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Why cinema will survive the coronavirus pandemic

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Almost certainly, according to experts. Fans — and that’s most of us — have an emotional and sentimental attachment to the cinema that started in childhood and will flood back to the movies as soon as it’s deemed safe to do so.

In the meantime, the uncertainty facing theaters as long as COVID-19 stops people gathering indoors in large numbers means a long period of upheaval. And there will be casualties.

“Cinemas are facing a ‘Mad Max’–style all-out war that is inflicting on them a dangerously high level of financial pain,” said Eric Schiffer, chief executive and chairman of Patriarch Organization and Reputation Management Consultants.

Cinema revenue is set to experience its sharpest contraction in at least 21 years, according to PricewaterhouseCoopers. That’s when the firm first started to publish an annual outlook for the entertainment and media sector.

“Cinema has taken a big hit this year, and we’re not forecasting revenues to recover to pre-pandemic levels until post-2024,” PwC principal CJ Bangah told MarketWatch. “The big theater experience, early access to blockbuster films and nostalgia have all played a role in getting us into seats. But that doesn’t mean cinema won’t face a new level of competition [from] in-home entertainment options. Innovations such as AR and VR plus the strong performance of some movies released direct-to-consumer have challenged common sentiments around how and when we want to engage with cinema content.”

There’s a lot at stake. PwC estimates the global entertainment and media business is a $2.1 trillion industry that will contract by 5.6% — or $117.6 billion — in 2020 alone. With no sign of a vaccine yet in sight, the revenue hit is expected to continue into 2021.

Companies that have had to endure months of closed theaters are feeling the pinch. AMC Entertainment Inc.
AMC,
-6.34%
,
the biggest cinema operator in the world, warned in a recent regulatory filing that it may run out of cash by year-end or early in 2021. AMC is too big to qualify for bailout loans like those available under the Paycheck Protection Program but has tapped capital markets, reorganized its debt and reached out to investor groups in an effort to bolster cash and stay afloat.

Then there’s Cineworld
CINE,
+9.86%

 
CNNWF,
+1.76%
,
the owner of the Regal chain and the second biggest cinema company in the world, which in early October temporarily closed all cinemas in the U.K. and U.S., putting 45,000 jobs at risk.

Cinemex Holdings USA, operator of Miami-based CMX Cinemas, filed for bankruptcy in April.

And Tim Richards, head of the cinema chain Vue International said demand is still there, but there are no major movies being released for consumers to watch, after the latest James Bond film, “No Time to Die” was delayed a second time. “Our problem right now is we have no movies, and this was a big blow for us,” he told BBC Radio.

A bailout? Fuhgeddaboudit

Like other industries, cinema groups have asked Congress for bailout funds. The Directors Guild of America, the National Association of Theatre Owners and the Motion Picture Association in a joint letter to congressional leaders warned that, without aid, “our country’s beloved movie theaters” could die.

“If the status quo continues, 69% of small and midsized movie-theater companies will be forced to file for bankruptcy or to close permanently, and 66% of theater jobs will be lost,” said the letter. “Our country cannot afford to lose the social, economic and cultural value that theaters provide.”

The letter optimistically requests that Congress redirect unallocated funds from the CARES Act relief bill to cinemas, or enact new policies, such as the RESTART Act, a loan program that would extend PPP loans for longer to give the hardest-hit businesses time to qualify for loan forgiveness.

“That’s not gonna happen,” said Schiffer. “It would be viewed as devastatingly inappropriate to bail out theaters. Instead, they will face the death rattle and have to pick up the pieces. It won’t be the last act of cinema, but it will be brutal.”

Steve Spitzer, managing director at restructuring firm AlixPartners, agreed that a bailout is a long shot but said there are ways in which cinemas can generate a regular flow of funds.

“Cinemas could change their model to a subscription service and ask their customers in the short term to help them bridge the financial gap,” he said. “They might get consumers willing to spend money today to ensure they are there tomorrow. It could be the customer doesn’t get the benefit now, but the assurance that the service will be there in the future, and they will get some kind of discount.”

Smaller, privately held cinemas in New York City have done exactly that with some success, according to a New York Times report. Others have made films available for streaming on their sites as a way to remain engaged with customers. Some have survived by cobbling together a mix of bank loans, emergency grants, deferred mortgage payments, concessions from landlords and donations.

“At a fundamental level, I think people believe the cinema model works, which is why, after being shut down, AMC feels it can go to market and raise money. Investors believe the model is not broken, just disrupted,” said Spitzer.

Still, not all theaters will avoid bankruptcy. That doesn’t necessarily mean they’ll go out of business. “Bankruptcy is a tool that could help theater owners restructure their business in a way to reset their capital structure and become more effective,” Spitzer said.

