Seeing this Sonny Bunch tweet over last weekend was probably the most disappointing news I’ve seen in a while:
Is this the final nail in the theatrical coffin for 2020? Probably. So let’s once again check in with theaters.
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Most Important Story of the Week – Movie Theaters…What Comes Next?
This seems to me like an unforced economic error. California and New York simply won’t reopen theaters or theme parks until an extremely efficacious therapeutic (meaning lowering death to below 1 in 10,000 for all ages) or vaccine is developed. And since California and New York are high-wealth and high-population states, it’s keeping studios from launching any films in America. And since America is at least 25% and sometimes 50% of a film’s gross, it’s keeping new films from launching anywhere globally.
So here is the specific news, if you didn’t see it last week:
– Jame Bond’s latest installment No Time to Die moved to 2021.
– Disney’s Black Widow moved from November 6th to May 2021.
– Dune moved to 2021.
– Universal then moved the next Jurassic World film to 2022.
– Soul is going straight to Disney+.
– Wonder Woman 1984 hasn’t moved from Q4. (Yet.)
– Since those films are moving, Regal closed theaters again to all films. As of this publication, AMC and Cinemark have not followed suit.
Is this bad for theater chains? Yes. Most forecasts at the beginning of the pandemic said they could last for 3-6 months, and a few could survive to 2021 as long as some films started returning to theaters. The last quarter of the year was the backstop…and now that backstop is gone.
The question, then, is what comes next? I haven’t seen that answered. Instead, I just see eulogies for theaters. Well, if you want a job done right, you got to do it yourself. First, some thoughts on the industry. Then the potential outcomes.
Thought 1: The Theatrical Distribution Industry is NOT Theater Businesses
The theatrical industry is made up of AMC, Regal, Cinemark and countless smaller independent theaters and smaller chains. But the industry will exist even if/after those chains go bankrupt or disappear. In other words, the business model is not the business, if that makes sense. We need to discuss two different questions:
– First, will theatrical filmgoing survive?
– Second, will the current theater chains survive?
We should keep those two questions separate as we forecast the future.
Thought 2: The smaller chains will have different outcomes than the giants.
Yes, AMC, Regal and Cinemark own a vast majority of theaters in the United States. But many smaller chains exist, and in some cases have better flexibility to survive in a post-Covid 19 world. In other cases, they have even tighter financials and will struggle to survive.
Thought 3: This is Disruption We’ve Never Seen
Meaning, I don’t have a lot of great comps for this business situation. Amazon disrupted retail, but that took years to take place. The internet disrupted daily newspapers, but again that took two decades to take place. Blockbuster was replaced by Netflix, but again that took years. (And Redbox and iTunes don’t get enough credit for their role too.) Same for cell phones, cable, and other disruptive technologies.
I honestly can’t think of a business situation that compares to the situation facing certain industries right now. Thus, all forecasting is that much more uncertain.
Thesis: The Theatrical Industry will Survive.
In some form. I would bet heavily on this outcome and invest heavily if I ran a hedge fund, private equity or conglomerate with cash to invest in media and entertainment.
The logic is fairly inescapable. A good portion of customers want to see films. I’ve written before that theatrical filmgoing has been remarkably resilient. For all the “death of theaters” narratives, the data frankly doesn’t support it.
Think of this like a Porter’s Five Forces analysis to ask if this is a good industry to enter. We just showed customer demand. Competition will wipe out some theaters, meaning competition is reduced. Meanwhile, theaters are unique buildings that don’t lend themselves to easy re-use. That means the land has a limited set of buyers. Plus studios still want box office.
If you have customer demand, weak competition, low barriers to entry, and cheap supply, then that’s a market to get into!
To top it off, if you’re the type of person who wants an innovative new theater experience, you could do that too. I’m not sure what this will be and how much innovation is possible, but if tons of theaters are left vacant, a clever venture capitalist will have lots of inventory to play with.
(Is there a chance the model is fundamentally broken and we’ll just stream from now on? Maybe. But the competitive logic makes it very unlikely. As many have noted, the industry earned over $11 billion in America last year and $42.5 billion worldwide.)
What Comes Next for Theater Companies?
To repeat ground rule 1, just because theaters will survive, doesn’t mean the same companies will. This is where all the uncertainty comes in. When we’re uncertain, our range of outcomes should be wide. Therefore, this is a list of many potential. Some of these will work together, while others are contradictory.
- Bankruptcy. This is simple. Some theater chains will declare bankruptcy to survive in some form or sell off assets. A few of the chains have quite a bit of debt, so this could be the precursor to everything else which happens.
- The chains squeak by. Yep, it sounds inconceivable, but, some of the theater chains could manage to survive despite everything. As I showed before–and the theaters themselves mentioned–they’ve cut costs to the bone and a lot of their costs are variable and tied to the exhibition of films. The biggest fixed costs are leases, but if their lessors play hardball, then the landlords are cutting off their nose to spite their face. (If your biggest tenant leaves, it could depress revenues for months or years until a new theater chain takes over.) Still, banks could provide loans or new ownership groups could buy ownership shares to help survive this downturn.
- The government bails out theaters. (Sonny Bunch inspired me with this idea in his newsletter.) How likely is this? Who knows? This is the type of scenario that is wildly tough to estimate probabilities. On the one hand, bailing out theaters will be much cheaper than bailing out airlines. On the other, no one likes bail outs, especially to over-leveraged theater chains that are both monopolies and private equity playgrounds. Conversely, given that over 150,000 folks are employed by theaters, it could be a popular case.
- Studios buy the theater chains. That’s legal now, remember? If the price for say Cinemark drops to below a billion dollars, maybe Disney says, “Yeah, we’ll do that.” That would be a better use of their dividend than more streaming content, in my opinion. And you know Comcast will buy anything.
