EY QUEST conducted a survey of 2,500 respondents, 80% of whom saw at least one movie in theatres in the last 12 months. The primary data collected in the survey was: (1) movie theatre attendance in the last 12 months, (2) streaming consumption in the last 12 months, and (3) demographic characteristics of the respondents.
- Those who attended movies in theatres more frequently also tended to consume streaming content more frequently. For every race and age demographic, average streaming hours per week was higher for respondents who visited a movie theatre 9 times or more than respondents who visited a movie theatre only once or twice. Moreover, respondents who visited a movie theatre only once or twice in the last 12 months reported an average of 7 hours of streaming per week versus 11 hours of streaming per week for those who visited a movie theatre 9 or more times.
- Those who did not attend a movie in a theatre in the last 12 months were more likely to report less streaming activity than those who did attend at least one movie in the same period. Of those who didn’t visit a movie theatre in the last 12 months, nearly half (49%) didn’t stream any online content. Of those who did not visit a movie theatre at all in the last 12 months, only 18% streamed online content for 8 or more hours per week.
At NATO, one of our most significant priorities in Washington is acting as an effective voice for our members with the government. Favorable laws and regulations are essential to keep movie theaters in the United States healthy, prosperous, and sustainable.
But no successful legislative campaign is complete without business owners talking directly to their elected officials about issues of concern to their industry. It is key for Senators and members of Congress to hear directly from their business constituents, the people responsible for job creation and economic investment within their communities and cities, about how policies and laws impact their ability to remain community anchors and conduct business. When movie theater owners and operators answer the call to project the voice of exhibition in our nation’s capital, not only are they acting as advocates for their own businesses, but they are ensuring that the industry has a seat at the table when Congress or a regulatory agency is deciding on a policy that will impact all theaters.
NATO members from across the industry gathered in Washington, DC in mid-November to lobby Congress on tax legislation. Exhibitors met with 35 House and Senate offices to discuss qualified improvement property (QIP) depreciation, urging them to fix the 39-year depreciation schedule for property improvements. In addition to meetings with members of Congress who represent their theaters, exhibitors teamed up with representatives of the restaurant industry to talk about this issue with House and Senate leadership offices and press them to put this legislation on the list of bills that need to pass during the lame-duck session. As of this writing, Congress has yet to pass technical corrections legislation to fix the QIP depreciation error in tax reform.
But what’s QIP, and why did exhibitors care enough about this issue to lobby Congress?
QIP: A Deep Dive
Before tax reform was enacted in December 2017, the tax code treated various kinds of property differently when it came to depreciation. Section 168(e) of the tax code allowed certain kinds of properties to depreciate over 15 years, including:
–Qualified leasehold improvements: Improvements made to the interior portion of a nonresidential building by a leaseholder. The improvements had to be made more than three years after the building was first placed into service.
–Qualified restaurant property: Defined as a building, or improvement to a building, of which more than 50% of the square footage is dedicated to preparing or serving meals.
–Qualified retail improvements: Improvements made to the interior portion of a nonresidential building used for retail. The improvements had to be made more than three years after the building was first placed into service.
Unless otherwise specified in the tax code as having a shorter depreciation schedule, other property changes were subject to 39-year depreciation.
In 2015, Congress passed legislation creating a new category of property: qualified improvement property, or QIP. QIP was defined as interior improvements made to nonresidential real property after the building was placed into service. QIP improvements did not need to be made pursuant to a lease (as was the case with qualified leasehold improvements), and could be made the same year that the building was placed into service. QIP improvements weren’t subject to the shorter 15-year depreciation schedule, so Congress made these improvements eligible for bonus depreciation. Under Section 168(k) of the tax code, properties eligible for bonus depreciation can immediately deduct a percentage of the acquisition cost of certain assets. So while QIP improvements depreciated over the longer 39-year schedule, business could take advantage of immediately expensing some of their costs. The costs of certain kinds of improvements, like adding an escalator or elevator, enlarging a building, or changing a building’s internal structural framework, could not be depreciated. But other assets, like new seats, for example, would be subject to depreciation.
In other words, a lease-held movie theater making interior changes—like installing new reclining seats, updating a concessions area, or putting in new lighting systems, for example—to a property that was at least three years old could depreciate those improvements over 15 years, but could not be eligible for bonus depreciation. Movie theaters that were owned outright could make improvements to newer theater properties and depreciate those over 39 years, but could qualify for bonus depreciation.