Another option is for a deep-pocketed investor to snap up theaters that become distressed, which could lead to new studio owners. In September, a federal judge in New York’s Southern District terminated the Paramount consent decrees, as part of a Justice Department review of legacy antitrust judgments. That piece of legislation came into effect in the 1940s and banned studios from owning the theaters at which their films were shown, as a way to block anti-competitive practices.

“I could imagine a Disney buying a chain to offer their own content, not just for the large tentpole films,” said Spitzer. It could also include TV shows, or sporting events that fans might enjoy watching on a big screen, as part of an audience.

Amazon.com Inc.
AMZN,
-5.44%

 could be a contender, too, given its financial clout and the fact that it already finances films and TV shows for its own streaming service.

Technology companies with over-the-top services can afford to drive innovation in the cinema experience, said PwC’s Bangah, and are “potential acquirers of legacy cinema chains.”

Back to the future

In many ways, the pandemic has simply accelerated changes that were already happening in the industry, as cinema chains were competing for consumer attention with streaming services and popular videogames like “Fortnite.”

The rising popularity of Netflix Inc.
NFLX,
-5.64%
,
and its resistance to observing the “theatrical window,” the period during which films are exclusively available in bricks-and-mortar cinemas, was already pressuring the sector and irking Hollywood executives. Studios had become more risk-averse about the kinds of films made, relying more heavily on blockbusters and franchises and the teenage audience that attends them in droves.

“Even pre-COVID, theaters had so many challenges to their business model, and industry folks believed they would have to bend in some significant manner,” said Marc Simon, a former filmmaker who is now a partner at Fox Rothschild and chairman of the firm’s entertainment law department. “Cinemas can introduce an experiential component that you don’t get with streaming, but especially in metro areas that won’t be enough for them to hold on.”

Cinema revenue fell slightly in 2019, with overall box-office receipts down 4.1% from 2018 at just below $10.4 billion. Attendance also fell by about 4.6%, though the decline was offset by higher ticket prices. Still, “the overall downward trend in attendances must be a concern for cinema owners,” said PwC. Box-office receipts fell off a cliff in March after rising in January and February. Only three major films were released in 2020 ahead of the March lockdown.

The marketplace has also become increasingly concentrated. Walt Disney Co.
DIS,
-0.23%

 chalked up revenue of $3.8 billion in 2019, thanks to its roster of Marvel films and ownership of the “Star Wars” franchise, more than double the haul of the second-place studio, AT&T Inc.’s
T,
+0.97%

 Warner Bros., with $1.6 billion.

Even before the pandemic, smaller, independent films were increasingly being financed and shown on streaming services, and that trend is expected to continue.

“Do we need to see a 100-foot-tall Jennifer Aniston chasing a 100-foot-tall Gerard Butler?” asked Anthony Palomba, assistant professor of business administration at the University of Virginia’s Darden School of Business. “What’s the relationship between genre and platform? We’ve seen a lot more horror movies debuting on streaming services. Maybe in future they don’t need to be on a big screen. They cost less to make. But if you make a superhero movie, you need everyone to come. Marketing is the biggest cost a movie faces.”

So what can cinemas do to boost attendance? Palomba says they can be much more adventurous in the content they offer, upgrade their menus and beverages offerings, and make seating more comfortable.

“Binge watching TV is like binge watching long movies — why not offer the opportunity to see the TV series on the big screen with breaks and intermissions?” he asked. “Imagine paying $20 for the chance to see a favorite TV show in plush seating with breaks for food.”

Cinemas could rent out their locations for people to gather to watch major sporting events, he said. They could beam popular plays or operas in real time, as some already do. They could encourage more audience participation — activities that made cult films like “The Rocky Horror Picture Show” a success and late-night mainstay for years.

Read now:Netflix not cutting it anymore? Here’s how you can rent out an entire theater for just $5 a person

“Increasingly, companies will have to focus on mastering the intricacies of consumer experience,” said the PwC report. “Providers have to continually figure out ways to delight consumers so they are willing to pay for the delivery of content and services, and must create differentiated experiences if they are to increase subscription charges over time. In many ways, the post–COVID-19 world is already here for [the entertainment and media industry]. The future has been pulled forward. It’s time to embrace it.”

Still, not everyone expects the post-pandemic world to be so different.

Simon from Fox Rothschild is expecting the basic business to remain the same post-pandemic; auteurs will show their films at festivals, where they may or may not find theaters willing to exhibit them. The studios will continue to make big “event” films. And the remaining medium-budget films, the rom-coms, dramas and family fare, will quite naturally gravitate to the streamers.

“Once the world returns to normalcy, things will continue, but the issues that were in place prior to the pandemic will be magnified — things like the position of streamers in the ecosystem, changing viewing habits now that we’ve got used to staying at home. Will it come back as a higher-priced event based on community, more akin to live theater?

“It might. But people have been sounding the death knell for cinema for a long time, and cinema has always survived. The communal experience of going with friends and loved ones to a dark room with a big screen and smell of popcorn is too powerful to die.”

Additional reporting by Lina Saigol.

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