Uptown Theatre, Minneapolis, March 28, 2020. Photo by Lorie Shaull.It sounds like a Hollywood pitch, as depicted in a Hollywood comedy: “There’s a global pandemic and then the trolls attack! Picture ‘The Andromeda Strain’ meets ‘Bridge to Terabithia.’”
Welcome to the real-life motion picture theater business, circa 2020.
This is not another obituary for film exhibitors. Many have been written since the 1940s, when antitrust rulings and the rise of television first challenged movie theaters’ grip on Americans’ leisure budgets and time. All have been wrong.
Over more than a century, the theaters’ business model has shown its resilience and adaptability. I don’t believe that even a months-long shutdown due to the COVID-19 pandemic is going to kill it. But it is probably going to change it.
By happenstance, the pandemic erupted in Europe and North America during the film studios’ slow season, well ahead of the summer blockbusters and the year-end push for Oscar nominations. Most studios reacted by delaying major releases. Yet eventually the uncertainty over the shutdown’s end date forced them to consider alternative ways to get their product to consumers. Production and release schedules for the most lucrative film franchises – think the Marvel Cinematic Universe – are set years in advance. Extended delays would have consequences long after the pandemic ends.
Of the major studios, Comcast’s Universal Pictures was the most aggressive in its response. It has also likely reaped the biggest financial rewards so far. In March it moved some films that were still playing in theaters into concurrent online video rentals, ignoring the usual period of around 75 days when theaters have a monopoly on new releases. Then, in April, it released its cartoon sequel “Trolls World Tour” directly to in-home, video on demand rentals the day of its scheduled theatrical debut.
This proved lucrative. In three weeks, “Trolls World Tour” generated more revenue for the studio than the original “Trolls” did in its five-month theatrical run. Not only were these home releases letting the films make money rather than gathering electronic dust, but The Wall Street Journal reported that Universal’s share of video revenues, at 80%, generated more profit than the studio could have expected from a traditional release to theaters with the customary 50-50 box office split.
Film exhibitors were apoplectic. AMC, the largest of the so-called “cinema circuits” with more than 8,200 North American screens (as of 2018), promised to boycott Universal releases once its theaters reopen. The National Association of Theatre Owners accused Universal of having a “destructive tendency to both announce decisions affecting their exhibitor partners without consulting those partners, and now of making unfounded accusations without consulting their partners.” (The organization released this statement in response to Universal’s claim that the trade group had coordinated earlier objections with AMC’s boycott pledge.)
These threats are hollow. The theaters have no business without the studios. But the studios have myriad ways to get their product in front of paying customers.
Even as it was promising to boycott Universal’s future releases, AMC was reportedly at the point of considering a bankruptcy filing. It avoided this, at least for now, only by raising $500 million in new debt. The Motley Fool reported that the debt is at a painful 10.5% interest rate, befitting AMC’s shaky financial status, and is due in five years unless the chain can refinance.
AMC’s financial woes are hardly unique. Cinemark, the third-largest North American chain, sought to raise $250 million in new debt after the pandemic-induced shutdown, according to The Hollywood Reporter. The small, Miami-based CMX chain filed for bankruptcy protection last week. In 2019, well before anyone had heard of the new coronavirus, the high-end iPic theater-restaurant chain – also based in South Florida – did too. The pandemic disrupted a prepackaged bankruptcy reorganization for VIP Cinemas, which makes the fancy reclining seats that theaters have spent a not-so-small fortune installing to try to lure customers off their sofas.
Yes, things are looking grim at the local multiplex. Maybe this really is the end. But come on, we’re talking about Tinseltown, the dream factory. There always seems to be a Hollywood ending for the auditorium behind the marquee and the box office.
Broadcast television, then color television and later cable television did not kill the business. VHS and DVD technology did not kill the business. Netflix and the streaming services that followed it did not kill the business. Even preshow commercials, which people used to decry as a contamination of the theater experience, have not killed the business.
While attendance has been stagnant in recent years, not counting this year’s plunge due to the pandemic, enough people have been willing to pay for tickets, food and refreshments, babysitters and urban parking to keep the business going until now.
