Village Roadshow is a co-financier of Warner Bros.’ iconic Matrix franchise. Just before Christmas 2021, Warner released the latest iteration, The Matrix Resurrections, in theaters and on HBO Max, the studio’s streaming service, on the same day.

The result: an apparent boost for HBO Max, but the weakest theatrical performance of all the Matrix films. In response, Village Roadshow sued.

Questions

Under the parties’ agreements, did Roadshow agree that Warner Bros. could:

1. self-deal,

2. “break windows,” and

3. muzzle the lawsuit?

The case is at an early stage, with resolution maybe months, even years away. And the lawsuit involves many other issues.

Nevertheless, even on the current state of the record, this case illustrates three critical trends affecting revenue participations: more self-dealing by studios, more shuffling of windows, and more privatization of disputes. Here, those trends reached a boiling point.

Film Investment Risks – Generally

For investors like Village Roadshow, film investment involves management of a set of interrelated risks. And any one risk that breaks the wrong way can have a significant impact on investment performance.

One such risk is that the motion picture will be distributed in a way that benefits the distributor over the participant. Let’s examine that risk in the context of “windows” and vertical media ownership.

Windows

Traditionally, a theatrical film was initially released, exclusively, in theaters. Thereafter, a theatrical film would typically be released, in predetermined sequence, through a series of exhibition “windows,” such as the transportation market (airlines, hotel, etc.), residential pay-per-view, other non-theatrical, home video (physical media such as DVDs and Blu-rays, and now download-to-rent and download-to-buy), premium pay television (such as HBO and Showtime), and free television.

Over time, the sequence in which these windows “opened” or “closed” has undergone big changes. Streaming and, especially, the impact of the pandemic have dramatically changed the paradigm.

Studios and Exhibition

Since the late 1940’s, theatrical distributors, for antitrust reasons, have generally not owned movie theaters. And, until the 1980s and 1990s, the major studios, also for legal reasons, did not own television networks.

The resulting “arm’s length” negotiations between studios and exhibitors tended to benefit investors and other revenue participants, since the more the studio was able to extract from third parties, the better the participant could do. Today, however, the new paradigm (with some exceptions) is that major studios seek to own downstream television and streaming exhibitors.

Rise of Arbitration

One more trend: In the past, outside of guild agreements, studios generally shunned arbitration with creatives. By contrast, studios now typically mandate arbitration of participation disputes, which is private and confidential, as opposed to litigation in courts, which is largely open and public.

Back to the Questions

Returning now to the opening questions:

1. Did Village Roadshow agree that Warner Bros. could self-deal? That is, license exhibition to a Warner affiliate?

Per current practice in the film business, Roadshow likely consented to some level of self-dealing by the studio. But whether Roadshow agreed to the specific self-dealing involved here – day-and-date release on an affiliated streaming service – is a different question, and a key issue in the case.

2. Did Roadshow agree that Warner Bros. could “break windows”? That is, shuffle windows so that streaming could occur on HBO Max earlier than, say, on HBO?

Again, per film industry practice, Roadshow likely agreed to some degree of shuffling of windows. But whether Roadshow agreed to breaking of the exclusive theatrical window – to day-and-date release in theaters and on HBO Max – is, again, a different question, and another key issue in the case.

3. Finally, did Village Roadshow agree that Warner Bros. could muzzle this lawsuit, by insisting on arbitration?

Per the pleadings, the parties’ agreements provide that some disputes are to be arbitrated, while others must be litigated. In this case, the parties have placed extraordinary importance on whether the dispute will be adjudicated publicly, in open court, or privately, in arbitration.

What This Case Means For You

If you are a motion picture investor or revenue participant, you need to understand your distributor’s exhibition arrangements, including the potential for self-dealing and the potential shuffling of windows, especially in the streaming context.

And, as to any deal in any entertainment vertical, you need to understand how industry changes may affect your deal expectations.

Final Thoughts

This case is part of a larger pattern of claims by revenue participants whose films were unexpectedly released, during the pandemic, on a day-and-date basis in theaters and on streaming. Warner reportedly resolved their disputes with high level talent behind closed doors, under an elaborate formula. By contrast, Disney’s dispute with Scarlett Johansson over The Black Widow played out via litigation, which I wrote about here.

Without commenting on the Village Roadshow case itself, in an interview this week with Deadline, outgoing WarnerMedia CEO Jason Kilar said that WarnerMedia’s record revenue of $35.6 billion for the past year and the growth of HBO and HBO Max’s combined global subscriber total to 73.8 million demonstrates the success of the studio’s 2021 move to day-and-date theatrical and streaming releases.

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Ezra Doner is an entertainment and copyright lawyer who focuses on the film, TV and other content sectors. He is based in New York and is admitted to practice in New York and California. He does not represent any of the parties in this case.