For an industry that's shut down and a company that was on the verge of bankruptcy, AMC Entertainment Holdings (NYSE:AMC) telling Universal Studios it would no longer show its movies in its theaters seems like a case of AMC shooting itself in the foot, if not striking a mortal blow to itself and its peers.

Beggars can't be choosers, and when theaters are fully up and running, they should willingly accept any film that can get warm bodies into the seats.

Except that AMC and rivals like Cinemark Holdings (NYSE:CNK) and Cineworld Group's (OTC:CNNW.F) Regal Entertainment have more market power than is immediately apparent.

People watching 3D movie

Image source: Getty Images.

An act born of necessity

No one criticized Universal's decision to opt for a video-on-demand (VOD) release with its Trolls World Tour movie. It had been planned for a theatrical release and subsequently proved to be more of a massive hit for the unit of Comcast (NASDAQ:CMCSA) than anyone had anticipated. It made about $100 million for Universal and was the biggest digital debut of a film of all time.

Many studios also chose to go the VOD route, particularly with those films that had already been in theaters for a few weeks before the pandemic lockdown kicked in, such as Bloodshot, Emma, and The Way Back. But other studios including Disney (NYSE:DIS) chose to hold back the release of some films until theaters are open again.

Of course, none of those sent to VOD had the remarkable success of Universal's Trolls, but it caused the studio to think it would be a good idea that even after the theaters open again, sending more movies directly to pay-per-view would be a good idea. AMC Entertainment had other ideas.

Adam Aron, the theater chain's CEO, told Universal chairman Donna Langley, "AMC believes that with this proposed action to go to the home and theaters simultaneously, Universal is breaking the business model and dealings between our two companies." AMC said it will never run another Universal movie in its theaters again.

As the saying goes, never say never, but rather than being just bluster, AMC is actually in a very strong position to carry out its threat.

A powerful incentive

Theater attendance has been on a decline, which has led operators to try to improve the experience by adding reclining seats, wider food and drink choices, and more. But many people -- a lot of people -- still want to see movies in a theater.

The studios had few options during the coronavirus pandemic but to release movies to VOD. And parents with kids looking for daily entertainment options after the academic school year was canceled had fewer options for movies for them to watch. It was a perfect confluence of events.

But Universal and other studios need theaters every bit as much as the movie houses need films to show. Although $100 million in a couple of weeks is huge, the original Trolls movie made almost $154 million in domestic box office receipts (over several months, to be sure) plus the international box office, which means Universal is missing out on a lot of money by only selling it for $20 a pop for family viewing.

Studios can't make nearly as much money going the home route as they can going into theaters first and then hitting the rental market afterward. And if they anger theater owners by bypassing them, they could find themselves shut out and with much lower total receipts.

That's why AMC has the backing of Cineworld, which also said it "will not be showing movies that fail to respect the windows" of theatrical release before going to VOD. 

Coming to their senses

In reality, it's a symbiotic relationship: AMC, Regal, and other theater operators need Universal, Disney, and the other studios just as much as the studios need the theaters.

While the pandemic may have changed the calculus enough to have studios consider more carefully which films need a full theatrical release, they're also smart enough to know that a one-off, worldwide catastrophe is not the basis on which to build a full-blown strategy.

It's likely we'll see the two sides reach a detente in this cold war that's on the cusp of turning hot, but it's also clear AMC Entertainment isn't operating from the position of weakness it appears to be.