AMC Entertainment's (NYSE:AMC) plan to shorten a movie's window of exclusivity to just 17 days in exchange for a cut of the film's profits when it goes to video on demand (VOD) is more a master stroke than desperate attempt to remain solvent.

While it threatens to turn the theater industry upside down, it also promises a major revival that leans in the direction the industry was already heading.

Two women eating dinner and drinking wine in a theater

Image source: AMC Entertainment.

A new way of doing business

The deal between AMC and Comcast's (NASDAQ:CMCSA) Universal Pictures allows the movie studio to offer certain films to video-streaming platforms, including the AMC Theaters on Demand app, significantly sooner than the traditional 90-day window. 

In exchange, AMC receives a portion of the revenue generated when the movie is shuffled off to VOD. AMC CEO Adam Aron said most of a movie's revenue is generated during that period, so it won't be losing all that much revenue on the theater end and could earn substantially more from VOD. 

Yet he didn't win many accolades from Cinemark (NYSE:CNK) and Regal Theaters owner Cineworld (OTC:CNNW.F), which panned the strategy. Cineworld CEO Mooky Greidinger called it the "wrong move at the wrong time."

Where the profits really are

Theaters are fighting for their survival as they emerge from the coronavirus pandemic. Forced to close for five months, even AMC was brought to the brink of bankruptcy.

Now that theaters are reopening, every penny counts, and the long tail of extended box office can help theater owners pad their profits from the concession stand sales that follow a movie's initial opening weekend run.

AMC generated over $1.7 billion in food and beverage sales last year, or 33% of its $5.47 billion total revenue, while only accounting for 5% of operating expenses compared to the 32% movie exhibition represented.

Similarly, concession sales represented 35% of Cinemark's revenue, but only 7% of total operating expenses, and retail sales accounted for 30% of Cineworld's revenue in the U.S. last year. 

It certainly makes it seem as if AMC is hamstringing itself, but in reality the new deal is much smarter, as it has the potential to transform the theater operator into a premium entertainment provider -- both out of home and in the living room. 

A brave new world

The plan recognizes the post-COVID-19 world we'll be living in. While some cities and states remain reluctant to open up certain businesses, even where it's allowed social distancing is the norm.

Admissions are being cut to a third or half of capacity to ensure moviegoer safety, and though Regal has said a bunch of the old movies it's been showing are "sold out," indicating latent moviegoer demand, that's based on these reduced seating numbers. Profitability will be constrained for the foreseeable future for theater operators, but getting a piece of VOD profits markedly improves the situation.

Only certain movies like the big blockbusters can successfully migrate to VOD and command the premium pricing it features. Smaller films, independent movies, and arthouse films still require a theater setting.

AMC says, "We believe it is the quality of the movie-going experience that will define future success," and this gives theater owners the opportunity to lean into the trend.

AMC can use this opportunity to remove regular seating from its theaters and install more of the luxury reclining seats found in its more upscale dinner-and-a-movie theaters. The company could convert more of its theaters to this style and use the opportunity to improve its menus. This could allow AMC to even raise ticket prices.

We're in this together

Movie studios still need theaters, and vice versa. But being the venue that brings patrons a premium experience in the theater and at home can only help AMC -- and if other operators and studios sign on, the industry itself.

Theater attendance was already lagging before the pandemic as consumers sought other entertainment venues, causing box office receipts to fall 4% last year to $11.4 billion.

As counterintuitive as it may seem, the AMC and Universal deal blazes a path forward to enhance that performance while pushing greater profitability for both sides.