Please ensure Javascript is enabled for purposes of website accessibility

Universal Studios Reminds Us How Much Movie Studios Still Need Theaters

By Stephen Lovely - Mar 24, 2020 at 8:08AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A movie theater experience -- and movie theater prices -- in your living room.

The COVID-19 pandemic has been massively disruptive to the market, but it hasn't been equally cruel to all businesses. At particular risk are companies that rely on public gatherings. Expert recommendations, government regulations, and consumer preferences -- as well as moral obligations -- have led to the shuttering of everything from sports arenas to bars.

Among the businesses suffering from the big and sudden changes are movie studios like Comcast-owned (CMCSA 1.18%) Universal Studios. Box office receipts, as it turns out, are hard to come by during a pandemic. But Universal has a plan for salvaging the coming weeks and months: It's offering digital rentals of films currently in theaters. For an eyebrow-raising $20 a pop, customers can stream films that are still in the midst of their theatrical run. It's an interesting workaround for a difficult time, and also a reminder of how much films rely on theaters to earn profits.

A father and son at the movies

Image source: Getty Images.

From bad to worse

2020 was already threatening to be a rough year at the box office, and the arrival of COVID-19 helped trigger the worst weekend for movie-going in recent memory. It has been nearly 20 years since the last time the film industry suffered through a weekend as bad as the one they had on March 14 and 15. The combined gross in the U.S. and Canada was $55.3 million, a shockingly low figure in this context. It's the worst since theaters in the same two countries took in $54.5 million on the weekend of Sept. 15, 2001, which was just days after the terrorist attacks of 9/11.

The massive changes associated with coronavirus are clearly the impetus for Universal Studios' creative solution, but there were reasons to be wary of 2020 at the theater even before the disease made international headlines. Box office revenue in the United States fell 4% in 2019, the steepest drop in five years.

Some observers were bearish on movie theaters even before 2019, fearing that the cinema was losing its edge as tech-industry competitors like Netflix and Amazon present a more comfortable and affordable alternative to theater viewing. Record-setting revenue in 2018 runs counter to this narrative, but other metrics may be more revealing: While U.S. box office revenue looks cyclical, domestic movie ticket sales are in clear decline, and have been since the mid-2000s. If more money is being made over time in the U.S. market (and that's more or less the case, despite the 2019 downturn and present crisis), then it's being made with the help of fewer and fewer customers.

Ticket sales trends abroad paint a rosier picture, but the trends being blamed for the domestic box office decline, including access to streaming services and other forms of entertainment at home, are fast taking hold in foreign markets, too.

Big screens, big bucks

To all of this, streaming customers might fairly ask: So what? Viewers have grown used to seeing great movies debut on streaming services, just as they've grown used to seeing streaming TV shows match cable's quality. If domestic ticket sales keep declining, movie studios can just release their films to streaming services instead of to U.S. theaters -- right?

The issue for studios like Universal is that a huge chunk of the cash that films earn comes from box office receipts. Those high ticket prices (again, theater revenue is up in the U.S. even as ticket sales are down) make a big difference for studios. Americans spent $5.9 billion to buy their own copies of movies in 2019 (that figure includes both digital and hard copies) and $3.4 billion on rentals that same year. Meanwhile, the box office generated significantly more than those two figures combined: $11.9 billion.

A short-term and long-term dilemma

This is why Universal Studios is desperate enough to make films available digitally during their theatrical run -- as well as why the company appears to not be desperate enough to charge any less than roughly triple the going rate for new release rentals. The temporary suspension of movie theater income is devastating to Universal Studios' box-office hopes, and making those movies available at the $6 or $7 that it typically costs to rent films fresh off their theatrical runs would not be enough to solve the problem.

This is also why viewers should not expect major blockbusters to morph into streaming exclusives. Disney (DIS 3.69%) might be content to release Lady & the Tramp (2019) as a Disney+ exclusive, and it will be using Marvel characters in its shows. But the next Marvel movie a streaming exclusive? It's highly unlikely, given how lucrative theatrical runs can be.

A problem looms here. The current crisis reminds us how much these studios still need movie theaters, but we should also remember that theaters were facing a domestic decline before this crisis. Even assuming a post-crisis recovery for U.S. theaters, the trend is still moving in the wrong direction for film studios and movie theaters. Global markets can help offset the problem, but a long-term solution will need to be found before China and India -- like the United States -- begin to choose home streaming over theater seating.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
$39.57 (1.18%) $0.46
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$97.78 (3.69%) $3.48
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$190.85 (5.03%) $9.14
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$116.46 (3.58%) $4.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.