(Welcome to the “Most Important Story of the Week”, my bi-weekly strategy column analyzing the most important (but often not buzziest) news story of the last two weeks. I’m the Entertainment Strategy Guy, a former streaming executive who now analyzes business strategy in the entertainment industry. Please subscribe.)
Well, one ongoing “will they/won’t they” had a partial resolution last week, as Paramount officially nixed their Skydance acquisition deal. Trust me, something will happen to Paramount Global (and its controlling parent company National Amusements) at some point, likely this year or, who knows, maybe later, but Skydance won’t be it.
(Unless they are. At this point nothing would surprise me. As for the other long term issue I’ve been waiting for, the NBA media rights deal remains in the same limbo, as it looks like lawyers are involved. Stay tuned!)
At first, I was tempted to call the Paramount decision “lots of news with no news”, but at least we have resolution to that part of the Paramount saga. That’s not the most important story of the last few weeks, though it’s almost there. Instead, I want to write about a strategic move I absolutely LOVE, though it could risk consolidating an already consolidated industry. And I still haven’t written about the Justice Department’s antitrust lawsuit against TicketMaster/Live Nation and that’s a big deal too.
Let’s dive in.
Most Important Story of the Week – Sony Buys Alamo Drafthouse
Last week came news that Sony—the video game company with a giant movie studio (formerly Columbia/Tristar)—had purchased The Alamo Drafthouse chain of movie theaters in America.
Strategically, I love this decision. Competitively, I (may) hate it.
Vertical integration makes a lot of sense for movie distributors, strategically, for a few reasons. As opposed to splitting the ticket revenue with someone else, when you own the theaters, you keep it all. Owning a theater chain may also make it easier for the studio to experiment with library titles or event screenings (already a specialty of the Drafthouse). On the competitive downside, owning some theaters could also strengthen a studio’s negotiating position with other theater chains, by potentially threatening to withhold its films from them. This is what made the repeal of the Paramount Consent Decree in 2020 such a big deal, though as others have noted, that decree was actually fairly complicated and some studios still owned theater chains in the 1980s and 1990s, though had mostly divested them by the start of this century.
Frankly, I’m surprised it took this long for a studio to buy a theater chain.
Or, actually, I’m not. So to answer the question, “Why didn’t a studio buy a chain earlier?” And it’s cousin, “Why don’t Disney/Warner Bros./Universal/Big Tech Company TBD buy their own theater chain?”, I have a few key reasons:
- Any acquisition deal takes time. Not this much time (the Paramount Consent decrees ended in 2020, during the Trump administration), but usually not overnight. Plus, a lot of studios need to take time to develop an actual strategy around the acquisition. (If they’re doing it right.)
- Just because the Paramount Consent Decrees ended doesn’t mean that it was a license to start buying. For example, Disney had never been a party to the decrees, but still abided by their terms. In other words, given the egregious violations from before the decrees (admittedly, over 80 years ago!), there likely would be heightened scrutiny of any theatrical deal. In particular, if a studio bought one of the big three theater chains, they would likely be litigated and opposed by the DoJ. This became even more relevant after President appointed the antitrust-enforcing duo of Lina Khan and Jonathan Kanter. Why risk buying a major theater chain just to possibly be forced to divest it a few years later?
- Not to mention, the timing sucked. Circa 2020 to 2022, no one wanted to buy a physical theater chain because all entertainment dollars were being pumped into streaming. Wall Street would have hated a it. Given the uncertainty around the future of cinema—first Covid-19, then labor stoppages, then rising interest rates—you can see why studios didn’t want to plop down a lot of cash for a business that many folks (not me) were predicting would “collapse” or “die”. Basically, the timing hasn’t been right to buy a chain for quite some time.
- Also, the studios didn’t want the scrutiny that would come from buying a major chain like Regal or AMC. Those companies are huge with thousands of screens, and the sweet spot for a studio—like Alamo Drafthouse which has 35 locations, or about 1% of locations—is probably 50 to 250 theaters in major cities. If the theatrical industry were de-consolidated, which would likely improve the experience across the board, then there would be more opportunities for studios to buy some theater chains. As is, it would seem like a tough sell to competition authorities.
- Don’t forget about the debt loads for the traditional studios. As I wrote four years ago, both the theaters and studios have (in some cases massive) debt loads, making acquisitions look even riskier.
