparison to rivals such as Netflix (196 million subscribers), Amazon Prime (150 million), and Disney+ (73 million as noted). HBO Max also counts a potential 28.7 million HBO pay TV customers who are eligible to subscribe to HBO Max but have not activated their membership. 

HBO Max also suffers a branding problem resulting from lingering confusion over the differences between HBO’s house of brands: HBO Max, HBO NOW, HBO GO, and HBO. The different apps and platforms are being streamlined, but WarnerMedia needs to build brand equity around HBO Max in order to convince audiences to sign up for one more service on top of the ones they're paying for already. Releasing its 2021 movie line-up on HBO Max is certainly one bold way to do that.

But despite being an upstart in a crowded field, HBO Max has a more promising future than movie theaters do, and Warner Brothers knows it. As Ann Sarnoff, chair and CEO, WarnerMedia Studios and Networks Group, said in the announcement, “We’re living in unprecedented times which call for creative solutions, including this new initiative for the Warner Bros. Pictures Group. No one wants films back on the big screen more than we do. We know new content is the lifeblood of theatrical exhibition, but we have to balance this with the reality that most theaters in the U.S. will likely operate at reduced capacity throughout 2021.”

The studio laid the groundwork for the December 3 bombshell with the distribution approach for WW84, which was estimated to bring in a potential $1 billion gross in ticket sales. After announcing the release of the movie in time for the summer, Warner Brothers moved the release date to Christmas Day. Deadline reported that Warner Brothers would postpone the movie release again until 2021. But Warner Brothers had already moved the release date five times going back to 2019, raising the question of whether further delays might cause audiences to lose interest completely. 

Instead, Warner Brothers pulled the trigger with a hybrid approach for Christmas Day. The film will debut theatrically in international markets that do not have HBO Max on December 16, 2020.

Instead of banking on WW84 raking in $1 billion, Warner Brothers is counting on the movie to drive sign-ups for HBO Max.

Watch how WW84 performs. Driving subscriber growth for HBO Max could bode well for the 17 titles dropping in 2021. If WW84 doesn’t attract sign-ups, Warner Brothers will face some serious questions.

There is no turning back for Warner Brothers now. The company is the modern-day equivalent of Hernán Cortés, the explorer who burned his ships upon landing in Mexico, giving his men no choice but to conquer the new world or die.

The movie theaters are now ablaze.

Note: I am an investor in Amazon, Disney, and Netflix