COVID-19 has exposed some serious cracks in the movie theater industry. Besides being closed down to help combat the spread of the virus, doubt is mounting regarding just how many movie-goers will return to silver screens once they do reopen. Lingering fear of the outbreak may leave a lasting impact on consumer behavior, hastening a long-term trend of declining ticket sales theater operators have thus far offset with higher ticket prices.
The pressure may be mounting from another front: movie studios themselves. Faced with their own worry over the coronavirus and presented with a new possible profit center in video streaming, all three major studio parents -- AT&T (T -1.21%), Comcast (CMCSA 0.82%), and Walt Disney (DIS -0.55%) -- indicated that they are ready to start testing the direct-to-consumer waters, bypassing theaters with some of their feature films.
That's bad news for struggling theaters like AMC Entertainment (AMC 8.23%), which is burdened with debt and faces an uncertain revenue stream once theaters reopen. It's a symbiotic relationship between theaters and studios, but the balance of power is shifting to content producers and away from the box office.
Image source: Getty Images.
What Comcast, AT&T, and Disney are doing
AT&T, which is the parent of the Warner Brothers studio, got the ball rolling, announcing in April that the film Scoob! would be headed directly to digital format and available for purchase starting May 15. Comcast's NBCUniversal followed suit and abruptly yanked its animated sequel Trolls World Tour from planned box office distribution and sent it directly to homes for purchase and streaming. The company claimed it set records for video-on-demand revenue. AMC Entertainment picked a fight with NBCUniversal over its decision to pull the plug on the theatrical release and vowed to not show any of the studio's films in retaliation, but that could be a losing battle.
That's because the real global box office powerhouse, Disney, is ready to follow a similar course. In its earnings call earlier this month, new Disney CEO Bob Chapek said that the long-awaited novel adaptation Artemis Fowl is skipping theaters and launching exclusively on Disney+ in June. Chapek expanded:
We very much believe in the value of the theatrical experience overall to launch blockbuster movies. As you know, we had seven $1 billion films in calendar year '19. But we also realize that either because of changing and evolving consumer dynamics or because of certain situations like COVID, we may have to make some changes to that overall strategy just because theaters aren't open or aren't open to the extent that anybody needs to be financially viable. So we're going to evaluate each one of our movies on a case-by-case situation as we are doing right now during this coronavirus situation.
Reading between the lines, this means major blockbuster films will still head to a theater near you to help offset production costs. For everything else -- especially those films with an uncertain likelihood of success -- a bypass of the box office entirely can't be ruled out.
High-speed internet and TV tech are laying a new foundation
The coronavirus is merely exposing the weakening hand movie theaters are holding. Technology has already been slowly chipping away at the reasons for going to the movies.
Seeing the action on the big screen has always been a powerful draw, but big-screen TVs are increasingly a household staple around the globe. Theater chains have spent a great deal of money installing higher-definition projectors, but tech is also getting better and cheaper for at-home use too.
The real nail in the coffin, though, could be the continued rollout of high-speed internet. Having a high-definition TV is one thing, but the ability to stream content to it over the internet is another thing entirely. An ultra-high-def 4K flick requires high download speeds. Netflix (NFLX -0.08%), for example, recommends no less than a 25 megabits-per-second (Mbps) download speed to enjoy its service in 4K. But as all consumers know, a plan of 25 Mbps from their local internet service provider (ISP) means 25 Mbps is the maximum speed they will ever see. The average speed will be far lower. Thus, to satisfy Netflix's recommendation, a household needs internet far faster than that.
But ISPs are progressively making higher speeds available, and consumers are responding. Comcast's recent results showed a net increase in high-speed internet subscribers of 477,000 in the first quarter of 2020 alone. As more households sign up for faster internet, high-def entertainment viewing becomes increasingly possible, and the reasons for "seeing the action" at the cinema less compelling.
Balancing two conflicting profit centers
Of course, this isn't to say theaters are getting the rug pulled out from under them entirely. The global box office hit a record $42.5 billion in receipts in 2019. Turning off that big cash spigot doesn't make sense for studios -- especially for big-budget tried-and-true franchises featuring superheros and sci-fi fantasy -- but it's also important to remember that theaters themselves take a hefty cut of the proceeds.
Let's use AMC as an example. The world's largest cinema chain hauled in $3.3 billion in ticket sales in 2019, but only $1.7 billion was paid out of that as "film exhibition costs." If that can be extrapolated across the whole industry, it's clear that movie theaters take a hefty cut from ticket sales. The actual box office income that goes to the content creators themselves is somewhere around half of the total. A $42.5 billion year therefore sounds more lucrative than it actually is.
The gross profit derived from direct-to-consumer streaming is an unknown, but it's likely that as the business model is still in its infancy, profit margins are low. But that will change over time as studios streamline their process, and margins will surely increase if the at-home purview of films also rises. It will be a balancing act for AT&T, Comcast, and Disney, but having another tool to monetize their entertainment isn't going to hurt. What is abundantly clear is that theaters are going to have to learn to compete with streaming for some of those movie debuts.