During the 2017 tax reform process, Congress intended to simplify these different categories, give all types of interior improvements a 15-year depreciation schedule, and give businesses a further benefit by making these improvements eligible for 100% bonus depreciation. But that’s not quite what happened.
In the Tax Cuts and Jobs Act (TCJA), Congress amended the tax code to remove qualified leasehold, restaurant, and retail improvements as separate categories, and instead, consolidated all such improvements under the qualified improvement property category. Congress then intended to make the necessary changes to put QIP in the category of properties eligible for a 15-year depreciation schedule. But that never occurred. In what is referred to on Capitol Hill as a “drafting error,” Congress made a big ole typo: They forgot to copy and paste the language into the right section of the tax code so that QIP could be eligible for a 15-year depreciation schedule, thus defaulting these property improvements to the longer 39-year schedule.
This mistake also meant that businesses could not take advantage of another intended benefit, 100% bonus depreciation.
As described earlier, under Section 168(k) of the tax code, properties eligible for bonus depreciation could immediately deduct a percentage of the acquisition cost of certain assets. To be eligible for bonus depreciation, a property had to have a regular depreciation schedule of 20 years or less—or, since 2015, be considered qualified improvement property.
Before tax reform was enacted in 2017, bonus depreciation was scheduled to phase out completely by 2020. In tax reform, Congress modified this aspect of the tax code to allow businesses to expense certain assets at 100% through 2022, and then phased out bonus depreciation from 2023-2026.
Remember how QIP was added to the category of properties eligible for bonus depreciation? Well, in the tax reform process, Congress removed QIP from the categories of properties eligible for bonus depreciation, because Congress intended to give QIP a regular depreciation life of 15 years—which would have automatically qualified such property for bonus depreciation, as it would meet the criteria of having a regular depreciation life of 20 years or less. But since Congress never actually wrote the necessary language giving QIP the 15-year depreciation life, businesses had to wave goodbye to bonus depreciation too.
Qualified improvement property: three little words that contain multitudes. Just one small phrase left out of a 186-page bill has made an enormous difference in the way that a business can plan and execute major projects.
Congress needs to pass technical corrections legislation amending the tax code to reflect their intended goal of a 15-year depreciation schedule for qualified improvement property. (While no legislation has passed as of this writing, this author hopes that Congress passes a bill by the time this article is published.) While there is bipartisan support for making this fix—16 Senate Democrats and 14 Senate Republicans have written to the Treasury Department asking that this issue be addressed through some kind of regulatory guidance—there are political power plays at work that could impact its quick passage.
House Democrats, buoyed by their wins in the midterm elections and upcoming control of the House of Representatives, are keen to wait until the next Congress to pass their own version of tax reform to roll back some of the changes made under President Trump. However, waiting until 2019 to make this fix could mean that businesses have an artificially inflated tax burden in 2018, miss out on crucial bonus depreciation, and face ongoing uncertainty about planning new projects. In exchange for supporting QIP legislation passage before the lame-duck session ends in December, Democrats will likely force Republicans to come up with some kind of trade-off—but what the Republicans will be willing to give Democrats isn’t clear yet. What we do know, however, is that the voice of exhibitors will remain essential as NATO advocates for this and other priorities of the industry.
First question. Of the 59 movies (not counting documentaries) Netflix has released in calendar year 2018, how many have you seen or how many can you name?
Second question. What’s the highest-grossing Netflix movie of all time?
Third question. How many Academy Awards has Netflix won for feature-length movies?
The first answer will vary, of course, but the point will not. Netflix movies rarely garner significant public attention. There is no publicly known second answer, because Netflix to date has not released any information regarding ticket sales for its movies. And the third answer is that Netflix has won only one Academy Award for a feature-length movie—Best Documentary for Icarus in 2018.
Now, leading into the 2019 Oscars season, Netflix desperately wants to expand its Academy Awards success rate. They are spending lavishly on advertising, public relations, and awards consultants, and the courting of Academy members. Bowing to the desires of their filmmakers, Netflix has recently announced that some of its movies will be released with a (very) short theatrical run before debuting on its streaming service.
But if Netflix wants to really be a movie company, and not just a highly successful television company, why won’t they consider the traditional movie business model? At least for their best movies from their most acclaimed filmmakers, wouldn’t Netflix make more money and establish a much deeper cultural conversation by offering a true and robust theatrical run first, and offering exclusive streaming to its subscribers later?
