Why cinemas may not be so disrupted

The news that AT&T-owned Warner Bros will launch its 2021 movies at the same time in the US at both the movie theatres and streaming service HBO Max (owned also by AT&T) has again led to fears over movie theatres and whether they will ever return to their pre-pandemic position. Leaving aside the question of the financial health of the cinema chains themselves - and the balance sheets of the likes of Cineworld and AMC are not pretty – there may be three reasons why movie theatres may not be gone yet (even if some of the chains such as AMC or Cineworld look vulnerable).

1. Movies are vital for theme parks – which are big contributors to the streamers’ parent companies

It’s important to recognise that the big streaming services run by the US content producers (Disney+, Peacock, HBO Max etc) do not operate in a bubble but that they are all part of bigger and wider conglomerates that have other operations. Currently, those who run the streaming services are calling the shots at their respective companies as the big US content players try to reorientate their business models away from sources seen as declining such as traditional Pay-TV and TV advertising. That doesn’t mean that will always be the case if corporates decide not to tolerate the losses and / or other divisional units regain power.

The most obvious impact financially is on the Films division. As mentioned above, Warner Bros’ move is seen as costing the studio $1bn+ in revenues. While it is possible the overall financial impact decreases over time if / when subscribers grow, some companies may be less willing to tolerate these losses than others. However, it’s worth pointing out that Films are not big in the overall scheme of things for the major conglomerates: at Comcast, it was less than 10% of NBC Universal’s profits in 2019, which were themselves less than a quarter of the wider Comcast group. Studios are more important for Disney but far less for AT&T (and the lines for the studios business also include their revenues from television shows, so the actual movie-related revenues are even less.

What is financially important, though, at least for Disney and Comcast / NBC Universal is the Theme Parks business – 40% of Disney’s FY19 profits ex-the D2C losses, or $6.76bn of operating income. Even for Comcast, while the overall importance of theme parks was less, they still generated nearly $2.5bn of adjusted EBITDA in 2019. Interestingly, for Warner Bros, theme parks are almost meaningless (Warner Bros got out of theme parks in the 1990s and licences franchises such as “Harry Potter”).

Movies are important for theme parks because they drive the attractions and rides that attract visitors (think “Star Wars” or “Frozen”). When movies hit big in a park, they exponentially drive traffic. Moving to a model where releases are launched on streaming services simultaneously or, down the line, switching to a model where movies are shown exclusively or in an exclusive window on streaming services risks that model because it reduces the overall global audience of a movie, and thus its monetizable value in a theme park. If your movie is available across the world in cinemas it is going to have a bigger audience than if it is shown exclusively on a streaming service. This may persuade the movie producers – or at least Disney and Universal – to continue to support the movie chains.

2. There are structural advantages for showing a movie in a movie theatre

One factor likely to play to the benefit of movies is that certain types of movies, particularly action and (arguably) animation, are better suited to the wide screen than the narrow screen. Looking at the 2019 US top movie grossers, action movies made up four of the top ten hits, including the number one hit, whilst animation made up another four. Yes, bigger screens are becoming available all the time but it will be impossible to replicate the screen size of a cinema in the home.

source: BoxOffice MoJo by IMDBPro

The second is that consumers may want just one place to watch movies than having to rely on multiple streaming services. One obvious analogy for the movie industry is with the music business. Streaming has been a great success for the music industry but, even though three global record labels dominate the industry and around 30% is given away to the streaming services, none of the record labels has seriously attempted to go down the D2C route. There is a clear reason for this: people care about the artist not their record label (in most cases, consumers probably don’t know the label). That means that a unified streaming service offering all labels’ music, like a Spotify or an Apple Music, makes most sense.

The same is likely to go for movies. People watch movies because they like the franchise or the actor etc but what they don’t do is say “I’m going to watch a Warner Bros movie”. So cinemas serve the same purpose for movies as a Spotify does for music – namely a unified place to watch whatever movie you want regardless of which company made the movie. The only option for a consumer to replicate the same offering would be to sign up to multiple streaming services and then remember which service is showing what movie. That does not mean there will not be leakage (there probably will) but there are likely to be a lot of consumers who value the “one shop for all”. In effect, this is the bet that Sky is making with its Sky Q service offering all content apps in one place and fundamentally changing its cost structure at the same time by reducing the fixed level of programming costs with the studios and moving more to arrangements such as revenue share.

3.    Warner Bros’ stance may be temporary in nature

The optimists for theatre chains will hope that Warner Bros’ move is the first skirmish in a clash that will lead to some sort of satisfactory conclusion between the movie producers and the cinema chains. This is what happened in negotiations between Universal (owned by Comcast’s NBC Universal unit) and the cinema chains, where the movie chains were able to – crucially – get Universal to agree to increase the exclusivity window on movies grossing more than $50m to 31 days as opposed to the 2 ? week window that was often highlighted in press reports. The chains therefore retained exclusivity on the more successful movies for longer.

There are two reasons why Warner Bros may be less receptive to a deal short term. The first is that AT&T’s HBO Max streaming service is not having a great start and so this move is being used to generate momentum. At its Q3 results, AT&T said that 8.6m HBO customers in the US had “activated” their subscriptions to HBO Max (for many customers, HBO Max comes bundled in with the HBO offer). That means 70% of HBO customers had not impacted their subscriptions to HBO Max at that point, which somewhat defeats one of the key aims of HBO Max which is to reduce churn. Having the 2021 releases stream at the same time at the theatrical release is one clear way to boost activations.

The second is AT&T may see be using this to pressurise Roku, which has 46m streaming customers, to do a deal. Both have stuck to their red lines (Roku wants HBO Max as a channel, HBO Max wants to be a standalone app; there are also issues over ad inventory). The publicity generated by the move puts Roku in a dilemma: at Christmas, many people will purchase a connected TV product and Roku not having HBO Max may be a big factor in making minds up given it would mean Roku customers would not benefit from the simultaneous release. This might be especially concerning to Roku given Amazon signed a deal with HBO Max last month.

The good news for the movie theatres though is that both of these may be temporary factors, especially point 2. If an HBO Max-Roku deal is signed, then the need to maintain such a strict position on the part of Warner Bros declines, especially if take-up of HBO Max by both new and existing customers increases (there is an argument that it is Warner Bros / AT&T’s interest to maximise the noise around any dispute as it provides further free marketing for HBO Max). It is therefore entirely possible – and likely – that the eventual outcome is that Warner Bros signs a deal similar to Universal’s.