Last month, AMC Entertainment (NYSE:AMC) inked a new deal with Comcast's (NASDAQ:CMCS.A) Universal Studios, marking a drastic change of course for the theater owner. The new distribution agreement allows Universal to take its films to premium video on demand (PVOD) home distribution channels just 17 days after their theatrical debut.
AMC wouldn't budge on the three-month exclusive window for years, and now it's offering terms that give it just three weekends. But in light of the COVID-19 pandemic and other industry trends, AMC was the first theater chain to work with studios to offer a better distribution agreement for today's environment.
During AMC's second-quarter earnings call, CEO Adam Aron discussed why the company made the deal with Universal and its hopes to ink similar deals with other studios.
1. Studios are getting bolder with direct-to-consumer strategies
More and more major film productions are making direct-to-consumer releases. Aron points out that Netflix is making theater-worthy productions, and they rarely see the silver screen. Meanwhile, Disney (NYSE:DIS) released Hamilton to Disney+ subscribers early, and it's offering subscribers a chance to watch Mulan next month through a PVOD model. It's increasingly dedicated to the direct-to-consumer model.
Other studios are also finding ways to get their films in front of home audiences and skipping the theater. And while much of the shift is related to COVID-19, there's a strong potential for studios to run more experiments with premium home video debuts even when the public health crisis is under control.
2. The economics make sense
Under current PVOD releases, AMC doesn't receive any economic benefits. Under the agreement with Universal, AMC gets a cut of every PVOD sale regardless of where it's sold.
AMC's modeling very high cannibalization rates from PVOD releases, Aron said. "In some circumstances, we would need for the incrementality to be small for us to be ahead of the game," he said, noting each release will be different.
Smaller films see most of their box office proceeds in the first couple weeks. The impact of PVOD on those releases will be small.
Big tentpole films made for theaters historically have seen longer runs. That's good for both AMC and studios. But if studios decide to move those films to PVOD earlier, it could have a negative impact on AMC.
Aron notes the number of releases grossing over $100 million in the U.S. and Canada last year totaled just 30, and only 15 grossed over $150 million. What's more, studios will likely postpone PVOD for those films, as they have more to gain from theatrical distribution. Those factors ought to mitigate the impact of PVOD distribution on box office results.
3. Market expansion
Aron sees PVOD as incremental to theater viewing. PVOD is just another option for consumers to watch a film, and he thinks it'll expand the total revenue for the industry compared to the status quo.
Aron does expect some cannibalization, so AMC will lose sales to PVOD. That's why it was important for it to participate in the economics of PVOD distribution. So, while the market expands, AMC expects to take a smaller piece of a larger pie, still producing revenue growth for investors.
4. Potential for studios to release more films
With more flexible distribution capabilities, studios ought to be able to turn a profit on more films. As a result, Aron expects studios will produce more films for theatrical release, taking more shots instead of relying heavily on big tentpole franchise films like they have for the last couple decades.
More theatrical releases is a good thing for AMC. It gives consumers more reasons to go to the theater even if they'll be able to watch the same films at home just a couple weeks later.
5. The first-mover advantage
AMC was the first theater-owner to ink this sort of deal with a studio, but Aron fully expects his competitors to follow suit. Considering AMC is the largest theater-owner in the world, it'll actually put pressure on competitors to make similar deals with studios for fear of getting cut off from certain film releases.
"I do think you should assume that we got a first-mover advantage," Aron told analysts. To a certain degree, AMC was able to dictate the terms of its agreement with Universal, and it'll be the measuring stick by which Universal makes any similar deals. And considering AMC is the largest exhibitor in the world, the terms for smaller theater owners won't be as good as they are for AMC.
Staying with the times
All things considered, Aron made a good deal with Universal. The move was necessary amid the current environment and ongoing trend toward direct-to-consumer distribution.
It remains to be seen whether it can make similar deals with other media companies like Disney, especially given the strength of Disney+. Additionally, there's a lot of uncertainty about how the agreement will impact box office sales. Investors will need to pay close attention to how the deals progress over the next year or so as AMC reopens theaters.