'Trolls' Triumph Doesn't Change Movie Math

(Bloomberg Opinion) -- Cinemas may be closed, but there’s no shortage of drama at the movies right now.

Simmering tensions between movie-theater chains and Universal Studios escalated into an all-out war this week when AMC Entertainment Holdings Inc. announced it will no longer show Universal films. AMC is the largest exhibitor in both the U.S. and Europe, and it has more IMAX screens than anyone else. (It’s also controlled by Chinese billionaire Wang Jianlin, owner of Wanda Cinemas.) Even so, AMC isn’t in a position to be cutting off partners that it will need when the Covid-19 crisis is over.

The feud is raising questions about the future of movie theaters: Will they rebound from the pandemic and survive the threat of streaming? Or are they done for? The answer isn’t so black and white. 

But first, the beef with Universal: It began when the studio decided to make the “Trolls World Tour” animated movie available on demand in April for a $20 rental fee instead of waiting to show it in theaters once it’s safe for them to reopen. The cinema industry was fuming. “Exhibitors won’t forget this,” John Fithian, head of the National Association of Theatre Owners, told the Hollywood Reporter at the time. 

“Trolls” did so well  — generating nearly $100 million in rental fees — that even when theaters do reopen, Universal is now planning to release movies both there and on demand, according to a Wall Street Journal article on Tuesday citing Jeff Shell, the newly minted CEO of NBCUniversal. AMC’s Adam Aron responded with a blistering public letter to Universal announcing the ban and saying it “is not some hollow or ill-considered threat.” Maybe not, but consider what it’s going up against: Universal’s parent, Comcast Corp., owns a powerful U.S. cable-TV and internet business, the Sky pay-TV service in Europe, Fandango, Vudu and the new Peacock streaming app. Cineworld Plc, Regal’s European parent, also made a point to shame Universal, but without going so far as to ban its films. 

'Trolls' Triumph Doesn't Change Movie Math

The way AMC and Cineworld see it, Universal breached the sacred theatrical window, which refers to the 90 days or so of box-office exclusivity. Even before the coronavirus outbreak, there had been pressure to shrink that time frame as more consumers become accustomed to streaming new releases from home on services such as Netflix. Companies such as Walt Disney Co. and Comcast are also getting into the streaming game. It’s an especially touchy subject for AMC, which has about $5 billion of debt and another $5 billion in lease obligations. The chain had been in spending mode in recent years to upgrade its venues; now, due to virus-related regional lockdowns, its mega-circuit can’t generate revenue.

That said, cinemas probably won’t disappear after the crisis. They’ll struggle, but they’ll be around, subsisting on what they can — blockbusters here and there and fewer customers. It’s a bit like brick-and-mortar retailers that have seen the writing on the wall but still have enough demand to keep going.

Media giants need the box office. There’s simply too much money at stake and the math doesn’t work without it. Consider that when a family goes to the movies, they’re buying multiple tickets, which can quickly add up to more than the $20 that it costs a single household to watch on demand. And keep in mind that the studio has to give a cut of that streaming fee to the distribution platform — Amazon.com Inc., Apple Inc., Google’s YouTube, etc.

A movie that generates $1 billion in box-office ticket sales may earn roughly $440 million in gross profits for the studio, according to Rich Greenfield, an analyst for LightShed Partners, who ran the numbers in a March report. He found that in order to replace those profits through on-demand viewing, 21 million households would need to rent the movie at $30 a pop, for total fees of $630 million — or more than six times what “Tolls” generated, as successful as it was. And that’s without assuming any marketing expenses, which of course is unrealistic, especially given all the other streaming-video content available on a given day.

“Trolls World Tour” also had the benefit of timing and unusual circumstances: It was released near the height of the pandemic, just as kids were really starting to go stir crazy. It’s not something most families are ready to pay for every weekend, and not when the entire Netflix library costs just $13 a month — ditto for Disney+ at $7. 

The Hollywood profit machine depends on theaters. But if that’s how theaters are kept alive, it’s still a sorry state for the industry.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.

©2020 Bloomberg L.P.

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