Studios Will Insist Theaters Accept Profit-Depressing PVOD Terms, Analyst Warns


Wall Street’s souring view of the movie exhibition business became a little more tart this morning after an analyst warned that theaters collectively could lose $380 million a year in profits from the introduction of a premium video on demand (PVOD) window, plus about $558 million from Netflix’s movie-making efforts.

MoffettNathanson Research’s Robert Fishman dropped his recommendations for Regal Entertainment and Cinemark Holdings to “sell” after concluding that the 90-day window during which movie theaters exclusively show new releases is “a luxury that studios can no longer afford.”

He expects Universal, Warner Bros, or Fox to become frustrated by the slow pace of negotiations with exhibitors on terms to offer new films on VOD. As a result, the studios could “move forward with their own PVOD press release by 4Q 2017, if not sooner.”

Last week National Association of Theater Owners’ Patrick Corcoran said that the private discussions to determine terms for PVOD have been “fruitful.”

The biggest challenge, Fishman says, “getting the studios to agree on terms.” They must decide, among other things, how quickly after a film premieres in theaters to make it available to home viewers. There’s a question of how much to charge, with estimates ranging from $30 to $50. And there’s no consensus yet on how much of the revenue should go to theater owners.

“Even if different initial dates and price points are tested at different studios, we expect the industry to eventually come around to a common standard by next year,” he says.

Studios have the upper hand because all of the majors, except Disney, want the change, the analyst adds. Theater owners can threaten to boycott releases from a studio that insists on lopsided terms — but “would be unlikely to boycott multiple studios’ upcoming releases.”

And studios are motivated to introduce PVOD. They want to make up for “the collapse of the home entertainment model,” Fishman says. In addition, they want to “proactively address Netflix’s ambitious goals” to produce about 40 films a year “and try to reach movie-goers in alternative, non-traditional ways.”

Fishman’s back-of-the-envelope calculations show that studios could add as little as $740 million a year to their bottom lines, and as much as $1.8 billion, by introducing PVOD.

The profit could hit $2.4 billion if they cut exhibitors out completely, which is why theater owners “should not overplay their hands” over the next few months.

They’ll just have to try to cut their losses, he figures: The profit hit from lost ticket and concession sales due to PVOD would range from $163 million to $592 million a year.

On top of that, exhibitors might lose anywhere from $279 million to $931 million a year if Netflix introduces 40 self-produced movies a year on its streaming service.

Cinemark shares are down 1.6% in mid-day trading, while Regal is flat, on a day when the Standard & Poors 500 is up 0.5%.

Over the last three months investor concerns about exhibition’s prospects, and this year’s box office, have depressed Regal’s stock value 10.8% and Cinemark by 11.0%.

Industry leader AMC Entertainment, owned by China’s Wanda Group, is down 22.7% over the last three months.

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