Please ensure Javascript is enabled for purposes of website accessibility

AMC's Hand in Its Spat With Universal Is Stronger Than You Think

By Rich Duprey – May 5, 2020 at 11:20AM

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

The theater owner has at least one ace in the hole.

For an industry that's shut down and a company that was on the verge of bankruptcy, AMC Entertainment Holdings (AMC 9.08%) 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 (CNK 2.44%) and Cineworld Group's (CNNW.F -12.42%) 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 (CMCSA -2.04%) 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 (DIS -2.31%) 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.

 

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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
$30.26 (-2.04%) $0.63
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$7.45 (9.08%) $0.62
Cinemark Holdings, Inc. Stock Quote
Cinemark Holdings, Inc.
CNK
$12.15 (2.44%) $0.29
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$95.85 (-2.31%) $-2.27
Cineworld Group plc Stock Quote
Cineworld Group plc
CNNW.F
$0.03 (-12.42%) $0.00

*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
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

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.