- Related, theaters don’t really have economies of scale. Improving them the way everyone dreams would require capital the studios don’t have or the streamers don’t want to spend. The dream a lot of folks have is for Amazon to buy a theater chain, but Amazon doesn’t want to have to fix up thousands of theaters to match its brand.
Overall, I would support most studios buying small theatrical chains, as long as no studio took greater than say 2-5% total ownership. That would allow for some innovation, while also preventing the dominance of the industry by the studio distributors. As the Ticketmaster deal shows, if vertical integration can lead to abuse, it will lead to abuse.
(Lest anyone reads the above and thanks I’ve changed my mind on antitrust, I’d whole-heartedly support breaking up Regal, AMC and Cinemark into smaller chains to spur innovation as well. I leave my politics out of my writing as much as possible, but at my core, I’m a capitalist. That means free markets—emphasis on the markets—are the key point. More on this in the next section.)
Revisiting My Initial Take
Back in August of 2020, when the Trump administration officially ended the Paramount Consent Decrees—which, as a reminder, were complicated and didn’t completely prevent studios from owning theater chains—I speculated about whether or not this would set off an arms race from studios racing to buy the three big chains, in an article that holds up pretty well, in my opinion, re-reading it four years later.
I made cases for and against, and in hindsight, the case “for” studios buying theaters chains is still compelling to me:
Even if it isn’t a great business opportunity, when Comcast announces it is buying AMC Theaters, hypothetically, that will leave Warner Bros and Disney staring at only two remaining chains in the US. If Amazon or Apple sounds interested, then suddenly the land grab is on. If the remaining theaters get purchased by other studios, the remaining studios will be terrified their movies won’t get played. That’s their worry. Sure, Disney will probably be fine with its blockbusters, but would Paramount make that bet? Or Lionsgate?
I also made the case that the antitrust wins were starting to blow against consolidation AND vertical integration. The title holds up too “Is Antitrust the New Deregulation?”
Remember: this was the third quarter of 2020, and back then, it was still a coin flip that President Biden would win the election. And even if he did, it wasn’t clear he’d support strong antitrust enforcement, since the Obama administration hadn’t. Indeed, he didn’t just appoint a good antitrust enforcer, he appointed Lina Khan, perhaps the best candidate for strong antitrust enforcement possible. (Kanter has done extraordinarily well as well.) Call it a 25% chance that Biden goes hard on antitrust enforcement.
Yet, that 12.5% scenario happened, and it’s likely the FTC or DoJ would have opposed any of the big three studios buying a big three theater chain…if they even had the cash to pull it off. (I mentioned back then that everyone’s cash flows were a hot mess.)
Competition (and Less Vertical Integration) Is Hollywood’s Salvation
As I just mentioned above, vertical integration is often rife with abuse. That’s why the antitrust enforcers of the 1940s/50s put the Paramount Consent Decrees into place in the first place, to keep vertical integration out of the movie business. Arguably, the boom of cinematic innovation in the 70s-on stemmed from that integration.
Indeed, the Alamo Drafthouse is really the story of a small chain struggling to survive amidst giants. The problem is those giants, in my opinion. If instead of three major chains, we had ten or twelve, then the studios could likely find smaller chains to buy, but still not own more than 3-5% of the total screens.
Meanwhile, with more theater chains, competition would go up, especially if the chains weren’t geographically concentrated, as many were. More competitors means more differentiation in the market place as different chains opt for different strategies to win over customers. Again, competition isn’t just needed nationally, but locally as well.
If I’m getting a little political, so be it. (I tend to avoid politics in my analysis.) But the political economy determines the strategic environment, and frankly robust competition makes for a stronger economy by forcing all companies to have better strategies. I see a lot of folks on my side of the political aisle—who clearly have no qualms injecting their politics into a lot of discussions—never mention antitrust or consolidation or vertical integration as major problems. Heck, I’d go further: some people actively support consolidation!
If you support labor in Hollywood—and again every writer or journalist or commentator or analyst or even yahoo on Twitter claims they do—and you also support industry consolidation, you’re doing it wrong. If you want to right Hollywood’s wrong—no matter what you perceive them to be—consolidation is NOT the answer. In fact, it’s the opposite: we need more competition.
M&A Update of the Week – The Department of Justice brings an Antitrust Suit against Ticketmaster/Live Nation
Speaking of massive consolidation…
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