It's been a tough year for travel and leisure. As of this writing, the Dow Jones U.S. Travel and Leisure index is clinging to a small year-to-date loss versus the greater S&P 500's gain of 13%. However, many companies in travel and leisure have been propped up by direct and indirect U.S. government assistance in the form of grants and low-interest loans through the Federal Reserve. Without generous taxpayer incentives, it's likely some constituents in this sector would have already folded.

Even within this industry, there's been notable underperformance among theater stocks. Not considered essential enough to qualify for the extraordinary support sectors like the airline industry received and lacking the cohesive lobbying power industry execs and organized labor have developed over decades, these operators have mostly been left to fend for themselves with balance sheets stretched thin.

If the pandemic wasn't enough, AT&T's (T 1.17%) Warner Bros. studio might have fired a final volley at shareholders of AMC Entertainment (AMC -0.88%) and Cinemark Holdings (CNK -0.17%) with its newest plans.

Empty theater with a facemask on a seat.

Image source: Getty Images.

HBO is finally putting the Home in Home Box Office

Earlier this month, Warner Bros. announced it would release its entire 2021 slate of movies on its streaming HBO Max service concurrently with their theater release dates. This is a clear break from the traditional release model that gave theaters at least 90 days of exclusivity in exchange for an average 60% to 40% revenue split (the studio taking the bigger share).

While the move was mostly reported as a way to reverse HBO Max's struggling fortunes and as a temporary stop-gap to ensure these movies are released next year, it's clear the century-old movie ecosystem is starting to unravel. On one side, you have the content creators like Walt Disney's host of studios, Comcast's Universal Pictures, and Warner Bros. On the other side, you have the legacy "pipes" or deliverers of said content: theaters.

A similar dynamic is taking place across nearly all forms of media but notably on the small screen as well. DISH Network has led the way in tense negotiations over carriage fees. As of Dec. 5, the satellite provider had over 200 channels on blackout, because it refuses to pay increased carriage fees. AT&T's DirecTV recently lost 60 channels from Tegna due to rate disputes. However, unlike the television ecosystem where the deliverers have the technology and last-mile reach, recurrent billing constructs, and (often) geographical exclusivity, the dynamics of the movie industry provide theaters no such protections. As such, they are often at the mercy of powerful studios.

Buyer beware, high risk but a potential high return

An old maxim originally credited to Baron Rothschild is "The time to buy is when there's blood in the streets." For theaters, it's safe to say that time is now. However, investors need to fully understand the risks associated with investing in theater operators at this point.

First, these companies essentially operate as cost centers, because they do not directly control their revenue stream. Theaters are heavily dependent upon studio releases for revenue, and as this ecosystem continues to unravel, expect the studios to demand their pound of flesh in the form of higher splits for the exclusivity window. The consolidation of studios -- led by Disney -- significantly disadvantaged theaters by shifting power to a virtual oligopoly of studio executives.

Still, there's money to be made from an industry shakeout. What's likely to happen is that consolidation will occur, ultimately resulting in fewer theater chains and fewer screens. Theaters that focus less on exclusivity and more on the experience -- think less "dinner and a movie" and more "dinner at the movie" -- will win out. However, it will be difficult for many of the major theater incumbents to grow market share and upgrade the user experience due to debt overhangs.

Theater stocks are also likely to get a short-term boost as good news on the COVID-19 vaccine front boosts all stocks that hinge on the economy reopening, but the long-term investment thesis remains cloudy. Warner Bros. might not have killed theaters, but the industry should get its affairs in order.