Although I don’t think the theaters will go away, I suspect their 75-day monopoly on new releases is an artifact that is not likely to outlast the pandemic. Universal has no reason to stop doing what has worked so well in the past two months, and other studios have no reason not to follow Universal’s example. AMC may talk a big game about boycotting Universal, but if Disney – today’s powerhouse studio – chooses to release simultaneously to video, AMC will instantly fall in line. No theater is in a position to argue with Disney.
Some customers may never go to a theater again. At this writing, an “86-inch-class” (big hype for a genuinely big screen) LCD TV from Korea’s LG can be had for about $1,800 at Costco; a 75-inch class from Samsung is available for half that price. Add a few hundred bucks for a decent sound bar, and you have created a replica of the big screen experience close enough to please most casual filmgoers. This setup also allows you to avoid overpriced refreshments, a fixed schedule, and the need to pay for a babysitter, not to mention gas, tolls and parking.
I am one of the lucky ones who has a big screen like these. My wife and I still go to theaters fairly often, but once we can see the latest films at home, we will surely do it less frequently. (Don’t tell her I wrote this.) If the streamers charge us the same amount we would have paid for two theater tickets, and the studios earn more money in the bargain, why wouldn’t we change our habits?
But not everyone can set up a big-screen home theater, even at an affordable price. In small urban apartments, there is often no room. Neighbors also won’t appreciate the sound of an Infinity War playing out on the other side of a thin partition. Those plush reclining seats at modern theaters, with built-in drink holders, are another big bonus unavailable in many homes of any size. My wife insists that a built-in drink holder is a domestic nonstarter.
Exhibitors pitch themselves as a social experience. I don’t know how many people see an upside in having strangers in the same room watching the same entertainment – or talking, or looking at a small screen instead of the big one. I can do without that stranger. But some people do prefer watching with a crowd.
This is why I expect the business model of a theater, with its huge digital screen and high-end sound system, to survive. That, plus the drink holder. Enormous technical and artistic attention goes into making commercial films. For all their limitations, theaters offer everyone a chance to see cinema the way its creators meant for them to see it. So even in a world where some may choose to watch the Avengers at home, I expect enough viewers will find their way to the theaters – and the concession stand, with the beverage cups that fit perfectly in those drink holders – to keep this ancient business model alive, despite the Trolls.
Posted by Larry M. Elkin, CPA, CFP®
Uptown Theatre, Minneapolis, March 28, 2020. Photo by Lorie Shaull.
It sounds like a Hollywood pitch, as depicted in a Hollywood comedy: “There’s a global pandemic and then the trolls attack! Picture ‘The Andromeda Strain’ meets ‘Bridge to Terabithia.’”
Welcome to the real-life motion picture theater business, circa 2020.
This is not another obituary for film exhibitors. Many have been written since the 1940s, when antitrust rulings and the rise of television first challenged movie theaters’ grip on Americans’ leisure budgets and time. All have been wrong.
Over more than a century, the theaters’ business model has shown its resilience and adaptability. I don’t believe that even a months-long shutdown due to the COVID-19 pandemic is going to kill it. But it is probably going to change it.
By happenstance, the pandemic erupted in Europe and North America during the film studios’ slow season, well ahead of the summer blockbusters and the year-end push for Oscar nominations. Most studios reacted by delaying major releases. Yet eventually the uncertainty over the shutdown’s end date forced them to consider alternative ways to get their product to consumers. Production and release schedules for the most lucrative film franchises – think the Marvel Cinematic Universe – are set years in advance. Extended delays would have consequences long after the pandemic ends.
Of the major studios, Comcast’s Universal Pictures was the most aggressive in its response. It has also likely reaped the biggest financial rewards so far. In March it moved some films that were still playing in theaters into concurrent online video rentals, ignoring the usual period of around 75 days when theaters have a monopoly on new releases. Then, in April, it released its cartoon sequel “Trolls World Tour” directly to in-home, video on demand rentals the day of its scheduled theatrical debut.
This proved lucrative. In three weeks, “Trolls World Tour” generated more revenue for the studio than the original “Trolls” did in its five-month theatrical run. Not only were these home releases letting the films make money rather than gathering electronic dust, but The Wall Street Journal reported that Universal’s share of video revenues, at 80%, generated more profit than the studio could have expected from a traditional release to theaters with the customary 50-50 box office split.
