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Theatrical Industry Faces Years of Pain and Wrecked Business Models, Top Investors Warn

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Two top media investors and advisors this week warned of years of pain still to come in the U.S. theatrical movie business. The disruption brought on by the coronavirus pandemic has accelerated some existing trends and already wrecked many studios’ business models.

The woeful tidings for traditional cinema industry models were spelled out in graphic terms Wednesday by media advisor Michael Nathanson, senior analyst at MoffettNathanson, and by Peter Chernin, former chairman and CEO of the Fox Group, and current CEO of Chernin Entertainment. They were speaking at APOS, the high-powered entertainment industry conference organized by consultancy Media Partners Asia, being held for the first time in a wholly virtual format.

Both identified the recent collapse of theatrical windows as evidence of a shift in power from the old theatrical business model to the new streaming paradigm.

Universal Studios’ “Trolls World Tour” going straight to video-on-demand, Disney’s “Mulan” being shifted to premium VoD and the sale by Paramount of some of its titles to Netflix and CBS’s All Access were all indicative of the trend, they said.

“We think this experimentation is a clear signal that studios are rethinking how they look at theatrical going forward,” said Nathanson. “Universal and Disney have been quite aggressive, and we think Warners will be next in reshaping windows.”

The recent agreement between Universal and cinema operator AMC sets a new benchmark for massively shortened windows. “We were at 90-day theatrical windows before PVOD, and (we) thought it should be 30 days. Now it is 17 days. Just three weekends,” said Nathanson.

“Will this bring Netflix and Amazon into the industry, with them offering ‘The Irishman’ or ‘Roma’ on a 17-day window too? Maybe AMC is thinking that you open up theaters to many more movies from the streaming companies this way,” Nathanson explained. But he also spelled out how fewer bums on seats will ultimately damage the exhibitors.

“This is a business that sells Coke and popcorn to make money. With every (person) who doesn’t show up in theaters you’re really wrecking the economics,” said Nathanson. “And for AMC, which is highly leveraged, the decision is interesting. We find it quite strange.”

Chernin said that exhibitors and distributors are likely to be flexible, quickly cutting off the theatrical runs of secondary titles, but letting bigger ones run for anywhere between 30 days and three months.

Both men agreed that mid-sized titles, those which are neither tentpoles or blockbusters, are an endangered species, leaving the theatrical sector almost wholly as a business of tentpoles.

“And when we think of tentpoles, we think of Disney,” said Nathanson, explaining that the company last year made 61% of aggregate Hollywood film sector profits.

Nathanson warned that Disney has to be “thoughtful” about how it proceeds, but he also said that other studios will be obliged to follow.

“Disney makes more profit in the theatrical first window than all the other studios. So Disney needs to be careful how quickly it blows up the theatrical window. Its theatrical window is not only profitable, but sets it up in consumer products and theme parks,” said Nathanson.

“The scary thing is that if Disney decides to forgo theaters and put more of its content on SVOD, the damage to the theater industry is incredibly high. Other studios then don’t see much growth in theatrical. Thus they (too) need to play with windows, improvising, and reducing the number of films they make. We can (foresee) Warner doing that with HBO Max, and Universal doing the same.”

Nathanson displayed a graphic showing North American theatrical revenues failing to ever return to a pre-COVID normal. Even after a degree of recovery, he predicted box office grosses in 2024, some $2.4 billion lower than last year.

His chart showed North American box office of $11.4 billion in 2019, tumbling to an estimated $3.4 billion in 2020, before climbing to $8.5 billion in 2021 and $9.5 billion in 2022. After that, theatrical definitively loses out to streaming, with box office for 2023 forecast as dropping to $9.2 billion in 2023, and $9.0 billion in 2024.

Nathanson also explained that capital markets give a lower valuation to Disney’s theatrical profits than to the SVOD earnings of Netflix, or Disney Plus. “(Investors) are telling Disney to make the shift,” he said.

Chernin found three reasons to be “slightly bullish” about the traditional film studio business, once things even out. He said there is pent up demand from audiences. He argued that a winnowing of some of the weaker players means there will be fewer titles fighting for business. And he said that the new windows regime “is a much better business model for the industry.”

Nevertheless, Chernin warned that studio conglomerates may never again find a gravy train as lucrative as the U.S. cable TV business has been for the past 30 years.

“Technology and capitalism are driving to the benefit of the consumer,” through greater choice and better pricing, Chernin explained. “Even an aggressive consumer with three or four streaming subscriptions is paying a helluva lot less than what the cable bundle has been,”

“All (old entertainment companies) are trying to pivot to other businesses. But I don’t see how any of the new businesses mirror the economics of those cable businesses,” he said. “Netflix and Disney Plus are now dominant.”