news Why Disney Money Is the Biggest Patron of Arthouse Cinema (Column)

Disney+ has Jedis and superheroes, but Hulu has prestige. The Disney-backed streamer scored 58 Emmy nominations this year, more than doubling its haul from 2021, but the prestige factor goes well beyond accolades for “Only Murders in the Building.” For at least five years, Hulu money — that is, Disney money — has been critical to sustaining arthouse distributors.

Hulu’s output deals with Neon, IFC, and Magnolia, as well as its in-house relationship with Searchlight, keeps the distributors in business. The only other major entity with similar deals is Showtime (aka Paramount money), with A24 and Bleecker Street. Now, if only they could spread those dollars around a bit more.

Earlier this year, this column argued that Sundance is now a market for VOD movies. Time for some clarity: We live in a VOD market bankrolled by the streaming landscape. Beyond the visibility provided by a theatrical release, cinema’s survival comes down to the streamers willing to invest in it.

With respect to market sustainability beyond the biggest blockbusters, I hear a lot of industry folks’ frustrations about the challenge in finding theatrical success for anything deemed “difficult.” Distributors with these streaming deals also tell me that their arrangements provide a coherent sense for which movies they acquire out of the festival circuit. If studios determine the state of the arthouse market, any company looking to survive should fight for a piece of that pie.

Watch Jeff Bridges grimace through FX’s “The Old Man” on Hulu and its algorithm may recommend you watch Nicolas Cage pull off a similar feat in “Pig.” That’s because Neon has made good use of its Hulu deal since 2017, acquiring movies that may seem like curveballs but make a substantial contribution to Hulu’s library.

Output deals vary, but for Hulu and Showtime they involve a ceiling and a floor for each title’s performance prior to their arrival on the platforms. Hulu’s licensing deals can run from as low as $100,000 to high seven figures, but the ultimate payout is typically determined by how much the movie grosses in theaters. That means that Disney and Paramount incentivize arthouse distributors to succeed at the box office.

Or, at least, that’s the way it used to work. Like everything else in the current landscape, the old model is in flux. Multiple sources told me that over the past year and change, output deals at these entities have been rewritten to incorporate TVOD performance (“transactional VOD”) prior to the pay 1 window (usually 90 days) when they arrive on their platforms. Ryan Roemer, Hulu’s VP of content partnerships, declined to give specifics of this shift when I asked about it via email, but alluded to the evolving arrangement. (Roemer oversees Hulu’s indie film licensing division, which is run by former IFC Films acquisitions director Aijah Keith.)

“I can tell you that TVOD performance can be an indicator of how well something may do on the platform,” Roemer said. “So we look closely at that information during deal negotiations.” Hulu is also keen on pushing its original content; Roemer pointed out that the platform’s most-watched film is “Deep Water.” (Produced by 20th Century Fox prior to its Disney acquisition, it did not receive a theatrical release.) “What we’ve all seen throughout the pandemic is that streaming provides fans the opportunity to see films outside of the theater to great success,” Roemer told me.

Streamers may not require theatrical success to hit their marks, but distributors need it in order to reach output targets. For key titles, the arthouse circuit may be the way to go: While everyone salivates over the blockbuster success of A24’s “Everything Everywhere All at Once,” the company also carves out a robust arthouse run for “Marcel the Shell With Shoes On,” an adorable stop-motion DIY odyssey that baffled a lot of distributors when it appeared out of nowhere at Telluride last fall. A24 is making it work through careful word of mouth and the promise of a quirky and distinctive feel-good moviegoing experience — all of which ties into its output deal. It won’t go to Showtime until early next year, ensuring that the box office and TVOD targets figure into its ultimate payday.

Marcel the Shell with Shoes On

“Marcel the Shell with Shoes On”

A24

Sometimes an output deal risks underserving a risky proposition. Neon knew that Apichatpong Weerasethakul’s transfixing slow-burn “Memoria” would be a tough sell in theaters and on streaming; severe underperformance would mean minimal ROI in both places. That’s why it engineered the ingenious plan to only screen the movie in theaters, one city at a time, forever. As an eternal event movie that will never be on Hulu, it will gradually accumulate a box-office total that its output deal would never allow. That said, the Hulu deal is what allows Neon to take this bold swing in the first place.

These output deals provide a lot of autonomy: Hulu and Showtime can suggest theatrical acquisitions that they think will work for their subscribers, but they can’t force the distributors’ hands. Neon can utilize Disney money to make aggressive plays for festival titles, but Hulu doesn’t get to weigh in. Multiple people told me Hulu has offered as much as $400,000 for foreign-language titles as part of its output deals in the past; Hulu declined comment.

This structure can lead to competition between entities that pull from the same bank account. At Cannes this year, Neon landed Palme d’Or winner “Triangle of Sadness” over Searchlight, which also bid on the movie. Of course, the winning company may have benefited from “Triangle” producer Dan Friedkin, a co-founder of 30WEST… which owns Neon. “While we are aware of the competitive landscape, it is important for us to let the market play out by not trying to influence it one way or the other,” Roemer said.

Mind you, this was an email exchange monitored by Disney reps. Internally, there are serious questions about Hulu’s priorities going forward. Searchlight’s current deal with HBO Max may inform whether films are theatrical or, like “Fire Island” and “Good Luck to You, Leo Grande,” become Hulu Originals. Until that deal expires at the end of the year, Searchlight’s theatrical releases have to go to HBO Max. Streaming premieres hurt the profiles of these touching and hilarious films, which hopefully have a long tail on the service, but Searchlight is eager to return to the theatrical releases that would help elevate the work it brings to Hulu.

In any case, Hulu’s hands-off approach to its relationship with arthouse distributors bodes well for the prospects of daring cinema on the festival circuit. Whenever “Triangle of Sadness” lands on Hulu, Ruben Ostlund’s ribald social satire will almost certainly capture some audiences who stumble onto it between seasons of “Only Murders in the Building.”

Only Murders in the Building Season 2 Steve Martin Selena Gomez Martin Short OMITB

“Only Murders in the Building”

That’s critical part of the equation: At some point, subscribers burn through the biggest shows of the moment and streamers need to keep them hooked. Otherwise, as Netflix learned the hard way, they may hop to another service.

A few years ago, streamers acquired libraries from all over the place. Today, studios prefer to reinvest in their own streamers rather than take the short-term win of a licensing fee. Lionsgate left its Hulu deal at the start of this year to redirect content toward its own Starz. Universal’s Focus Features regularly sends its newest titles to Peacock in a matter of weeks, rendering box-office performance moot. IFC Films, which had a healthy Hulu pay 1 deal for several years, now brings its films to AMC+ after 90 days, serving the streaming aspirations of its parent company. (IFC still gets some Hulu dollars for the pay 2 window, in a co-exclusive deal with AMC+ that kicks in six months after the AMC+ premiere.)

The studio that stands to benefit from these competitive shifts is Sony, since it has no streaming presence of its own. The company’s output deal with Netflix — which replaced an earlier one with Starz — has a trickle-down effect for Sony Pictures Classics, which releases movies to the streamer after a full seven-month window. (It has the option of a shorter window for certain movies.) A few weeks ago, I suggested that Netflix could address subscriber woes by acquiring the best movies at Cannes. That sort-of happened via SPC with the acclaimed Cambodian drama “Return to Seoul” and Mia Hansen-Love’s touching “One Fine Morning.”

Left adrift in all of this are the filmmakers, who have no idea if their work finds success on the streamers. “Streamers need to open up their books and develop a royalty system commensurate with what creators have been paid in the past for post-theatrical rentals and sales,” the director of a 2022 specialty release, who spoke on condition of anonymity, told me.

Of course, that’s capitalism for you: Most companies don’t want to expose data that might oblige them to spend more money. In turn, that obliges filmmakers to educate themselves about the financial hurdles they will face. “I really think filmmakers need to start being more transparent and open about the financial realities,” the director told me, “even though it feels bad or crass to do so.”

