AMC Entertainment (NYSE:AMC), the largest movie theater operator across the U.S. and Europe, is feeling the pinch from last year's down box office. While the North American box office was actually the third-highest in history, attendance was down 6% from 2016 and at a 24-year low, with revenue benefiting from increased prices. At first, you may not think this is such a big deal. After all, if theaters can offset traffic declines with price hikes, who cares?

Well, theater chains do. That's because their most profitable business (on a margin basis) is actually those egregiously priced buckets of popcorn and soda. While contributing roughly 30% of AMC's revenue, concessions provided roughly 40% of its gross profit last year. Thus, lower traffic still hurts.

In response, theater operators are now (finally) experimenting with subscription offerings to boost traffic. This move has been spurred not only by lower attendance, but also by Helios & Matheson's (NASDAQ: HMNY) acquisition of MoviePass in August 2017. Helios & Matheson subsequently dropped the price of MoviePass to an absurd $9.95 per month for a movie per day, which caused a huge stir in the industry.

AMC CEO Adam Aron has long said MoviePass' business model (in which it pays the full price of  admissions) was unsustainable, and currently, Helios & Matheson is on life support. But that doesn't mean AMC doesn't want in on the subscription game in some way.

But there's a potential looming problem in AMC's new Stubs A-List subscription plan, and it has nothing to do with MoviePass.

two hands grab a wad of hundred dollar bills.

Will AMC A-List spark admissions growth? Image source: Getty Images.

What does AMC's Stubs A-List offer?

AMC Stubs A-List will cost $19.95 per month (not including tax) for up to three movies per week at any AMC theater -- even including deluxe IMAX offerings. That's double MoviePass' price, and A-List also (somewhat) limits the potential for abuse of the program, capping movie fans to only three films per week.

The program also includes other benefits, such as:

  • Free size upgrades on popcorn and soda.
  • Express service at the theater and concession line.
  • No online ticketing fees for pre-booking.
  • 100 points for every dollar spent on concessions. When 5,000 points are reached, theatergoers receive a $5 discount (equaling a 10% credit for every $50 spent).

What could come of this?

A-List drew rave reviews from some analysts and AMC predicted a revenue boost, with Aron saying on a call with analysts:

We believe that for every 1 million A-List members we have in the program, run rate incremental EBITDA will be between $15 million and $25 million per annum ... [That] assumes a steady state of 2.5 movie theater visits per member, per month. But if that frequency were to drop to 2.25 visits per month, for example, the annual incremental EBITDA range per 1 million members boosts by $10 million more.

Aron noted that there could be some "cannibalization" of ticket sales as those who attend a lot of movies would be the first to join. "This could cost us a net of $5 million to $10 million in ticket revenues in the next 6 months ... " he said, continuing:

And we'll have program launch costs on top, including approximately a $5 million war chest of marketing monies spent in the second half of 2018 to aggressively put this program before consumers. So in total, we could be taking a $10 million to $15 million adjusted EBITDA hit in the next two quarters. However, if there was ever a year to sacrifice short-term adjusted EBITDA for future gain, it's right now in 2018.

For context, AMC made $218.5 million in operating income in 2017, adjusting for merger costs and impairments.

AMC says its Stubs loyalty program, of which A-List is a part, counts nearly 15 million households as members, up from 2.5 million two years ago.

However, all is not sunshine and rainbows with A-List, as the plan also sparked concern among AMC's most important constituency: the movie studios.

How much will AMC pay the studios?

The hangup for studios is that A-List pays studios a cut of admissions using a ticket price of $8.99. The problem? A-List members are probably going to see films in deluxe formats (since it doesn't cost extra), which carry a higher price. In fact, AMC's average ticket price was $9.32 in 2017 ($9.68 in domestic markets), with deluxe offerings in big-city markets being much higher. So studios will make less from a person seeing a film via A-List than if they'd seen it without the program.

AMC justified choosing the $8.99 by saying that is the figure used by the new monthly plan of rival Cinemark, which offers only one film per month and 20% off concessions (with unused tickets rolling over to the next month). The catch: Cinemark's average ticket price in 2017 was only $6.48 ($7.71 domestic), as it operates in smaller markets than AMC.  

Will studios go along or play hardball?

For all the hemming and hawing, it appears studio executives are not considering pulling their films from AMC. At least not yet. 

Remember: AMC Entertainment is the largest theater operator, so it has some leverage in these negotiations. It's also an open question as to how many people will actually sign up for A-List. If the numbers remain relatively small, it's possible studios won't put up a fight. Ironically, if AMC Stubs A-List is a hit, the studios may actually become a problem.

Much ado about nothing?

With MoviePass feeling the heat, AMC has come to market with a compelling offering. Still, I don't think the number of people who will pay $20 per month for three movies a week at AMC is as big as those who will pay $10 for a movie a day anywhere. A-List could help around the edges, but I don't think it will exactly be a sea change for either AMC or the studios. More important to AMC's fate will be the quality of movies that studios make going forward, as well as the success of AMC's recliner renovation program.