Film exhibitors were apoplectic. AMC, the largest of the so-called “cinema circuits” with more than 8,200 North American screens (as of 2018), promised to boycott Universal releases once its theaters reopen. The National Association of Theatre Owners accused Universal of having a “destructive tendency to both announce decisions affecting their exhibitor partners without consulting those partners, and now of making unfounded accusations without consulting their partners.” (The organization released this statement in response to Universal’s claim that the trade group had coordinated earlier objections with AMC’s boycott pledge.)
These threats are hollow. The theaters have no business without the studios. But the studios have myriad ways to get their product in front of paying customers.
Even as it was promising to boycott Universal’s future releases, AMC was reportedly at the point of considering a bankruptcy filing. It avoided this, at least for now, only by raising $500 million in new debt. The Motley Fool reported that the debt is at a painful 10.5% interest rate, befitting AMC’s shaky financial status, and is due in five years unless the chain can refinance.
AMC’s financial woes are hardly unique. Cinemark, the third-largest North American chain, sought to raise $250 million in new debt after the pandemic-induced shutdown, according to The Hollywood Reporter. The small, Miami-based CMX chain filed for bankruptcy protection last week. In 2019, well before anyone had heard of the new coronavirus, the high-end iPic theater-restaurant chain – also based in South Florida – did too. The pandemic disrupted a prepackaged bankruptcy reorganization for VIP Cinemas, which makes the fancy reclining seats that theaters have spent a not-so-small fortune installing to try to lure customers off their sofas.
Yes, things are looking grim at the local multiplex. Maybe this really is the end. But come on, we’re talking about Tinseltown, the dream factory. There always seems to be a Hollywood ending for the auditorium behind the marquee and the box office.
Broadcast television, then color television and later cable television did not kill the business. VHS and DVD technology did not kill the business. Netflix and the streaming services that followed it did not kill the business. Even preshow commercials, which people used to decry as a contamination of the theater experience, have not killed the business.
While attendance has been stagnant in recent years, not counting this year’s plunge due to the pandemic, enough people have been willing to pay for tickets, food and refreshments, babysitters and urban parking to keep the business going until now.
Although I don’t think the theaters will go away, I suspect their 75-day monopoly on new releases is an artifact that is not likely to outlast the pandemic. Universal has no reason to stop doing what has worked so well in the past two months, and other studios have no reason not to follow Universal’s example. AMC may talk a big game about boycotting Universal, but if Disney – today’s powerhouse studio – chooses to release simultaneously to video, AMC will instantly fall in line. No theater is in a position to argue with Disney.
Some customers may never go to a theater again. At this writing, an “86-inch-class” (big hype for a genuinely big screen) LCD TV from Korea’s LG can be had for about $1,800 at Costco; a 75-inch class from Samsung is available for half that price. Add a few hundred bucks for a decent sound bar, and you have created a replica of the big screen experience close enough to please most casual filmgoers. This setup also allows you to avoid overpriced refreshments, a fixed schedule, and the need to pay for a babysitter, not to mention gas, tolls and parking.
I am one of the lucky ones who has a big screen like these. My wife and I still go to theaters fairly often, but once we can see the latest films at home, we will surely do it less frequently. (Don’t tell her I wrote this.) If the streamers charge us the same amount we would have paid for two theater tickets, and the studios earn more money in the bargain, why wouldn’t we change our habits?
But not everyone can set up a big-screen home theater, even at an affordable price. In small urban apartments, there is often no room. Neighbors also won’t appreciate the sound of an Infinity War playing out on the other side of a thin partition. Those plush reclining seats at modern theaters, with built-in drink holders, are another big bonus unavailable in many homes of any size. My wife insists that a built-in drink holder is a domestic nonstarter.
Exhibitors pitch themselves as a social experience. I don’t know how many people see an upside in having strangers in the same room watching the same entertainment – or talking, or looking at a small screen instead of the big one. I can do without that stranger. But some people do prefer watching with a crowd.
This is why I expect the business model of a theater, with its huge digital screen and high-end sound system, to survive. That, plus the drink holder. Enormous technical and artistic attention goes into making commercial films. For all their limitations, theaters offer everyone a chance to see cinema the way its creators meant for them to see it. So even in a world where some may choose to watch the Avengers at home, I expect enough viewers will find their way to the theaters – and the concession stand, with the beverage cups that fit perfectly in those drink holders – to keep this ancient business model alive, despite the Trolls.
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