In which we examine why releasing Olivia Wilde and Jake Johnson's Drinking Buddies directly to iTunes was a smart move

Movie studios have traditionally segmented their customers into two main groups:  highly profitable theatergoers who watch films first, and less profitable customers who wait to catch movies on DVD, pay per view, or cable.  The advent of online movie streaming didn’t initially alter this division; distributors lumped streaming in with the other ways to see a movie after its theatrical release ended.  Change is coming, however, as new movies like Drinking Buddies experiment with a strategy aimed at a new market segment:  people willing to pay a premium to stream a movie before it plays in theaters.

Drinking Buddies released in theaters in mid-August, but was available on iTunes for over a month before that.  The rental price was initially $10, twice the price of a typical new film, but fell to $7 after the movie appeared in theaters.  Despite a limited marketing campaign, Drinking Buddies has been near the top of the iTunes charts since it was released, outselling all other independent films on several occasions.

Does this success presage a future where people won’t have to wait for a movie to leave theaters in order to stream it online?  Sort of.  Looking at the benefits and costs of immediately releasing a movie online, it seems that we’re heading for a world where documentaries and indie films will release straight to iTunes while big blockbusters stick with their current strategy.

The main benefit of immediately releasing online is that it creates a new segment of online consumers that pay a premium to get early access to the film.  Additionally, it’s easier to benefit from positive buzz when a movie is simultaneously released to theaters and streaming.  This is particularly important for films like Drinking Buddies that are only released to “select” theaters in major cities.  Even if somebody doesn’t live near a theater where Drinking Buddies is playing, when they read a positive comment about it online or have it recommended by a friend or an economics blog, they can immediate stream it online.  They can purchase the movie before the buzz fades and they forget about it.

The major downside of immediately releasing online is that you lose money on the large groups of friends or families that would have paid a per person price at the theater.  Instead of buying multiple $10 tickets, these groups pay $10 once.  This hurts the movie’s box office performance, reducing buzz and increasing the chance that theaters will stop screening the film.  There is also a larger risk that people will be exposed to spoilers, or that a series of negative reviews will scare away the audience before the movie even releases to theaters.

For an indie movie like Drinking Buddies, the benefits seem to outweigh the costs.  Fans of its director Joe Swanberg, a key figure in the culty mumblecore genre, sought out the movie online and spread positive buzz.  The film is a “simple story of ambiguously romantic friendships,” to quote Olivia Wilde, and cannot be spoiled as much as movies like Fight Club or The Usual Suspects.  A romantic comedy like Drinking Buddies attracts an audience of couples rather than families and groups, so foregone revenue from people who stream online instead of visiting the theater isn’t that large.  The buzz from the theatrical release encouraged online purchases, propelling the film back up the iTunes charts, where it was once again the #1 independent film.

For mainstream blockbusters, however, the costs probably outweigh the benefits.  The risk of plot spoilers and early negative reviews is larger, and the lost revenue from families and groups is more significant.  People go see these movies because they’re doing well at the box office, not because The Atlantic gave it a good review; hence, cannabilizing ticket sales with streaming is quite harmful.  Kids’ movies are particularly unsuited for early streaming.  Theaters earn their keep off of minivans stuffed with candy addicts, after all.

Given these economics, other independent films will surely follow the lead of Drinking Buddies and charge a premium to customers chomping at the bit to stream the movie.  What isn’t clear is what will happen as customers continue to shift away from the multiplex toward online streaming.  Will we reach a point where the economics flip, where theaters will be forced to downsize, to only screen movies that attract big groups, because streaming has taken over the rest of the market?

In a world where people are willing to pay $10 to rent a movie at home, movie studios will figure out a way to profit from this demand.  How theaters will adapt to this change, how they will lure people away from their Rokus and Chromecasts, is the question surely keeping Cinemark executives up all night.

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Although economists are rarely sought after for movie criticism, we nevertheless declare that BSE gives Drinking Buddies two thumbs up.  A romantic comedy for people sick of the usual tropes!

Photo:  Magnolia Pictures