How Wall Street Views The AMC-Universal Theatrical Window Deal

July 29, 2020

Georg Szalai "We worry that the near-term impact on attendance can be more substantial and consumers in the long run will continue to opt to watch more non-blockbuster films in their homes," says one Wall Street expert. Wall Street analysts on Wednesday weighed in on AMC Theatres' historic agreement with Universal Pictures that will allow the studio's movies to be made available on premium video-on-demand after just 17 days of play in cinemas, including three weekends. The deal, which initially covers AMC's U.S. locations, shatters the traditional theatrical window of nearly three months before studios can make movies available in the home. The partners didn't detail financial terms, but AMC, the world's largest theater chain, is expected to share in the revenue from PVOD. In a report entitled "The Day the Windows Broke," MofffettNathanson analyst Michael Nathanson called the development "a groundbreaking moment for the film industry." What does it mean though for movie going and the like? Nathanson predicted movie attendance would be cannibalized. He said that looking at the top 2019 films in key categories shows that roughly 80 percent-90 percent of total box office was generated within the first four weeks, with the first three weeks accounting for 70 percent-80 percent. "So if the 17-day option becomes standard across all studios, we expect a higher level of movie attendance cannibalization than if the exhibitors could have held the PVOD window at 30 days," Nathanson concluded. He added: "If consumers are trained to wait only a few weeks to watch the movie at home, especially while increased COVID-19 risks still exist, we worry that the near-term impact on attendance can be more substantial and consumers in the long run will continue to opt to watch more non-blockbuster films in their homes going forward. Of course, the lower box office attendance will also negatively impact high-margin per cap spending on food and beverages." What about the window deal's financial impact on studios? "There is good news here with this PVOD announcement as they can open up a shorter consumer window to more efficiently leverage marketing spending," Nathanson argued. "However, given only 17 days of theatrical release, we would also expect a larger negative impact on downstream windows like electronic sell-through, VOD rentals and pay 1 per title payments." But he concluded: "Given the higher PVOD revenue take for studios and depending on the PVOD price, net-net, we think that this outcome is a positive for the major Hollywood studios." Nathanson in his Wednesday report also reiterated his previously voiced view that "the only long-term winners in film are Netflix, Amazon, and Disney because they have built scaled global streaming platforms that will benefit from a shortened release cycle of theatrical films that populate their own proprietary SVOD platforms." He expects the AMC-Universal window deal "to pressure those unaligned studios to consolidate to find cost synergies as profitable long-term film windows like home entertainment, cable syndication and pay 1 are squeezed by SVOD competition." As far as exhibitors go, the fact that AMC has struck the first deal with Universal "puts the rest of the industry at a disadvantage," Nathanson suggested. "It is still possible Cinemark and Cineworld will try to push for greater economics and/or a longer period of theatrical exclusivity. However, now that Universal (and maybe other studios shortly) have this deal in place as an initial template, it may be challenging to find any other outcomes to meaningfully improve terms." On the positive side, "exhibitors would benefit if the PVOD window helps de-risk future movie investments and leads to more green-lighting of movies, especially independent and mid-tier films," he wrote. "This announcement could – optimistically – also help some studios stick to some of their 2020 release dates that were at risk of shifting into 2021 because of the pandemic, which would allow for much-needed content to fill the screens in the fourth quarter." The analyst also highlighted that "maybe the biggest positive for theater owners could be using this new 17-day window to reach a similar agreement with Netflix and other SVOD services that are ramping up production of their own original movies." Nathanson also expects fallout on the number of movie screens in the U.S. "We would expect the number of screens in the U.S. to start to shrink as owners refocus on protecting their most profitable multiplex locations, which will hurt the overall exhibition industry," he wrote. "This would be especially true if the smaller, independent exhibitors are unable to successfully negotiate their own revenue splits of PVOD windows." Credit Suisse exhibition analyst Meghan Durkin in a report argued that in the AMC-Universal deal the "only clear winner is consumers." She explained: "We expected a 30-day window, and were surprised to see AMC agree to only 17 days, which increases the risk many consumers will wait a few weekends to see films in home rather than going to the theater. Key will be whether the revised theatrical splits and PVOD revenue sharing will cover any lost box office from the shortened window, how many films the studios elect to sell into PVOD, whether other studios and theater companies embrace this new AMC/Universal PVOD model (certainly Universal needs broad theater company acceptance of this model to be able to release films into PVOD), and if PVOD flexibility causes studios to release more films into theaters in the future (due to leveraging their marketing spend better, and by capturing enhanced economics with $20 per home pay-per-view rentals versus the typical $5 per home after 74 days)." Added Durkin: "If this arrangement was structured in a way that results in higher studio profitability or less studio risk, we could see more theatrical releases, and a more diverse slate of films, which could prove a positive for theaters over time." Her overall conclusion: "Given the environment created by COVID-19, in which theaters in the U.S. still remain closed, and with film releases being constantly pushed back, investors are likely to view this deal as increasing uncertainty for the theatrical distribution model until financial benefits can be proven out, and the impact on consumer behaviors and studio output are better understood." B. Riley FBR analyst Eric Wold had more of a "wait-and-see" take on the AMC-Universal deal despite some initial concern among investors. "In our opinion, it is too early to draw a line in the sand on this agreement and come to the conclusion that it is a positive for Universal and a negative for AMC (or any other exhibitors)," he wrote. "Nevertheless, we are remaining on the sidelines with a 'neutral' rating for pure-play exhibitors AMC and Cinemark Holdings until there is increased visibility into the industry restart [after the coronavirus pandemic] and response from moviegoers." He said that on the surface the deal "seemingly represents a reduction in the overall theatrical window from nearly three months to nearly three weeks," but said "this would be too naive of an interpretation of the agreement." He explained: "While this agreement gives Universal the option to make any film available to PVOD platforms after 17 days, we do not believe every film would move to PVOD after 17 days. In our opinion, this agreement provides an out for Universal (as well as AMC) to move underperforming films out of the theater and into the PVOD window — where they may not only perform at a higher level (i.e., consumers may not view the film as worth paying a theatrical ticket price), but can also benefit from the marketing spent promoting the theatrical window." He added: "We find it hard to believe that Universal would move a film out of the theater (or provide a less expensive home option to consumers) if the film is performing well in theaters and still generating attractive box office revenues. And as for AMC, we believe this not only provides an opportunity to move underperforming films out of the theater (where they are taking up valuable screen real estate), but creates a new way for the exhibitor to share in the economics of the film as it moves to the next distribution window." Wold expects more deals in that vein. "We would not be surprised to see other 'option' agreements entered into between the remainder of the major studios and the leading exhibition chains — especially as the other exhibitors may be unwilling to keep a film on their screens anyway once it becomes available through PVOD (and they would likely prefer to share in the PVOD economics as well)," he said. Meanwhile, MKM Partners analyst Eric Handler mentioned the windowing news in a Wednesday report about giant-screen company Imax, arguing that "AMC's PVOD deal with Universal should not have a material impact on Imax." The analyst said the news "caught many people by surprise," adding: "While this event is being perceived (rightly or wrongly) as an incremental negative for the industry, we believe Imax is well insulated from any implications from any PVOD developments. Of note, Universal cannot announce a film will launch on PVOD platforms until after the second weekend of its theatrical release. As nearly all of the films shown on Imax screens run for just one to two weeks, the company should not face any overlap with the PVOD window." And Handler said: "In addition, as many Imax customers pay to see a particular film specifically because of the platform's premium, large-format experience, we believe the marginal utility is far greater for the company than what an in-home viewing opportunity can deliver."

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