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Does Anyone Win in AMC Theatres’ Fight With Universal Pictures?

Trolls World Tour
Universal

Exhibitors and studios might be well served to remember a saying from Mahatma Gandhi — “An eye for an eye only ends up making the whole world blind.” Instead of heeding the words of the Indian nationalist, the two camps are locked in a deadly struggle, one fueled by ego, distrust, and recrimination, that will likely leave both sides gravely wounded unless, or until, cooler heads prevail.

Tensions between AMC Theatres and Universal Pictures reached a boiling point Tuesday night, ending in an explosive proclamation that the world’s largest theater chain would no longer play movies from one of the biggest studios in Hollywood.

The seeming declaration of war was triggered after Universal took a victory lap in the press, touting better-than-expected success for “Trolls World Tour.” The studio decided last month to move its animated sequel to “Trolls” directly on premium video-on-demand — and in a handful of drive-ins across the country — when it became clear cinemas would have to close amid the coronavirus outbreak. Exhibitors’ eyebrows were raised, particularly as Universal made its announcement before the shutdown went into effect, but they ultimately accepted it given circumstances and a general understanding that studios would otherwise wait until multiplexes reopen to showcase their most anticipated films. But the claws didn’t come out until NBCUniversal’s CEO Jeff Shell suggested on Tuesday that Universal might start to simultaneously release some movies in theaters and on-demand, even after the pandemic subsides.

“As soon as theaters reopen, we expect to release movies on both formats,” Shell told the Wall Street Journal.

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Shell’s comments were interpreted as fighting words to those in the business of showing movies on the big screen. And there are other reasons relations have grown strained. Before taking a shot across exhibition’s bow, Universal reported a day earlier that Pete Davidson and Judd Apatow’s comedy “The King of Staten Island,” would also forgo a theatrical release and drop on digital rental platforms in June.

AMC’s CEO and president Adam Aron called Shell’s remarks “unacceptable.”

“This radical change by Universal to the business model that currently exists between our two companies represents nothing but downside for us and is categorically unacceptable to AMC Entertainment,” Aron wrote in a letter to the studio Tuesday night, announcing his venues would ban Universal’s movies. “Accordingly, we want to be absolutely clear, so that there is no ambiguity of any kind. AMC believes that with this proposed action to go to the home and theaters simultaneously, Universal is breaking the business model and dealings between our two companies.”

A spokesperson for Universal Pictures responded at the time, defending the studio and saying Shell’s comments were misconstrued.

“Our desire has always been to efficiently deliver entertainment to as wide an audience as possible. We absolutely believe in the theatrical experience and have made no statement to the contrary,” the studio said Tuesday evening.

It remains to be seen if Universal is going to continue playing around with theaters’ exclusive access to its films. But if Aron makes good on the threat, that would deprive Universal of thousands of screens to play movies — and pissing off the world’s largest exhibitor will take a big chunk out of the studio’s box office earnings. For AMC, which was struggling even before forced closures due to the pandemic, icing out Universal means the circuit won’t be able to screen the next “Fast & Furious” flick or “Jurassic World” sequel. Those are the kind of blockbusters that can be counted on not just to sell tickets, but also tons of popcorn and concession stand treats that exhibitors rely on to boost revenues.

Aron said AMC would also cut ties with any studio “contemplating a wholesale change to the status quo.” Cineworld, the owner of Regal Entertainment, took a less radical stance, barring anything that threatens to disrupt the way movies traditionally arrive in theaters, but stopping short of a total ban on Universal titles.

“Universal unilaterally chose to break our understanding and did so at the height of the Covid-19 crisis when our business is closed, more than 35,000 employees are at home and when we do not yet have a clear date for the reopening of our cinemas,” Cineworld said Wednesday in a statement.

Other movie theater chains are being tight-lipped about whether they are following Aron’s lead, arguing that conversations between the two parties should remain private.

For decades, studios and exhibitors have debated the utility and length of theatrical windows, industry speak for the amount of time a movie plays exclusively in cinemas. Films commonly run in theaters for 90 days before they are available to watch on home entertainment through video-on-demand. Studios have attempted to shorten that gap, in an effort to reduce marketing costs. They believe that they will get more bang for their buck by having movies debut on in the home shortly after they have blanketed the airwaves for theatrical releases. But theater chains have been concerned that audiences will be less inclined to buy tickets if they can see the movie on their couch just a few weeks later.