- A big tech company buys one. Big tech has bought 500 companies in the last 20 years, what’s a few more theater chains? The only caveat? The big tech firms are finally under scrutiny for monopoly power. (See context below.)
- Private equity buys a chain or pieces of a few chains. This seems as likely as anything. Once firms go into bankruptcy, they’ll need cash and private equity has cash to invest. Whether in whole or in part, this is likely.
- Smaller theater chains move up the value chain. Whether this is a smaller company like Arclight or Alamo, or a new company set up to buy theaters or something else entirely, the big chains could be replaced by a series of smaller chains. This could be powered by private equity too.
- A new theater chain is born. Again, if AMC goes bankrupt, its theaters across the landscape are suddenly empty. Depending on how many it actually owns versus leases, these are now assets to be acquired. While monied players are more likely to swoop in, a clever new business could buy the theaters and start a new chain with an entirely new business model.
This Process Won’t Be Pleasant
Let’s be clear about that. Going through bankruptcy, or needing a bail out or barely squeaking by means lots of economic pain. Even if new companies buy theaters, that will cause immense disruption, hurting studio profits and closing many smaller theater chains too. And it could take years for the situation to shake out.
Data of the Week – Sports Ratings Are…?
This is a story that is a tale of a few tweets. First, here’s the bad news:
Then, here’s the good news.
Huh, now I don’t know what to think. Viewership is up and down. And it doesn’t seem like too long ago when ratings for new sports returning was through the roof. (The PGA in particular.)
Here’s the thing: sports ratings, like all ratings, are noisy as hell. We love to talk about big data, but let me tell you: ratings are small data. Tiny!!!
Especially annual data, which is really just a data point per year. I’ve run into this with box office data: if you take a data set of 2000 to present, you only have 19 data points. Thus, drawing even conclusions from the trendlines is tough; trying to figure out causal relationships? Forget about it.
Fine, you still want explanations for the decline in NFL and all sports ratings? My gut is multiple factors are impacting them simultaneously. You judge the magnitude on your own.
– First, cord cutting is impacting some of the ratings data. The trendlines are clear, and could account for 1-10% of the drop off. (The debate for me really explains this trend line, being down about 10% despite high interest.)
– Second, there are so many sports right now it is incredible. Lots of fans are fans of both the NFL and NBA, but if both are on simultaneously they can’t watch both. That’s logic.
– Third, the NBA in particular had a terrible post-season from an interest standpoint. They got Lebron, but Giannis dropping out hurt the perception of the final product. And I say this as a Lakers fan. Indeed, once the Miami Heat won a game, interest seemed to pick up. As always, a bad product leads to bad ratings.
– Fourth, piracy. One of the reasons cord cutting is available is that live sports piracy is even easier than bit torrent. The NBA in particular could salvage its ratings by intervening with Reddit to stop pirated streams.
– Fifth, (grudgingly) politics. No matter your political persuasion, pretending like interjecting politics into sports has no impact seems like a naive position. (Again, I’m here simply to talk about making business decisions, not the politics or ethics of the situation.) To pretend like everyone has uniform political views or that many sports fans aren’t apolitical just doesn’t match reality. (Again, this isn’t to say that the NBA and its players don’t have the right to use their platform. They do. And this is about more than making money to the league, the teams and its players. But that doesn’t make exercising that right a profit-maximizing business decision.) All that said, given that multiple leagues are down in the ratings, it’s hard to give this factor too much credit. It likely plays a small role, but we’ll never know how small because this is small data.
Context Update – The Cicilline Antitrust Report Matters
I don’t think we’re paying enough attention to how antitrust could change in a Biden administration. Since I wrote this look on the future of antitrust (“How Antitrust is the New Deregulation”) Joe Biden has become much likelier to win the election (85% chance in Nate Silver’s model) and now antitrust is trendy.
Matt Stoller wrote a great piece on the implications and so did David Dayen. Read either or both, but the conclusions are fairly clear: big tech firms know they have market power, and they use this to control markets. Congress appears poised to make changes.
The implications can’t be underplayed. Even now, my Twitter feed is constantly awash with dealmaking speculation. Who should Company X buy? Should company Y sell itself? Should companies W and Z merge?
Imagine if that conversation reverses to: Who will get split up next? And into how many pieces?
Strategically, this would be much more fun. Companies could no longer compete by acquiring rivals, but compete on the quality of their products. Big tech couldn’t throw off the rules of the game by losing billions to enter new markets. That’s a much harder strategic challenge.
Entertainment Strategy Guy Updates
Mulan Starts Non-Exclusive TVOD; Soul goes to Disney+ in December
Combined with the news that Soul is going straight to Disney+, the Disney+ PVOD exclusive plan didn’t work. The news is this week Mulan became available for digital purchase on other outlets. This likely won’t boost revenues exorbitantly, but somewhat.
The Soul news is more interesting. Given that Disney+ is now Disney’s home entertainment, Pay 1, Pay 2 and streaming library windows, Disney just can’t delay the films too much without hurting subscriber acquisition. It also surprises me how late in the year it is, but the cynic says it’s to drive end of quarter subscriber numbers.
UTA Promotes 35 Agents
For all the doom and gloom of the agencies, at least one is promoting talent. Maybe signing that WGA contract is good for business.
Gilmore Girls Heads to The CW
The CW grabbed the rights to the Gilmore Girls revival for a four day event over Thanksgiving. This is a fascinating deal. I would love to see the deal terms. Specifically, what could Netflix control? Or was this a WB TV only deal? We’ll never know, but I’d love to find out. It either means Netflix doesn’t control a big show on their platform, or that they’ve changed their distribution strategy.
