Disney Lays Down The Law For Theaters On ‘Star Wars: The Last Jedi’

November 1, 2017

The box-office domination of the “Star Wars” franchise has given Walt Disney Co. DIS +1.43% unprecedented power over the nation’s movie theaters.

Before exhibitors can begin screening “Star Wars: The Last Jedi” this December, they must first commit to a set of top-secret terms that numerous theater owners say are the most onerous they’ve ever seen. Disney will receive about 65% of ticket-sales revenue from the film, a new benchmark for a Hollywood studio. Disney is also requiring theaters to show the movie in their largest auditorium for at least four weeks.

Ignoring the terms carries an unusual penalty. If a theater violates any condition of the distribution agreement, Disney can charge it an additional 5%, bringing the studio’s total haul to 70% of sales on a movie likely to gross more than $500 million at the domestic box office.

The case of “The Last Jedi” highlights a perpetual but growing tension between the business partners who bring movies to the public: studios and theaters. Negotiations between the two parties have grown pitched as Disney has become one of the most powerful studios in Hollywood and theaters have lost leverage as box-office sales fall. Box-office revenue is down 5% so far this year.

The depressed box office is accelerating plans at other studios to shorten the theatrical window, so movies would be available to watch at home sooner. But Disney has said it wants to preserve the theatrical model as it currently stands, making the studio an even more indispensable supplier for exhibitors over the long term.

That dynamic has exhibitors across the country resigning themselves to a new condition of doing business: If you want to play Disney’s blockbuster movies, get used to Disney’s rules.

“They’re in the most powerful position any studio has ever been in, maybe since MGM in the 1930s,” said one film buyer.

A Disney spokesman declined to comment on the negotiations.

The studio’s slate of surefire hits this year has included “Beauty and the Beast” and “Guardians of the Galaxy Vol. 2,” with “Thor: Ragnarok” coming this weekend.

Last year, with just 13 new releases, Disney had a 26% market share in total domestic box office, according to Box Office Mojo. The No. 2 studio, Time Warner Inc.’s Warner Bros., had a 17% market share with 23 movies. Disney is expected to top the market-share ranking this year, too.

Disney’s string of hits in recent years—fueled by its acquisition of Marvel Entertainment in 2009 and Lucasfilm in 2012—gives it sway over theater owners, many of whom described the studio as exercising more control over every detail of a film’s release than any of its rivals.

Few operators can afford to turn away a Disney windfall. But some independent theaters have decided not to screen “Last Jedi” when it’s 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).

Toward the end of a monthlong run, Mr. Akin said he would be unable to swap in more popular titles and instead have to play “Last Jedi” to near-empty auditoriums—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 and 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.

Most theatrical releases send about 55% of ticket sales back to studios, though the average split is about 60% on major hits. Hollywood makes more money on tickets sold in the U.S. than in overseas markets, where the split averages about 40%. Disney has deals with some exhibitors that give it less than 65% on “Last Jedi.”

Disney’s rules on “Star Wars” begin before tickets go on sale online, when the studio outlines presale terms to theaters in contracts that are individually watermarked to prevent exhibitors from leaking them. Previous “Star Wars” installments gave Disney 64% of ticket sales and included four-week holds, and other releases from the studio usually require theaters to commit to a minimum of two weeks of screenings.

But Disney’s 5% penalty for not meeting terms on “Last Jedi” is unusual. The charge will be implemented for various violations, including if a theater pulls even one “Star Wars” screening from its schedule or begins marketing the movie before Disney gives the OK, according to theater operators.

The four-week hold in a theater’s largest auditorium, meanwhile, has frustrated distribution executives at rival studios that also have major releases hitting theaters around Christmastime. Soon after the “Last Jedi” opens on Dec. 15, movies such as Sony Pictures Entertainment Inc.’s “Jumanji: Welcome to the Jungle” and Twentieth Century Fox’s “The Greatest Showman” will begin jockeying for screen times. Twentieth Century Fox’s owner, 21st Century Fox Inc., and Wall Street Journal parent News Corp share common ownership.

Of course, most exhibitors make more money on concession sales than box office, and a theater receiving 35% of ticket sales on a hit that grosses $700 million is in better shape than one receiving 50% on a $200 million movie.

Disney’s terms on “Last Jedi” kick in if the movie collects more than $500 million in the U.S. and Canada, which box-office prognosticators say is a near certainty. The studio’s first installment of the space opera, “The Force Awakens,” opened in December 2015 to $248 million and became the highest-grossing domestic movie of all time, collecting $937 million in 2015. “The Last Jedi,” which has Mark Hamill returning as Luke Skywalker, is expected to draw gargantuan crowds.

Exhibition executives have already promised impatient investors the movie would help balance out a summer full of duds. Adam Aron, chief executive of No. 1 exhibitor AMC Entertainment Holdings Inc., called “Last Jedi” a “gift from heaven” earlier this year.

Disney’s terms have annoyed theater owners before. In May 2015, a trade group representing theater owners took the rare step of sending Disney a letter outlining “an avalanche of complaints, concerns and fears” from its members over conditions imposed on theaters that wanted to show the studio’s “Avengers: Age of Ultron.”

On the “Avengers” movie, Disney tried to limit matinee discounts and issued a rule stating theaters must use a national-average ticket price when calculating the box-office split. Disney retreated from both rules following the trade group’s letter.

Read More: