The Coronavirus May Kill Movie Theaters – A Perfect Time For Studios To Buy Them

If our social distancing effort to suppress the coronavirus is prolonged, movie theater chains will be forced into bankruptcy. In the most optimistic scenario, theaters will not reopen until the end of June which will result in a 30% loss of box office receipts. If some cautious consumers decide to avoid crowded auditoriums throughout the summer, it could result in a total loss of 40% or so. And if the virus returns in the fall as some healthcare experts suspect, theaters may be required to close again and lose as much as 60% of the box office. With rent and debt interest expenses mounting, a quick slide to failure could be likely. It has been reported that AMC is already shopping for bankruptcy lawyers. 

Theater chains were barely treading water even before the coronavirus, having lost audiences for decades. In the 1930’s, about 65% of Americans visited a movie theater each week. It is about 10% today. The long, hard decline was a result of the introduction of other entertainment platforms. It started with the rise of television, then came movie videos and DVDs, then videogames, and finally streaming. A dirty secret of the theater business is that revenues have risen in the past decade not because theaters have attracted greater audiences, but because they raised ticket and food prices while adding higher priced viewing experiences like IMAX
IMAX

Major theater chains have also been at odds with the preferences of consumers and studio executives, both of whom have expressed a desire for new movies to be available on all platforms simultaneously, known as a day-and-date release. But theater chains have demanded a 90-day window before a film can be available at home. Studios that challenged this had their films blackballed by the major chains. They refused to run the 2016 sequel to Netflix’s Crouching Tiger, Hidden Dragon, and more recently Martin Scorsese’s 2019 film, The Irishman, because Netflix wanted to stream them earlier than the 90-day window. While it is understandable for theaters to protect their business, they are doing so at the expense of consumers who prefer flexibility to see what they want, when they want, at the price they want. There is more money in the entire system if consumer needs are met, but it cannot be garnered if theaters are fighting studios and streaming services.

Theater chains need to be saved, and they need new ownership that can manage the entire consumer entertainment experience. That can only be achieved by the likes of Netflix, Amazon, Disney and NBCUniversal. The studios will be able to infuse theaters with needed cash, safeguard their own roughly 55% of the box office, and also give audiences the ability to see films when, where, and how they prefer. They will also better extract the value of each film by instituting “dynamic pricing”, a tiered system in which films in higher demand command higher prices. European theater chains do this now, but American chains have been shy to implement. If any company knows how to tier prices to optimize profits, it is the studios.

While studios are also hurting financially, they are in a stronger position to make prudent decisions that will impact their future. Importantly, it would be best if multiple studios formed a consortium to purchase distressed theater chains in the same fashion that multiple studios once had an equity stake in Hulu. The balance will hopefully instill fairness and avoid running afoul of the 1948 United States v. Paramount Pictures Inc. decision, enacted at a time when studios owned theaters. The decision prohibited nasty practices such as showing only a studio’s own films, using “block booking” which requires independent chains to acquire large blocks of films of varying quality, and forcing “blind buying” which made independent theaters rent films before seeing them.

Theaters caught the coronavirus in mid-March when they closed their doors, will probably be in the ICU ward by July or August, and could be in a coma and on a ventilator by December. As distressed assets, they will never be cheaper. AMC Entertainment stock was in the $30 range in 2017 but it has now fallen to $2.18 as of April 14, 2020. The market cap hovers just above $227 million. 

There will never be a better time to reimagine the entire movie delivery process.

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