Is This Black Widow’s Last Move? Explaining the Latest Covid-Theater Disruption – Most Important Story of the Week – 26 March 21

The big story of last week is fairly obvious: Disney moved Black Widow to July, along with changing the distribution strategies for Luca (now straight-to-streaming) and Black Widow (now going to theaters and  premium VOD).

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Most Important Story of the Week – Theatrical Return So Far

In the past, I’ve used Uno games, climbing a hill, and going into bankruptcy as analogies for theaters and Covid-19. But this might be the most esoteric analogy I’ve used yet:The best analogy for the return of blockbuster movies in theaters may be calling for artillery fire. 

In case you haven’t ever actually directed artillery fire, here’s how it works. First, you call the position in to the guns. They aim their artillery pieces, load in the right amount of charge, and fire a shell. But the thing about artillery is that it isn’t very accurate. Usually your first round is pretty far off. So you call the artillery battery back, and you “adjust” the fire, left and right, and up and down to get the guns firing where you want. Usually you cut the distances in half, then in half again, until you are right on target. At which point you “fire for effect”, or launch all the shells.

That’s like the return of theaters. At first, films were delayed for a year or more. Then they were delayed by a matter of months. Now, we’re down to moving films back by weeks. Eventually, we’ll stop moving them entirely. If I had to guess, we’re now locked in to the schedule–with simultaneous streaming launches as needed–for the rest of the year. In other words, by Q2 of 2021, big blockbuster films will “fire for effect” and start releasing week after week to finish the year.

Good analogy, right? 

Still, there’s more to explain. Today I’ll cover four areas: the latest Covid news that matters, the impact on theatrical distribution, the impact on home entertainment, and what I think could happen next.

Covid 19 Updates

The biggest driver of all these moves is still Covid-19. So let’s check in on the most important Covid-19 news since I wrote about it three weeks ago. This is sort of a “higher level than daily headlines”, which, due to the need to drive clicks, can sometimes be more misleading than accurate:

– First, more and more vaccines are being approved, and increasingly they all show benefits after one shot. For instance, for all its failed public messaging, AstraZeneca’s latest test results show it is nearly 100% effective at preventing serious illness. It will still likely be approved too late for use in the US, but this should provide further proof that it will work as a vaccine. The more vaccines we have, the faster we can vaccinate the entire world. 

– Second, another study provided more evidence that the Pfizer and Moderna shots are nearly 80% effective after just one shot. 

– Third, the US is accelerating its vaccine roll out. This is almost exactly on the “linear” model line I had modeled out in February. That model forecast that we’d be distributing about 2.7 million shots per day (using the seven day average) and as of today, that’s right where we are. 

Now, this is slower than I had hoped–I hoped we’d be at about 3.5 million per day by now–but even at this rate the US is on track to have 60% of the 16+ population vaccinated by the end of April. Including folks who have already had Covid-19, then the total protected could be as high as 75% by early May.

– Third, the increase in vaccinations is just starting to show signs that it is really driving down cases in the US, especially in the most vulnerable populations. This can be seen in the case rates and hospitalizations in older populations.

– Fourth, this distribution, though, isn’t equal. As this map from Covid Act Now clearly shows, states with warmer weather have seen cases drop much faster than in the northeast, just like last spring.

Screen Shot 2021-03-29 at 3.53.39 PM

– Fifth, this is all about the United States. Internationally, many fewer people are vaccinated than in the US, UK and Israel. As a result, some countries are seeing spring surges as they did last year. There are also signs of surges in the northeast states like New York, Connecticut and Michigan.

This last point likely influenced Disney the most.

The Impact on Theaters

As I wrote back in February, my model about theaters reopening was not about when blockbuster films would return to theaters. When I tackled blockbusters, one thing mattered above all:

Disney wants to maximize the revenue for potential blockbusters. It is one thing for films destined for $100 million in US box office to lose some revenue straight to streaming; it is another order of magnitude for a potential $1 billion dollar film to only collect 80-90% of its potential revenue.

Call this the “expected value” problem. When Disney had to make the call for how to distribute Black Widow–a call they had to make about six weeks early–two things likely scared them for how many theaters would be open by May of 2020:

1a. Europe is very likely going to be locked down.

1b. New York and other northeast states may return to lockdown, or their theaters won’t be at 50%+ capacity.

Above I talked about $1 billion in revenue, but that’s a global number; meaning Europe, America, China and the rest of the world. Disney needs the entire world to maximize revenue, and May just has too much uncertainty. Listen, forecasting vaccine distribution for one country is tough, so I didn’t bother building a model for Europe as well as the US. Same for predicting the course of the pandemic across the world. And looking just six weeks out, it is reasonable for Disney to think Europe will still be locked down. By July, likely even the slow rollouts of vaccines will have accelerated to the point to protect everyone.

