Disney Gets Down

The Walt Disney Co. (DIS) has gone “rogue” in the way it intends to roll out “The Last Jedi” as evidenced by the abnormally “onerous” terms that it is mandating upon theater owners across the country in connection with the much-anticipated December 2017 release.  The Wall Street Journal reports that Disney is contractually requiring the following: (a) a 65% cash return from ticket sales from all theaters showing the sure-to-be blockbuster (the industry norm is a 55-60% return); (b) a four-week commitment to mandatorily show the motion picture in a theater’s largest-seat auditorium (rankling competing studios that will release their own hoped for blockbusters in the weeks following “The Last Jedi”); (c) requiring no cancellations of any advertised show time; and (d) a 5% return “penalty” on any theater owner that breaks the mandatory terms (for example not showing The Last Jedi in the largest-seat auditorium) driving the potential cash-on-ticket sales return up to 70%.  Disney has become a motion picture juggernaut in recent years, with its acquisition of the LucasFilm franchise in 2012 and the Marvel Comics line in 2009. 

While some corporations might be reticent to require such onerous terms upon a motion picture release, Disney now commands 26% of the motion picture market share (as compared to the second-place Time Warner Inc’s Warner Bros. at 17%) and can demand such terms if theater owners want to play ball.  Such “onerous” terms make little sense for small theater owners in small-town America, some of whom are choosing to pass on booking “The Last Jedi.”  Per the WSJ article “Disney Lays Down the Law for Theaters on ‘Star Wars: The Last Jedi’:

“Few operators can afford to turn away a Disney windfall.  But some independent theaters have decided against screening ‘Last Jedi’ when it is released, saying the company’s disproportionate share of ticket sales and four-week hold make little economic sense–especially in small towns.  ‘There’s a finite number of moviegoers in my market, and I can service all of them in a couple of weeks,’ said Lee Akin, who operates a single-screen theater in Elkader, Iowa (population: 1,213).” 

“If he were to sign up for the movie under Disney’s terms, Mr. Akin said he would be stuck playing “Last Jedi” to near-empty auditoriums toward the end of a monthlong run while still giving Disney 65% of those paltry sales.  The studio is applying the 65% split across all weeks of the film’s release, rather than some studios’ practice of beginning a split at a high figure then lowering it in subsequent weeks.  ‘When [studios] get much bigger than the other guys, that’s when all these wacky rules come into place,’ said Mr. Akin.”

From a contract law and corporate law perspective, Disney is doing its thing by seeking to wring every possible profit avenue out of its upcoming Star Wars release.  From a business perspective is this always the best strategy?

hat tip:  Bryan Higgins, 1L, The John Marshall Law School