Going [Back] to the Movies

 While domestic box office receipts were lower in 2019 relative to the blockbuster prior year, revenue topped $11 billion, the fourth time in five years.  Among distributors, Disney led the way with nearly a 40 percent share of the market, and accounted for eight of the ten largest grossing movies, including Avengers: Endgame, The Lion King, Frozen II, Toy Story 4, Captain Marvel, and Star Wars: The Rise of Skywalker.

	2019	2018	2017	2016	2015
Total Box Office ($M)	11.26	11.95	10.99	11.26	11.16
Tickets Sold (M)	1,228.76	1,311.32	1,225.64	1,301.66	1,323.27
Top Movie	Avengers: Endgame	Black Panther	Star Wars VIII: The Last Jedi	Finding Dory	Star Wars VII: The Force Awakens

The quantity and quality of the movies released each year by the studios is critically important to the well-being of studios and exhibitors alike.  The studios leverage box-office success when negotiating television deals with third-party video distributors or adding to the library of valued content on their own platforms.  The exhibitors, plain and simple, need content to fill seats.

As 2020, began, the expectation was for another strong year with the planned release of must-see in-the-theater movies, including MGM’s No Time to Die, Disney’s Black Widow, Mulan, and Soul, and Warner Media’s Wonder Woman 1984.  While the recent entry and expansion of streaming platforms by the top studios created heightened concerns that some content would bypass theaters and go directly to television, the three largest US exhibitors, AMC, Regal (Cineworld), and Cinemark, viewed streaming as a complement and not a substitute to going to the movies.  Through acquisitions mainly, the chains got bigger providing them with some ability to push back when negotiating for content with the studios.     

	U.S. Market (2019)
	AMC	Regal	Cinemark
Locations	636	546	345
Screens	8,094	7,178	4,645
Attendance (M)	250	177	176
Revenue ($M)
Box Office	2,388	1,860	1,432
Concessions	1,348	954	936
Other	287	396	213
Total	4,023	3,210	2,581

 

That all changed in 2020.  With theaters closed or operating at a fraction of capacity for most of the year, studios increasingly released films directly to their own or partnered streaming platforms.  The pandemic exposed the exhibitors’ vulnerability of having no content of their own and no alternative distribution channels. Through the first 9-months of 2020, the three top U.S. theater chains earned less than a quarter of what they brought in for the same time period in 2019.  (AMC’s numbers are shown below)

	U.S. Market - 9 Months Ending 9/30/2019
Revenue ($M)	2020	% of 2019
Box Office	408	23%
Concessions	227	22%
Other	90	43%
Total	724	24%
Costs ($M)
Film Exhibition	208	21%
Food & Beverage	43	29%
Operating Expenses	454	50%
Rent	496	93%
G&A	53	66%
D&A	275	109%
Impairments	1,400	--
Total	2,929	101%

 

Once vaccinated and herd immunity is achieved, will people go back to the movies? As an affordable form of entertainment that provides an event-sized shared experience, they will.  Behind the scenes, however, things will be different.  Studios have renegotiated contractual terms that have reduced theatrical exclusivity windows (i.e. Universal) and announced intentions to simultaneously release movies to theaters and streaming platforms in 2021 (i.e. Warner Media).  Exhibitors have few good options.  They can continue to work with landlords for concessions on lease terms and seek out alternative uses of their spaces (e.g. live events). But, what else can they do?  Scale back or exit markets?  Maybe.  This would reduce exposure to the whims of the studios.  Vertically integrate or partner with content creators (e.g. MGM, Lions Gate, Sony/Columbia, Netflix, Amazon).  Maybe.  This would partially offset the hold-up problem.  Create promotion bundles/loyalty programs with other entertainment venues. Maybe.  This would offload some risks.  The bottom line is that there is no single, cheap, low-cost answer.  Survival will take vision and boldness.  Who has the “right stuff” to make it happen?  Time will tell…stay tuned!    

Sources: firms’ SEC filings and https://www.the-numbers.com.