“I’ve always believed exhibitors hold the upper hand in these negotiations, even if Universal’s stance was to circumvent the theaters,” said Eric Wold, an analyst with B. Riley FBR. “If all exhibitors banded together, it would be tough for the studios to stand against them.”

Others maintain it’s the studios, who are responsible for producing content, wielding the power.

“Theaters need to stand in solidarity because the theatrical window is the lifeblood of theaters,” said Jeff Bock, a box office analyst with Exhibitor Relations. “It prevents them from having to compete against video-on-demand. Now Universal is saying, ‘We’re going to see film by film.’ [Shutdowns due to coronavirus] are affecting everyone, but theaters stand to lose the most.”

In any case, exhibitor’s leverage isn’t what it once was, however. Theaters are struggling to pay their rents and plan for uncertain re-opening protocols. When they do get the all-clear to reopen, the hope is that new safety guidelines will be enough to persuade consumers to check out the multiplexes, but it’s unclear if that will be the case.

Privately, some theater owners were rattled by what felt like a lack of solidarity from Universal at a time when their business is in free-fall and they are unable to generate any income. Roughly 150,000 cinema workers across the country have been furloughed or laid off, and many exhibitors are worried that they won’t be to go back to making money any time soon.

With theaters closed, on-demand platforms are booming. Universal estimates about five million people rented “Trolls World Tour,” generating roughly $100 million in sales. Studios keep nearly 80% of revenue from premium video-on-demand rentals, compared to only 50% of traditional tickets. Universal trumpeted that its “Trolls” follow-up was more lucrative after only three weeks of digital release than the original film was over its entire five-month run in North American theaters. However, those stats don’t mention international figures. Overseas audiences largely contributed to the financial success of the first “Trolls.”

Analysts also point out that “Trolls World Tour” represents a unique situation, because families are stuck at home. And while it might have paid off generously for Universal with this particular offering, cutting off theatrical revenue can limit intake from ancillary sales down the line.

“Universal was the first to jump on this very early, and for them it made sense. They did a ton of marketing and had promotional tie-ins that they couldn’t recreate if they pushed the film,” Wold said. “I don’t expect a lot of what’s happening right now to be happening a year from now. They had to play up what they could, but it’s a very incomplete picture of what the film could have done.”

Rival studios have experimented with digital releases while cinemas are closed. But, for the moment, those companies have largely remained in theater owners’ good graces. That’s because, in the case of Disney putting “Artemis Fowl” on its subscription streaming service and Warner Bros. sending “Scoob” straight to digital rental services, neither were market as day-and-date releases that will premiere simultaneously in theaters and on-demand. Moreover, Disney and Warner Bros. have endeared themselves to exhibitors by keeping upcoming releases on the summer movie calendar. While Universal pushed most of its big films, such as “Fast 9,” into 2021, Warner Bros. is holding firm with plans to debut Christopher Nolan’s “Tenet” in July and “Wonder Woman: 1984” in August. Disney is moving forward with a July release of “Mulan,” as well.

In a recent Variety interview, National Association of Theatre Owners chief John Fithian singled out both studios for praise. “These two studios are signaling that they are fully committed to the theatrical model,” he said. The exhibition industry’s top lobbyist went on to predict, “Other studios that pushed their titles way, way to later in the year or into next year, I think they’re missing out on a resurgence of moviegoing, and I think they’re going to regret that and reconsider.”

Most major movie theaters won’t be able to open again until the end of summer, at the earliest, leaving ample time for the two companies to make nice. In the interim, AMC could leverage their sweeping statement against Universal to negotiate a happy medium that could appease both sides.

“If it is content that wears the crown, studios are going to be in a very good place in terms of negotiations, and that puts theaters into a corner,” Bock said. “These discussions have to change from the traditional 50-50 [revenue split] and have to start looking at fluid release changes depending on how films do in the first couple months.”

In the short run, this battle will only serve to damage an exhibition business that’s facing an existential crisis. No one wins that kind of fight.