Could Hollywood studios increase their profits by sending more films to theaters, as Wall Street demands?

• Wall Street may push Hollywood studios to prioritize profitability over subscriber growth, leading to a reevaluation of their streaming release strategy and a potential increase in sending films to theaters.
• A constant flow of low-to-mid-budgeted films from diverse genres is crucial to the success of the box office and can generate substantial profits for studios, despite the attention given to big-budget blockbusters.
• Due to the surge of streaming services and the closure of movie theaters due to pandemic restrictions, audience behavior has shifted. However, studios may need to adapt to these changes and retrain moviegoers.

The streaming service is frequently approving low- to mid-budget films for its platform, but subsequently changing its mind and sending them to theaters instead.

The strategy could gain traction as the media company and its rivals compete for higher profits.

The horror film "Smile," with a $17 million budget, was initially planned to be released directly on Paramount+ in 2022. However, due to positive test screenings, it was ultimately shown in theaters. The movie grossed over $200 million worldwide. As a result, a sequel is currently being developed.

This year, the musical film adaptation of "Mean Girls" was released in theaters by Paramount after positive responses from test audiences led the company to abandon its straight-to-streaming release. Since its release on January 12, the $36 million film has generated $83 million globally, according to Comscore data.

The strategy of Paramount is mainly centered on the potential success of individual films. However, analysts predict that other studios will adopt this approach as they struggle to make profits from films that do not receive a theatrical release.

In recent years, traditional media companies have shifted their focus from theatrical releases to streaming platforms, prioritizing low-budget genre films to boost their content libraries and attract more subscribers. This strategy has been successful in increasing user growth, earning Wall Street's approval for a time.

As linear TV ad revenue declines, investors are now seeking immediate earnings growth instead of the promise of profit in the future. While Netflix is profitable and not involved in theatrical releases, traditional media companies like Disney, Warner Bros., and Paramount may need to reassess their streaming strategies.

Eric Handler, managing director at Roth MKM, stated that studios cannot solely rely on streaming services to bring in subscribers by using movies as loss leaders. Instead, the best way to maximize profits is to release movies in theaters first.

More drama and comedy on the big screen

Essential to the health of the box office are a steady stream of low- to mid-budget films from a variety of genres, which often receive less attention than Hollywood's big-budget blockbusters.

Typically, low-budget films cost less than $20 million, including many horror films and independent features. Mid-budget films, usually defined as those under $100 million, are typically comedies, romantic comedies, and dramas, with budgets typically falling between $30 million and $70 million.

According to box-office analysts, an increase in the number of films in cinemas will lead to higher theatrical revenues.

The decline in domestic box office revenue can be attributed to both the pandemic shutdowns and the shift toward streaming.

In both 2018 and 2019, there were 112 films that premiered in over 2,000 theaters, resulting in annual box office revenues of $11.9 billion and $11.4 billion, respectively.

In 2023, the number of wide-release films decreased by 15% compared to pre-pandemic times, and the box office revenue was only about 20% smaller than in 2019 and 24% less than in 2018.

Comscore's senior media analyst, Paul Dergarabedian, stated that the correlation between wide releases and positive box office impact is evident, making it a wise decision for studios to elevate films to theatrical releases rather than streaming.

While these films may not achieve the same level of box-office success as $200 million blockbusters, their combined ticket sales can still result in billions of dollars at the domestic box office.

Studios like Universal, which typically release a number of low-budget horror films annually, can experience substantial returns on investment. The company spent approximately $250 million to produce "M3GAN," "Knock at the Cabin," "Cocaine Bear," "Renfield," "The Last Voyage of the Demeter," "The Exorcist: Believer," and "Five Nights at Freddy's," not including marketing fees. All of these films were released in 2023 and generated over $800 million at the global box office.

Falling back into old habits

Consistently releasing these types of films in cinemas is not enough; studios must establish a regular release pattern.

Due to the pandemic, many streaming services were launched, causing a significant change in viewing habits as people were forced to stay at home. Platforms further intensified this shift by releasing streaming-only titles, which conditioned audiences to expect certain films, such as rom-coms, dramas, and comedies, to premiere on streaming services first, rather than in theaters.

Although theaters are often the go-to place for event movies and big blockbuster tentpoles from major franchises, audiences tend to visit the cinema less frequently when smaller-budget films are available.

Premium screens like IMAX, Dolby, ScreenX, and 4DX are increasingly popular among moviegoers who are willing to pay higher prices for a better cinematic experience.

With fewer big-budget blockbuster titles in the first quarter, audiences are turning to lower-cost options.

"Anyone But You," starring Glen Powell and Sydney Sweeney, has been generating ticket sales at the box office since its release in late December. The film, which had a reported budget of around $25 million, has tallied $126.4 million in receipts globally.

Since Jan. 12, "The Beekeeper," produced by MGM Studios, has grossed over $100 million worldwide, with a reported budget of $40 million.

In addition to "Aquaman," "Jumanji: The Next Level," and "Spider-Man: Far From Home," other successful films in January included "Mean Girls," "The Boys on the Boat," and "Night Swim," all with budgets under $40 million.

Despite the sluggish winter market, films like 'Mean Girls,' 'Anyone But You,' and 'The Beekeeper' have been successful and are propping up the box office, setting the tone for 2024, a year of headwinds and transition due to industry strikes and evolving audience tastes.

"Dune: Part Two," directed by Denis Villeneuve, is the first major film release of 2023 and will hit theaters on March 1.

A group of films with lower budgets could still achieve success among a lineup of upcoming movies featuring sequels, prequels, and remakes from major franchises like Fast and Furious, Mad Max, Planet of the Apes, Ghostbusters, and Despicable Me.

Universal's 'Monkey Man' and 'Abigail,' A24's 'Civil War,' and Paramount's 'Smile' sequel are all action flicks and horror movies.

Dergarabedian stated that the lack of interest in these unconventional profit centers should serve as a warning to the industry that as audience preferences change, so too should studios and creatives adapt and release more of these types of films in the current movie marketplace.

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.