I’d add that piracy makes this all worse. Once a film is released somewhere, it’s de facto released everywhere. So it made sense that Black Widow moved back dates. But then why did Disney also decide to release it on “Premier Access” at the same time?

The Impact on Home Entertainment

On the surface, this is an even bigger change. It is one thing to offer Raya and the Last Dragon on PVOD at the same time it went to theaters. Most theaters were closed. But Black Widow is the giant tentpole of the Disney franchise system. What are they thinking?

Well, probably that the pandemic could still be going on, and at some point Black Widow has to come out lest the entire movie calendar get stalled out. And if some places may still be on lockdown, then a PVOD offering can help those customers who can’t go to theaters. 

I’d call this the “Covid exception” at work. If the world has mostly reopened by September, I could see theaters pushing back on Disney on PVOD. For Black Widow, though? They’ll hold their fire. They need that giant tentpole.

The Future?

While I don’t like predicting the future, I think we can make a few guesses about what happens next. First off, I wouldn’t be surprised if more smaller films move around on the calendar. And by move, I mean move up into May. Again, Disney had billions (potentially) riding on Black Widow; if you have a smaller horror film, action flick or comedy, moving up into may get the best of both worlds: a mostly reopened American hungry to leave the house and a wide open release calendar. Indeed, I wasn’t tracking Wrath of Man, a Jason Statham action film, but it’s now coming out May 7th and released its trailer today.

These smaller films will get us through June. We can officially say that Q2 of 2020 will be bad for theaters…but starting in Q3 the revenue should be back. (Fast 9 opens June 25th.) Also, almost all the major theaters chains are fully capitalized through the end of the year. They probably can’t survive until 2022 with no tentpoles, but they can make it through the quarter.

As for home entertainment, I think that story will have to stabilize somewhere. Right now, each streamer/studio has their own plan. Netflix skips all extra windows; Comcast has a three week hold back until PVOD, and Disney keeps switching their plans. Meanwhile, even Warner Bros will likely be back to “normal” next year

I don’t think this will last. Business likes to settle into routines. It just makes life easier for everyone. So after this Covid disruption, I’d expect a new standard to emerge. The 90 day window is gone, but day-and-date streaming and wide theatrical feels unlikely too. Something along the lines of Comcast’s 3-week PVOD feels like the best bet for what all studios eventually commit to. But don’t hold me to that: the studios will settle on one standard, but precisely what is too hard to predict.

Other Contenders for Most Important Story

Viacom’s Stock Rise…and Fall?

A few weeks back, I noticed that ViacomCBS had been having a really good year. Their stock was actually up since the merger, which many folks doubted would ever happen. Then last week, as they planned to issue stock to take advantage of the price, a few Wall Street investors downgraded the stock and it went tumbling. In other words, over two years,  Viacom’s stock went as low as $14 and as high as $97, and ended up in the exact same spot as the merger price in December 2019:

Screen Shot 2021-03-29 at 2.37.28 PM

To make things crazier, now it turns out the stock dropped so quickly because of a highly leveraged hedge fund that had borrowed from multiple places. The story is still evolving, but the rise and fall could be because of this hedge fund, meme stocks and multiple other factors.

The lesson? Don’t pay attention to stock price, and especially not the day to day and even month to month movements. And especially don’t use stock price to tease out larger strategic lessons. If a stock can go as high as $97 and as low as $14, clearly it’s not a very precise signal to use!

Jason Kilar’s $52 million Salary

I wasn’t going to talk about this, but you know what? It is somewhat news. The top man at Warner Media–the man leading the turnaround–is getting paid a tremendous sum to make HBO Max a thing. Is it “worth” it for AT&T?

That’s the crazy part, because honestly I don’t think so. Frankly, I don’t think any top flight executives are worth these salaries. 

Think of it like this: who was competing with AT&T to pay Kilar $50 million dollars to run HBO Max? It’s not like Kilar would have that many other opportunities to run a huge multibillion dollar streamer. (Disney wasn’t hiring him, Netflix has Reed and Ted, Amazon had just hired another ex-Hulu manager and CBS seems satisfied with their Pluto team.) Why not offer him just $10 million dollars and the opportunity to run HBO? Did he have better offers? Who was AT&T bidding against? 

Or look at it from this angle: how many other folks would want this job? That’s the craziest part of this. There are hundreds of executives who would want and are qualified to have his job. And desperate to have it too.

In short, I don’t understand executive compensation. The ROI seems atrocious.

M&A Updates – Cable Companies Merge in Canada

In a sign that–despite what I’ve written–renewed antitrust enforcement isn’t on the table, up in Canada, the biggest cable companies are merging. Read about it here.

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