‘Freaky’ is The First Test of Comcast’s Big New Release Strategy: How Did it Do? And What Does it Mean?

I’ve been playing a zombie city building game on my iPad recently. (Specifically, the indie game Rebuild 3, a fun but very addictive indie game.) And it honestly felt like good training for my day job writing about the entertainment business.

Theaters are experiencing a zombie apocalypse of Covid-19’s making. Film after film that was slated for this year was pushed to 2021 or released early to digital streaming. Yet, like humanity fighting back against fictional zombies, theaters are seeing a light at the end of the tunnel.

That light is the vaccine for Covid-19. The announcement earlier this month that Pfizer has developed a 90% effective vaccine is the best news struggling theaters have heard all year. (And Moderna followed it up with a 94% effective vaccine announcement.) It may take months to vaccinate all of America, but at least a bright spot is on the horizon.

The question for theaters is whether or not they can get there.

The hero who may rescue theaters is Comcast/Universal Studios. They are an unlikely hero. At the peak of the pandemic, Comcast was threatening to up the theatrical window. Then, a few months later, they made peace with AMC Theaters, partnering on a new model that adds a Premium Video-On-Demand window after a film has been in theaters for only 3 weekends.

Earlier this month, the first of Universal’s films rolled out under his new model. Specifically, Freaky debuted in theaters on November 13 and has grossed $5.7 million so far at the domestic box office (closer to $10MM with international numbers figured in). It will be in theaters for three full weekends before Universal has the option to release it to iTunes, Amazon and others for rental for $20 in a new window being referred to as a PVOD (Premium Video On Demand); Universal has already indicated that they will be exercising this option with a December 4 PVOD release of Freaky. Because of this unique pact, Universal will be the only major studio releasing films until December 25th, including the family-friendly animated film The Croods 2 (now in theaters).

Is this new distribution strategy a good idea for Comcast/Universal? Maybe. Let’s run through the upsides and downsides, and what may come next.

The Upsides

To start, this new release strategy limits Universal’s marketing costs. Those costs have been rising for years now, especially as more blockbuster films compete year-round. With only three weeks between Freaky debuting in theaters and its digital distribution, Universal doesn’t need to plan two separate marketing campaigns, especially since the initial campaign is usually more expensive and effective at building awareness.

However, that’s just one cost savings. The bigger prize for Comcast is (hopefully) earning more money for “mid-tier” films. Think of films like comedies, horror and rom-coms that have slowly been pushed aside for franchise films featuring superheroes, animated characters or sci-fi spectacle films. Comcast’s hope is to still give each film a theatrical debut, but optimize the release strategy so that smaller films don’t have to try to “win the weekend” to succeed. Comcast is convinced this flexibility will make more money in the long run.

Lurking in the background is Peacock. Comcast’s best laid streaming plans were walloped more than anyone (except for maybe Quibi) this summer when the coronavirus cancelled the Olympics. Comcast/NBC was banking on the Olympics to drive a huge number of new sign ups for Peacock. The sooner Universal can release films on streaming, the sooner it can steer some of those films to Peacock. Shortening the home entertainment window from 90 days to 3 weeks accelerates that timeline by a few months. (Universal has a current distribution deal with HBO that will still be in effect.)

As for theaters, they really need this new plan right now. Even though Freaky netted under $4 million at the box office in its first weekend, that’s more than theaters are getting from the rest of the big studios. Long term, since Comcast has promised to split revenues with theaters in this new window, this new plan could actually help theaters if it doesn’t cannibalize too many customers.

What about customers, do they stand to benefit? Sure. The windowing system is, frankly, an arbitrary construct to maximize revenue for theaters. For certain types of films—comedies, rom-coms, some prestige films—customers have shown a preference to stream at home. This plan acknowledges that reality.

The Downsides

The trend has been—for decades—towards shorter and shorter windows between theatrical release and home entertainment. Films used to wait a year or more to come out on DVD and now that’s down to 90 days. Yet, films were stuck at the 90 day mark for the last few years because, frankly, studios were afraid to break that last barrier.

Why? Because studios make a lot more money from theatrical distribution than they do from straight home entertainment. Especially when renting a movie is only $10-15 dollars. The big worry about Universal’s new plan is that it will start to erode (or even blow up) that final barrier. If customers only have to wait three weekends to watch a movie at home, maybe they won’t venture out to the theater at all.

(The counter to this is that customers may just love going to the movies, and theaters need to keep working on the experience to draw customers out of their homes.)

Let’s do some back of the envelope math for this. A typical film earns between 25-33% of their domestic gross on the opening weekend. Then revenue drops off quickly after that, often by 50% to the second weekend. Let’s say that the introduction of PVOD accelerates this drop off after the third weekend and films make 20% less at the box office overall. (Again, these numbers are just hypothetical.)

Well, that would mean your typical films that grossed $100 million dollars at the US box office would now be short about $20 million dollars. The good news for Comcast is that PVOD has better economics than theaters. In PVOD, studios take home about 70% of home entertainment revenue versus only 50% of theatrical box office. Comcast, though, promised to split revenue with theaters. If they take home 65% of $20 a pop PVOD sales, Comcast would need to get about 750,000 rentals to “break even” on the new PVOD window.

Is that doable? Maybe. But finding comps for it is tough. Trolls: World Tour announced that they had 2.25 million sales on their opening weekend. I estimated that Mulan sold 1.2 million times at $30 a pop on its opening weekend. The caveat is that both premiered during a quarantine when folks were stuck at home and literally no films were releasing in theaters. When new films go back to releasing every week, those numbers likely won’t hold up.

So getting a million or so folks to buy movies at home is really the bet Comcast is making. They expect that the amount of folks who will decide to buy on PVOD at home will exceed the folks who decide to skip theaters entirely. The other worry could be that folks skip theaters to wait for PVOD, and then just wait until the price drops to $5-10. That scenario, for example, happened plenty with Trolls: Wold Tour that stayed on top of the digital rental charts for months.

What Comes Next?

Well, Universal won’t draw too many conclusions from these first few releases. Covid-19 has shuttered most theaters, and while $6 million is a tiny haul, it’s not the end of the world. They’ll be more interested how all the films released over the next few weeks do.

Meanwhile, blockbusters like Universal’s Fast and Furious 9 or next Minions film won’t change strategies. Universal knows those films can make over a billion dollars at the box office and they still want that cash. So next summer, if the vaccines can be distributed, those films will be back at the box office in a big way.

It will be interesting to watch Comcast’s partnership with studios. This year the Department of Justice rescinded a historic agreement with studios going back to the 1950s preventing them from owning theaters. This means studios can bring back practices like block booking and even buying a theater chain. It would be even easier for Comcast to blow up theatrical windows if they owned AMC Theaters.

Finally, as I wrote before, Comcast has dreams of not just being a cable company, but of being the distributor who controls how you watch TV. In the last few weeks, they’ve been rumored to want to expand distribution of the Comcast Flex, their internet TV device. They’ve even discussed making a TV with Walmart. Being able to sell movies in multiple windows is part of this strategy.

The Entertainment Strategy Guy writes under this pseudonym at his eponymous website. A former exec at a streaming company, he prefers writing to sending emails/attending meetings, so he launched his own website. Sign up for his newsletter at Substack for regular thoughts and analysis on the business, strategy and economics of the media and entertainment industry.