Many fans all over the world are extremely excited about the upcoming Star Wars: The Last Jedi, starring Mark Hamill in his return to the role of Luke Skywalker.
But perhaps no one is as excited as shareholders of movie theater stocks. The entire sector has been sold off this year on the back of a weak overall box office results (sales are down 5% this year versus last year), as well as concerns about streaming television cutting into theater traffic permanently.
AMC Year to Date Price Returns (Daily) data by YCharts
However, Star Wars owner Disney (DIS -1.01%) reportedly just became the Ebenezer Scrooge in the exhibitors' holiday season, insisting on tough terms for its revenue-share agreement for The Last Jedi.
The terms
According to the The Wall Street Journal [subscription required], Disney is insisting on 65% of box office proceeds for The Last Jedi. On top of this, the company is also reportedly insisting theaters play The Last Jedi in each theater's largest auditorium for at least four weeks, with an extra 5% of the box office haul as penalty if theaters fail to comply.
The 65% is more than the normal 55% split on most movies and 60% on major hits, according to The Wall Street Journal. In foreign markets, studios usually only take 40%, according to the publication.
While the reported Last Jedi terms may seem harsh to some theater owners, it is hard to argue Disney shouldn't receive more favorable terms than the normal Hollywood studio. Disney has increased its box office market share from about 12% in 2011 to 26% in 2016, despite releasing only 13 movies last year, 10 fewer than second-place studio, Warner Brothers (owned by Time-Warner (NYSE: TWX)), with 17% market share). In fact, seven of the top 11 films in 2016 came from Disney. When you have such a dominant brand and execution, it's appropriate to get favorable terms.
Disney is trying to offset declines in its media networks business (which contains ESPN, The Disney Channel, and ABC), which is feeling the effects of cord-cutting and makes up over 42% of company revenues. Thus, the company is taking steps to wring all the profits it can from its other better-performing segments, even though the studio entertainment segment only makes up just over 15% of revenues. Despite troubles with its media networks segment, these new Star Wars terms should assure Disney investors that the company's premium brands are intact, which should be encouraging for those with a long-term perspective.
Image source: Getty Images.
Effect on theater stocks
Investors in theater stocks did not take too kindly to the news, with all of them declining the day of the story. However, I think the news by itself does not mean doom and gloom.
First, the WSJ article notes Disney has deals with some exhibitors that give it less than 65%. That could include the largest theater chains, such as AMC Entertainment (AMC), Regal Cinemas (NYSE: RGC), and Cinemark (CNK -1.30%). In addition, the deal only kicks in if the new Star Wars movie rakes in more than $500 million -- although that is a virtual certainty, given the performance of the last two recent additions of Star Wars under Disney.
Given the fact that theater companies make a majority of profits on concessions, giving away a slightly higher percentage of admissions for a single film in exchange for the traffic of a Star Wars movie is a good trade-off, and shouldn't affect the bottom line too much. If the negotiating power of theaters in general is waning, that would be one thing. However, I think Star Wars is a bit of a special case, so I don't believe the Disney deal should scare you out of theater stocks.
More important is if the traffic declines at movie theaters accelerate beyond the slow declines they have seen over the past decade. Theaters have been able to raise prices at a higher rate than the declines in overall tickets sold, but if traffic declines accelerate, that would be a problem.
The crystal ball is murky
Despite the tough negotiations, Disney is actually theater owners' best friend right now. Its films are almost guaranteed to bring in traffic, and Disney is the only studio refraining from shortening the theater-only window for newly released movies.
Of course, if you're someone's only friend, that means that person owes you a lot, including a higher cut of Star Wars revenue.
