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CBS Films Is Ditching the Box Office for Streaming

2019 will be the last year CBS (NYSE: CBS) releases its films to theaters. The company is folding CBS Films into CBS Entertainment Group over the next 12 months, according to a report from Variety.

After completing the transition, CBS Films will go to work finding projects for the company's streaming services. CBS operates CBS All Access and Showtime.

It's become increasingly difficult for smaller studios to compete against bigger companies at the box office. The forthcoming combination of Walt Disney (NYSE: DIS) and Twenty-First Century Fox (NASDAQ: FOX) (NASDAQ: FOXA), and AT&T's (NYSE: T) acquisition of Warner Media, will only make things more difficult for smaller film outlets. Streaming services provide a better way for CBS Films to increase the reach of its projects and attract talent to its studio.

Image source: Getty Images

All about reach

CBS's decision to move future film productions to its streaming service can be summed up in one word: reach. Given the current state of movie-theater box offices, CBS Films can reach a broader audience if those productions are part of CBS All Access or Showtime.

Box-office sales are increasingly top-heavy. The top-10 grossing films of 2018 accounted for nearly one-third of all box-office sales for the year. In 2011, the top-10 films accounted for just one-fourth of all box-office sales. As big companies like Warner Bros. and the combined Disney-Fox make big-budget films with massive marketing budgets, there's just not enough room for smaller studios to compete.

That said, there are plenty of creative filmmakers that want to tell original stories. Netflix (NASDAQ: NFLX) caters to those creators, and it's been on a spree attracting top talent to its production studio. That's because Netflix provides creators with an opportunity to reach hundreds of millions of viewers, and it can take more risks because the economics are often better than with theatrical releases.

While CBS doesn't have nearly the audience of Netflix, it can provide a platform for creators to get in front of millions, instead of having their films drowned out by the next Marvel superhero in theaters. The company says its two streaming services are on track to combine for 8 million subscribers by the end of this year, and could reach 16 million combined subscribers by 2022. Given the more limited film selection on its platforms compared to Netflix, there's an opportunity to highlight new original films released directly to those platforms.

Growing the streaming business

The addition of original films that would be right at home in a movie theater to CBS All Access or Showtime could help boost subscriptions. Netflix is focused on adding original film content to its platform, as it sees about one-third of all viewing goes to films. For CBS, adding films, especially films people can only see on its streaming service, could be a major driver of gross additions and subscriber retention.

That said, Disney and AT&T have similar plans for their forthcoming streaming services.

Disney+ will feature most of Disney's back catalog of films from its major studios -- Disney, Pixar, Marvel, and Lucasfilm. On top of that, Disney is producing new original films for the platform, including a live-action remake of Lady and the Tramp. Disney's live-action remakes of its classic animated catalog have been big box-office hits.

Warner Media hasn't said it plans to release any films directly to its streaming service, but its film catalog will play a key role in the three-tiered product.

Disney and Warner Media represent significant threats to the continued growth of CBS All Access and Showtime. Both have extremely valuable film and television assets. CBS can differentiate its product by including original films, and concentrating its marketing budget on its streaming products.

CBS has a head start over Disney and Warner Media, but it'll have to fight to stay that way.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.

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