How soon before we watch first run movies at home?

Hollywood studios make films that are first distributed to movie theaters, followed by cable on demand, DVD release, pay TV and free TV.  The system is designed so that those who have the highest demand to see a film pay a premium for seeing it sooner than others, whereas the more patient can wait a few months and get a much lower price. 

In the not too distant future, we will have enough digital bandwidth to allow direct downloads from servers at movie studios to homes.  Won't this then spell the end of the movie theater?  The Economist magazine has an interesting assessment of where the movie industry is going in terms of product distribution.  Expect studios to shorten the traditional four month window between initial release to movie theaters and wider release via cable on demand.  Movies may be available within two months after their release, but the rate will be much higher than $3.95.  However, the full cost for a family to attend a movie can easily exceed $60 once one accounts for family size, cokes and snacks, and babysitters.

Versioning Hollywood movies

Saturday's WSJ reports a long overdue development: Hollywood studios plan to start distributing new films directly to households within 30 days of their initial release.  MBA 505 veterans know that the studios use Shapiro and Varian's theory of versioning to extract the maximum amount of consumer surplus.  After appearing in first run theaters, movies are distributed to dollar movie houses, cable, and DVD.  Those who are most impatient pay the higher price.  With the growth of bandwidth and a rising share of households with HD TVs and surround sound, I have long thought that the studios would start issuing movies directly to households sooner -- thereby grabbing more of that consumer surplus for themselves and leaving less for movie theaters.  It appears that day is here.  Studios plan to charge $20-30 for a nearly first run movie (e.g., Robin Hood would be a likely choice this weekend), which is competitive with movie prices for a couple.  Of course if you watch a movie at home you will miss certain things, like overpriced snacks and strangers talking on their cell phone.

Think Hollywood is having a tough year?

This has not been the greatest year for Hollywood; only one summer flick ("Transformers II" of all things) has cracked the $300 million mark that customarily signals blockbuster hit status. The Economist reports that business is much worse in the underground film industry in northern LA, where they make films with titles that cannot appear in a family-friendly PG rated blog. As an economist, I merely will take note that actors' salaries have fallen because fewer such films are being made. This appears to be a consequence of a sharp leftward shift of the demand curve (brought about by the recession and competition from substitutes available at a lower price, i.e., free).

As for me, I have only seen one movie in a theatre this summer ("Julie and Julia," which pulled a mere $80 mil probably because it had no explosions or chase scenes), but plan to catch "Up" and "Star Trek" when they come out on DVD through Netflix this fall. Movies we enjoyed this summer: all 13 episodes of "I Cl-Cl-Claudius" and "Rififi."