You might have missed the news about movie-theater chain AMC Entertainment (NYSE:AMC) buying a smaller operator in Europe earlier this month. And who could blame you?
Odeon & UCI Cinemas is far from a household name in the states. But the company is a big theater operator in Western Europe, where it has more than 2,200 screens in the U.K., Germany, Austria, Italy, and Portugal.
That makes the news important if you're a shareholder in Walt Disney Co. (NYSE:DIS) or any other company that makes a significant share of its money turning out motion pictures.
This is continuing consolidation
AMC's purchase of Odeon & UCI was the latest in a growing line of purchases by AMC, controlled by the Dalian Wanda group of China. It's quietly turned itself into the biggest theater operator in America.
It's poised to get bigger, with a proposed deal to acquire major U.S. cinema operators Carmike Cinemas (NASDAQ:CKEC), which itself was once America's largest theater operator.
This is important for Disney and other movie studio operators like Comcast and Viacom because it means that AMC's bargaining power is continuing to grow. The acquisition will give AMC more than 7,600 screens in the U.S. and Europe, and give it a share of the theater market in many of Europe's biggest cities.
If AMC can complete the Carmike deal, the company would control nearly one in every five theaters in the U.S. It would have have double the number of screens as the third-largest operator, Cinemark.
There's a history here
Disney and AMC have clashed publicly a number of times over the past few years, at least in part because AMC would like to be taking a bigger cut of ticket revenue.
Exactly how revenue brought in by ticket sales gets divvied up is complicated. Ticket sales for opening-weekend shows usually heavily favor the studios, which get as much as 75% of sales. But as time passes, the split evolves in the favor of the theaters. This makes sense for the most part, since interest in a film is usually at its highest for the opining, and the studio has made the big investments in production and marketing. As interest ebbs, the higher rate gives theater owners additional incentive to keep the film rolling on one of their screens.
On average, studios have historically claimed about $0.53 on every $1 in tickets sold. But Disney has reportedly been able to wrangle better deals on recent blockbusters like Star Wars: The Force Awakens, where it managed to secure an estimated 60% of the ticket haul.
That's been great for Disney -- not so great for theater owners like AMC. And that's led to some tension, including a fight in 2013 that left Iron Man fans unable to score advance tickets to the franchise's third film. Disney, which had become a much bigger player in motion pictures with its acquisitions of Marvel and Lucasfilm, signed contracts with better terms with a number of other bigger theater owners. AMC, however, was reportedly so unhappy with the deal that Disney was seeking, it was refusing to sell advance tickets for the much-anticipated sequel.
And more history...
Last year, the two companies were fighting again. This time, it was about Avengers: Age of Ultron. Again, AMC was unhappy about the 60-40 revenue split, the Los Angeles Times reported, as well as a bevy of stipulations from Disney regarding show times and screens.
Disney's movies brought in $5.85 billion in box-office sales in 2015. That means revenue-sharing agreements that deliver several more cents on every dollar have the potential impact in hundreds of millions in studio revenue. And Disney's been able to ink those better deals because it's in a better bargaining position.
But that could change as AMC gets bigger
As AMC continues to grow, it improves its position at the table, making it more likely that it may be able to claw back a couple cents on each dollar.
This is important for Disney, because the company has been relying on its studios segment for a growing share of its income in recent years. In 2009, its studios contributed just 3% of the company's income. By fiscal 2015, that had risen to 13%.
And we can likely expect that to continue to grow, because its biggest source of income -- the media division that includes ESPN and other cable networks -- is coming under increasing pressure due to cord cutting.
AMC's purchase of Odeon & UCI might not tip the scales on its own, but it shows how hungry the company is to become a bigger player and improve its bargaining position with the studios. That consolidation is going to have an impact on Disney eventually, and it's something investors should keep an eye on.