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How the tables turned – studios in driving seat for US cinema crash

A mixed set of recent reactions from financial analysts on the future of movie theaters have done nothing but echo the state of disorder facing the cinema industry, as stocks in major chains have fallen off a cliff edge over the last two quarters.

Matters look set to get worse still for movie theater owners, as just a matter of days ago rumors circulated that US studios Paramount Pictures and Warner Brothers eying a potentially market-altering movie download service with Comcast and Apple.

AMC Entertainment, the largest of the big three US movie theater chains, has seen its share price plummet 45% since Memorial Day on May 28, while shares in Regal Entertainment are down 28% and Cinemark Holdings have dropped 18% in the same period. Imax has suffered a 31% drop and the implosion has rippled out to hit stocks in cinema advertising firm National Cinemedia by 25%.

One analyst from investment bank B.Riley believes that movie theater upgrades will be enough to revive their former glory days, even going as far as to suggest the collapse in stock prices represents a buying opportunity. “The issues that have plagued recent box office trends were mostly slate-specific and should not have any bearing on future expectations,” said Eric Wold.

Wold’s future expectations don’t offer any insights into which innovations will save the cinema, but we know that the theatrical owners have made the seats more comfortable and sold alcoholic drinks that you can take into the show – hiking ticket prices in the process, just to stand still in terms of visitors and revenue. Experimenting with VR is another possible way for cinemas to attract audiences, but this is a niche market which would just result in further price increases and a delay of the inevitable.

Another analyst, Barton Crockett of FBR Capital Markets, came out with a slightly less optimistic observation that upcoming blockbusters – such as Star Wars: The Last Jedi, of the Disney-owned franchise, and Warner Brothers’ Wonder Woman – will perform strongly in the fourth quarter, but that the box office will suffer a fall of 3.2%. Crocket projects box office takings of $2.36 billion for Q3, which would be a decline of almost 21% from the previous year.

A view more in line with Faultline Online Reporter’s came from MoffetNathanson, as analyst Robert Fishman forecast that studios launching into premium VoD (PVoD) could drain $380 million a year from movie theaters. “Until we get some resolution on PVoD, it will be difficult for the theater stocks to make sustained headway,” commented Fishman.

It is the tentative nature of the PVoD strategy, which we spoke about in detail last week, that is preventing a complete collapse of the industry – with stocks sliding further this week, the studios will be thinking more seriously about their own future and will become gradually less concerned with leaving behind their aging movie theater partners. The more the industry believes that the day of the cinema is over, the more people will invest in PVoD.

A key factor in studios striking deals with the likes of Comcast and Apple to offer movie downloads just two weeks after theatrical release is the power the cinemas retain over the movie industry. It could leave the movie theaters with little option but to boycott certain blockbusters and therefore slash a significant amount of studio revenues.

Theater owners have shown they aren’t scared to do just that. In 2011, US cinemas chains threatened not to show the movie Tower Heist, which the studios wanted to use as a test bed for a $60 PVoD offer three weeks after its initial theater showing. The cinema chains won that battle and the PVoD plan was axed, but today the studios are in the driving seat and are actively in discussions to seek a way out. If they do not find a new format soon, they risk going down with the cinematic ship.

Paramount will end 2017 with the most scars from the year’s poor performance in cinema, predicts FBR’s Crockett, with Paramount’s top 20 movies seeing a 27% year on year box office income drop. Disney’s top 20 movies will experience a 23% predicted drop, followed by 20th Century Fox falling 17% and Sony slipping 2%.

Sources close to the rumored Apple and Comcast deal with Universal, which Comcast owns, and Warner Brothers, expect studios to reach an agreement with distributors as soon as next year. God forbid what the cinema chain stocks will look like when that day comes.

As for analysts upgrading cinema stocks to buy, perhaps they are thinking of China where some 15 new cinemas are opening every day, while the US has been flat for five years at around 40,000 screens at 5,000 sites.

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