The Rise of Straight-To-VOD and the Fate of Box Office Bonuses

Sheppard Mullin Richter & Hampton LLP

As the COVID-19 pandemic has ravaged the movie theater business in 2020 and into 2021, all Hollywood studios have had to adjust their theatrical release strategies via straight-to-VOD exhibition or concurrent theatrical and digital exhibition. According to one report[1], as the reopening of U.S. theaters at full capacity became more remote towards the end of last year, straight-to-VOD movie premieres increased over three times year-over-year in Q4 2020. While 126 films premiered in either SVOD or TVOD in Q3 2019, 424 films premiered this way in Q4 2020. However, even with the arrival of a COVID-19 vaccine and the imminent return to “normal” towards the end of 2021, some experts believe that this trend will likely continue, and the pandemic had simply accelerated an inevitability[2].

The paradigm shift towards straight-to-VOD release and hybridized releases of motion pictures has had a direct impact on the value a customary deal term for actors, writers, directors and producers – box office bonuses. Studios often may agree to pay these bonuses in the event domestic and/or worldwide box office receipts for the initial theatrical release of a film reach a certain thresholds. Such thresholds can be based on multiples of the pictures’ negative cost, plus sometimes advertising spend, or alternatively tied to certain flat levels of box office receipts. Often, these bonuses are meant to make the recipients more whole in terms of upfront compensation and/or to reward them in success on the film. Clearly though, if deals are made tied to box office receipts and a film is never released theatrically or in a more limited pattern than originally contemplated, the value of these bonuses is significantly diminished.

A straight-to-VOD movie release or hybrid exhibition (1) renders this box office bonuses deal term meaningless if the theatrical release never occurs, or (2) substantially reduces the possibility of satisfying the required box offices receipts thresholds to the extent a movie is theatrically released, but without a traditional long theatrical window (i.e., a movie played exclusively in theaters for at least 75 to 90 days). When strictly viewed from a financial perspective, a studio’s decision to forego a theatrical release (or a traditional theatrical windowing practice) is controversial to talent, considering that these bonus payments are often significant sums, and arguably, the deal structure would have been different had it been known that a studio would release the picture straight-to-VOD. When WarnerMedia announced late last year that Warner Bros’ entire 2021 slate would be concurrently exhibited in HBO Max as the films open in theaters, two Hollywood powerhouse talent agencies, CAA[3] and WME[4], voiced strong dissent and vowed to aggressively negotiate on behalf of their respective clients.

In response to the agencies’ distress over decisions by studios like WarnerMedia, they and some studios have amended deals to provide: (1) additional fixed compensation in the form of an advance against box office bonuses, backend or an additional fee; and/or (2) for a reduction of the box offices receipts threshold(s) that would trigger the bonus payment(s) by 50% or more. The aftermath of this direction towards straight-to-VOD movie releases is yet to be fully determined, but sophisticated participants in the entertainment industry are negotiating for more complex deal terms to account for various potential movie release strategies. Going forward, we can expect feature film release patterns to be forever changed. Accordingly, talent deals will all have provisions like the above, as well potentially higher upfront fees, greater shares of backend, streaming bonuses and other restructured terms to account for the new landscape on box office revenues.

With the U.S. box office receipts plummeting 80% in 2020 and global box office receipts revenue dropping 71% in the same year[5], major shake-ups in the theatrical release model and ensuing uncomfortable conversations were unavoidable. Whether or not there will be light at the end of the pandemic tunnel remains to be seen, but the end certainly feels closer than ever, as movie theaters in New York City finally reopened last weekend at 25% capacity after being shut down for nearly a year due to COVID-19 lockdown. While another major domestic theatrical market, Los Angeles, continues to be closed to the public, we suspect it will open soon and the marketplace will begin to bounce back by fall with releases like James Bond’s No Time to Die. But, with fewer, bigger event type films and smaller films likely to mostly go to digital, deals will be more complicated for the foreseeable future.

FOOTNOTES

[1] https://biz.reelgood.com/2021-vod-catalog-insights-report-mv2.html

[2] https://www.businessinsider.com/how-many-movies-went-straight-to-streaming-release-2020-data-2021-2

[3] https://variety.com/2020/film/news/caa-blasts-warner-bros-hbo-max-1234851004/

[4] https://deadline.com/2020/12/wme-patrick-whitesell-warnermedia-hbo-max-move-blatant-attempt-to-self-deal-use-our-clients-work-to-build-their-hbo-max-streaming-service-1234655268/

[5] https://variety.com/2021/film/box-office/box-office-final-revenues-2020-coronavirus-pandemic-1234879082/

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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