The relationship between motion picture exhibitors and movie streaming services has been frequently mischaracterized in two significant respects. First, many pundits have claimed that content streaming is disrupting exhibition. This theory suggests that the more movie lovers watch movies and other content on streaming services, the less they watch movies in movie theaters. Yet thus far in 2018, streaming services have signed up more and more subscribers even as the theatrical box office is headed toward an all-time record. As of the date this column was drafted, domestic box office receipts were up 9.89 percent year to date, and admissions were up 7.01 percent, and virtually every commentator and Wall Street analyst is predicting a record year.
To better understand this seeming paradox, NATO recently conducted a study with Ernst & Young of over 1,400 people who had watched at least one movie in theaters in 2017 and spent one hour per week on streaming services. The study found that 33 percent of moviegoers, who see nine or more movies per year—twice the national average—also spend 15 or more hours per week on streaming platforms. In other words, movie lovers are movie lovers everywhere. People who consume a lot of content do so across multiple platforms. The movie industry is not a zero-sum game. The more movie lovers we can create, the better off we all are.
Streaming service success in the home does not pose a threat to the theatrical industry. It poses a threat to traditional broadcast television, and to the already declining transactional home video market. Indeed, streaming services and the theatrical industry can work hand in hand.
Amazon created a robust streaming subscription service in its Amazon Prime platform. Yet when Amazon surveyed their Prime members regarding their movie preferences, those members expressed a preference for movies that had established themselves in the cultural conversation created by a theatrical release. Amazon announced that they would offer a robust exclusive run in movie theaters, and then made their first appearance at CinemaCon 2016 to describe their movies to theater operators at NATO’s official convention.
One of the movies highlighted during that presentation in Vegas was Manchester by the Sea. Amazon reportedly paid about $10 million for the picture, which went on to gross $48 million domestically over an exclusive theatrical run of 95 days, and garnered Academy Awards for Best Actor (Casey Affleck) and Best Screenplay (Kenneth Lonergan.) Then at CinemaCon 2017, Amazon showcased clips and stars from The Big Sick. Amazon reportedly paid $12 million to acquire that movie, which then grossed $43 million domestically over an exclusive theatrical window of 88 days, and garnered a nomination for Best Screenplay.
To be sure, not all movies, distributed by Amazon or anyone else for that matter, produce such stellar results. The movie business is tricky and fickle. But for movies with real quality, a robust theatrical run offers the best way to be discovered, and the best way to turn a profit.
Shouldn’t Netflix want their best movies to be discovered and to make money? As this author stated publicly during the Toronto Film Festival in September 2018, the movie theater door is open to Netflix if they want to support a customary theatrical window. It isn’t about streaming versus theatrical. It’s about the movie business model.
Subsequent to the Toronto Festival, Netflix equivocated on the issue of exclusive theatrical runs. On October 16 Netflix CEO and Co-founder Reed Hastings told investors that Alfonso Cuaron’s Roma would release simultaneously on Netflix and 100 movie screens worldwide. Netflix had just followed a similar simultaneous release plan on Paul Greengrass’s 22 July, which opened on October 10. “We believe in our member-centric simultaneous release model for our original films and welcome additional theatre chains that are open to carrying our films . . .” Hastings wrote in his letter to investors.
On October 31 Netflix reversed course and announced that they would offer exclusive but very limited theatrical runs on some of its movies, with the Coen Brothers The Ballad of Buster Scruggs getting a one-week exclusive run and Roma getting a three-week exclusive run. The Hollywood press responded that Netflix had bowed to the desires of some of its top filmmakers for exclusivity in cinemas (see, e.g., The Hollywood Reporter, “As Netflix Blinks on Theatrical Runs, Which Directors Will Get A-List Treatment?” by Pamela McClintock, November 7, 2018).
Exhibition responded to the very modest alterations in the Netflix model. This author, for example, called the Netflix limited exclusive run “little more than a token.” To be sure, each individual cinema company decides the circumstances under which it will agree to exhibit movies, and several exhibitors have played Netflix movies with little or no exclusive window. Other exhibitors have stated the opposite conclusion.
In a conference call with investors on November 1, for example, Cinemark CEO Mark Zoradi said, “This issue comes down to the exclusive window. And at such time that they’d be willing to abide by the windows that all of our major studios currently do, we would welcome them. As it currently stands with a one- or two-week window, I don’t anticipate that we would be playing the Netflix films.”
