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Untangling The Movie Business

What a week with movies being pushed back into fall, AMC stalling bankruptcy by finding $917 million dollars, studios launching more streaming platforms and theaters scratching their heads wondering what the heck is going on. One analyst came up with a statement that it is going to finally return to normal in 2023 and there will be a huge box office. I found that statement ill-founded and dangerously optimistic. I wondered which head of a major circuit may have planted that story.

Eric Wold, an analyst with B. Riley Securities, stated in a memo to his client base that theaters were struggling to emerge from the abyss of Covid-19 as a result of the molasses like vaccine rollout. He states that he continues to believe that repressed demand will drive an explosion of moviegoing once theaters reopen. Using 2019 as a baseline, when box office in North America totaled $11.4 billion, he projected that the box office will have a 40% drop in 2021 and a further 7% drop in 2022 before exploding to an amazing 7% growth 2023. The previous high for domestic box office came in 2018, when it reached just shy of $11.9 billion. In the last couple of years box office rose as a result of ticket pricing increasing and not because of increased movie attendance. I think he is deeply overstating what is going to happen.

This week, Reddit proclaimed that AMC was going to be the next GameStop and the market reacted. It is not based on performance, not based on management aptitude….it is based on pure speculation. There is a ton of wanton money out there waiting to find a home. The truth of the matter is that Wall Street thinks GameStop and AMC are horrible stocks. AMC has been flirting with bankruptcy since last year and GameStop is facing obliteration as a result of games starting to be heavily sold online. So the vulture like Wall Street hedge funds all start circling, marking “shorts'' against the theater chain. They are forcing the price up, so they can make a ton of money on the margin. That makes it highly attractive for these barnacles on the ship of a free market economy because if they all invest in a company that should be in the proverbial dumpster, then they can artificially inflate the price of the stock and make a bundle by manipulating the market.

The bottomline is some deep thinking has to go on regarding what the future holds and which forward thinking analysts are truly bringing deep sentient thought to assessing this rapidly shifting market. I myself do not have a crystal ball but I do tend to rely on the past. I like to look at what has been happening and I know firmly that in many ways, the stone has been cast for a while.

From 2015 to 2018, Hollywood wanted to try out what the impact was by messing around with theatrical windows. They chose the market of South Korea and started testing out windowing.

In 2015 it was announced in South Korea that Hollywood studios would begin to shorten the exclusive theatrical windows for all their releases, from the traditional 90 day windows to a 30 day window. This change resulted in a drop of 0.8% of traditional box office. We found that, after controlling for differences between movies with early digital releases versus traditional release windows, early releases had a statistically and economically insignificant impact on theater sales, equivalent to around a 0.8% drop in total box office. The studios then said, hey it worked in South Korea why shouldn't it work in North America. The trap was set.

There are a couple of key issues where the Korean findings might differ. The first Korean made movie was produced in 1921 and the first theater opened in 1903, so there is longevity when it comes to moviegoing. The windows being implemented are either 17 day put forward by Universal or day and date as being set by Warner Brothers.

The most dangerous thing though if we look at the music industry, music single sales did not erode the gross music revenue, what changed though is who got that revenue. Jason Kilar, the CEO of Warner Media, was quoted as saying early digital releases provided a choice “whether that choice is to enjoy a great new movie out at the cinema, to open up HBO Max, or to do both.” But any knowledge of the market is going to tell us that the bottom-line numbers for Warner Brothers will increase greatly and the theaters on a long-term basis will suffer.

What truly baffles me is that analysts, Hollywood and exhibitors are not stating what I think is the simplest of truths. This business is forever changed by this Pandemic. Habits are being reshaped and behaviors are being redefined. Hollywood took the opportunity of implementing a long-held plan, and by the way it was a plan that was shared between all the studios. In fact, the industry as a whole should give serious consideration to the business ethics behind the MPA. The MPA is made up of Walt Disney Studios Motion Pictures, Netflix Studios, LLC, Paramount Pictures Corporation, Sony Pictures Entertainment Inc., Universal City Studios LLC, and Warner Bros. Entertainment Inc. . These folks are a self policing body to the public focused primarily on movie ratings, but since its inception with Jack Valenti (a political operator within the Johnson Whitehouse) it is one of the most powerful lobbying bodies in Washington. They wrap themselves in the banner of protecting the moral interest of society but in reality they are focused on ensuring financial security in the face of potential legislation.

Independent exhibitors, these people are not your friends.

I propose that the independent theaters band together to advance free and independent thinking within this industry. There are some very bright minds in this business which I believe should start talking honestly about this industry and the deep challenges it faces. I think it’s time to move from the mantle of NATO and other derived groups and allow leadership to grow within the ranks of the independent theater owners, outside of those addicted to bureaucracy and stale process. It is a time for leadership and a time to realize the state this business is truly in.