Roemer said movies licensed to Hulu through output deals are critical to their infrastructure. “They ensure a steady cadence of the moment-defining, aesthetically subversive, indie-film content for our subscribers,” he said, “and further define Hulu as a place for movie fans to find the best of what independent film has to offer.”

Kent Sevener, VP content for Showtime, responded by email with a similar endorsement: “We believe that films from distributors like A24 and Bleecker Street perfectly complement our sophisticated original series offerings,” he wrote. “As audiences become more diverse and sophisticated, we rely on our output partnerships to help bring culturally relevant and timely stories to our subscribers in meaningful ways. Our subscribers expect the groundbreaking content from major film festivals these deals provide and we’re always happy to deliver.”

All of which raises the question of why every distributor worth its salt hasn’t worked its way into one of these deals. “I’m all for that,” Kino Lorber CEO Richard Lorber told me this week. “Send ’em over!”

For years, Kino has been one of the most risk-friendly U.S. distributors, cobbling together meticulous release plans for exciting foreign and experimental films that critics adore. One recent example is Panah Panahi’s Iranian road trip comedy “Hit the Road”: It did not cross $1 million at the box office, but it’s an absolute charmer of a family story with serious cultural ramifications as it makes its way around the country while Iran cracks down on dissidents, including Panahi’s own filmmaker father Jafar.

Hit the Road

“Hit the Road”

Kino Lorber

However, Kino’s relationship with streamers remains piecemeal. The company holds a monthly call with Netflix to review Kino Lorber’s latest offerings. “They usually decline,” Lorber said. Conversations with Hulu have been intermittent and inconclusive. “When [competitors] have a relationship with streaming, it puts us at greater risk,” Lorber said.

Which brings us to the inevitable part of this column where I suggest a modest way forward. There are a handful of valuable U.S. arthouse distributors currently without output deals: Beyond Kino, there’s Strand Releasing, Oscilloscope Laboratories, Music Box, Utopia Releasing, and Roadside Attractions. (If I left you out and you feel dissed, please complain and plead your case: eric@indiewire.com.) These companies are in the business of making smart curatorial decisions; streamers like Hulu and Showtime might consider how they might benefit from more modest output deals with them.

Let’s say these smaller arrangements were structured around a slate of 10 movies, each with a ceiling of $150,000. That’s a maximum of $1.5 million per year for some of the buzziest festival titles. Establish that deal with 10 distributors and you’re looking at a $15 million investment in developing a library of arthouse films. The first streamer to pull that off would hold a significant advantage in the arthouse market, and it wouldn’t cost much more than one day of CGI effects on a Marvel movie.

Asked if Hulu might consider additional output deals, Roemer kept the door open. “We’re always interested in exploring opportunities with companies that align with our brand and share our commitment to bringing the best of independent cinema to a broad audience,” he said. Showtime’s Sevener expressed a similar sentiment: “We are always seeking a diversity of content in our film slate,” he said.

Friendly words, but they come from companies that don’t share a Lorberian appetite for risk. Some buyers told me that output deals in the past have been specific to the point of exempting black-and-white movies, foreign-language titles, and even documentaries. These conservative instincts get in the way of a valuable long-term investment.

The entertainment industry is a data-driven business, and that data grows more diffuse by the day. One successful piece of content matters less than the way it interacts with a broader set of possibilities. Netflix realized this early on when it crafted “House of Cards” out of the realization that people who watched the British original also liked Kevin Spacey movies. (OK, so maybe Spacey wasn’t a long-term golden ticket, but it worked pretty well for a while.) Building out a space for adventurous storytelling can yield more profound understandings about underserved audiences, which can lead to more ideas for films and TV shows. Streamers might even score some masterpieces in the process — and maybe some Emmys, too.

I am sure I have missed some of the nuances involved in the tenuous relationships between small-scale distributors and major streaming entities. To that end, I encourage all of them to reach out and correct the record, explain why this utopian proposal won’t work, suggest some alternatives, or…you know, call me an idiot, as long as you can back it up: eric@indiewire.com

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