As of the writing of this column, there was one example of Netflix’s new release model. On the weekend of November 9–11, The Ballad of Buster Scruggs opened on three screens in the United States prior to the global streaming date of November 16. Results are impossible to quantify, of course, because Netflix blocked any public release of the grosses of its movie at those theaters, as it has consistently done for all its movies in theatrical release.
The movie Roma will no doubt play much wider than that. But how wide? And with what results? Roma has been reported as a possible Best Picture contender and has won significant awards at film festivals. Netflix clearly desires results at the Academy for this movie. But wouldn’t Netflix have made more money and generated a better level of social discourse if the movie played wider and longer in theaters?
Consider some examples of other successful and awards-worthy theatrical movie releases:
A-24’s Moonlight and Lady Bird
Independent distributor A-24 was founded only in 2012 but has achieved both box office and critical success quickly. The A-24 movie Moonlight played for 130 days exclusively in cinemas and won the Best Picture honor in 2017. The movie cost A-24 $4 million and grossed $28 million domestically. Then the following year, A-24 found success with Lady Bird, a movie that enjoyed an exclusive theatrical run of 123 days and garnered five major nominations from the Academy, including Best Picture, Actress, Supporting Actress, Director, and Screenplay. Lady Bird cost $10 million to produce and garnered $49 million in grosses domestically (plus another $30 million overseas).
Neon; I, Tonya; and Tom Quinn
Margot Robbie reportedly turned down a $12 million offer from Netflix for I, Tonya and went instead with a $6 million deal with Neon and 30 West. Why? Because Robbie wanted a substantial theatrical run and knew that such a run would help with Academy voters. The movie played exclusively in cinemas for 95 days and won Best Supporting Actress and received nominations for Best Actress and Film Editing. And for a movie acquired for $6 million, I, Tonya grossed $30 million domestically.
Tom Quinn at Neon understands the importance of the theatrical release better than most industry leaders. Quinn and his former partner Jason Janego once led Magnolia, and then Radius, an arm of the Weinstein Company. Both of those companies released movies simultaneously in theaters and in the home. Quinn and Janego left Radius, and its multi-platform day-and-date model, to form a company that would utilize exclusive theatrical releases.
Now at Neon with partner and Alamo Drafthouse founder Tim League, Quinn says it best. He told IndieWire’s Eric Kohn in March of 2018 that filmmakers want their movies seen in theaters. “I don’t think that the same success or end results would have happened with the Netflix release,” said Quinn. “The transactional value for film is diminished. It’s an all-you-can-eat buffet, you can dip in and out, and if you don’t like a movie, you move on. This is the one sort of crystallizing moment for me in building our business plan—film is dependent on its transactional value in order to succeed, to thrive, to compel, to challenge.” Referring to Moonlight, Quinn went on to say, “How long would a majority of the people who saw that film have given it on Netflix—as opposed to getting up and going to your local theater, sitting down, and committing yourself to watching the movie?”
The movie theater door is open to Netflix—to grow their revenues and improve their awards chances—if only they will give their best movies the time and attention they deserve, in cinemas. Filmmakers and movie lovers will appreciate Netflix so much more.
This article originally appears in the December 2018 edition of Boxoffice Magazine.
From The Hollywood Reporter‘s coverage of the event:
NATO president and CEO John Fithian argues that Netflix should follow Amazon’s example and give their awards hopefuls longer periods in the theater.
Theater owners on Friday urged Netflix to follow the lead of rival Amazon and show their movies at the local multiplex.
“Our model can work for their movies, too,” National Association of Theatre Owners president and CEO John Fithian told the Hollywood Reporter while attending the Toronto International Film Festival. Holding out an olive branch to Netflix, Fithian welcomed the streamer’s success in bringing more content to more audiences.
“But if you want to play theatrically, come play theatrically. There’s a model that works, and it works for Fox, Amazon and all these companies, because a theatrical movie is different,” he added. Netflix is aggressively embracing A-list directors to make movies for its streaming service, but which also could have a profile in the awards season race (the Oscars require at least a short theatrical run for films to be eligible).
To do that, Fithian cautioned that Netflix should not consider token short runs in the cinema for its movies before quickly shifting them to its digital platform. “It has to be a substantive commitment to theatrical, not just a marketing play,” he argued.
At the Venice International Film Festival, the Coen brothers said their upcoming Netflix Western The Ballad of Buster Scruggs will get a theatrical release. But Fithian said a limited theatrical release to boost word of mouth in a home market won’t play with theater owners.
“It’s not just a little dip into theatrical. You have to give [a movie] a chance to work,” the exec insisted.