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Cinemark-Universal agreement advances conversation, but little else – analysts

A recent film debut agreement between Cinemark Holdings Inc. and Comcast Corp.'s Universal Pictures added another chapter in the drama between theater operators and movie studios, but analysts were split on its long-term impact on the industry.

Similar to the one between Universal and AMC Entertainment Holdings Inc. struck in July, the new partnership provides studios the option to put a film on streaming video after 17 days in theaters, as opposed to the prior industry standard that gives theaters about 90 days of exclusivity for debut films. The Cinemark agreement also requires Universal to keep a film in theaters for an additional two weekends if it opens to more than $50 million.

There were 17 films in 2019 with an opening gross greater than $50 million. They averaged a $112.5 million opening gross and $342.0 million in total domestic gross, according to data from Kagan, a media research group within S&P Global Market Intelligence.

Though opinions on the overall impact of the windowing deal differed, analysts agreed that it comes amid unprecedented times for the industry that cloud even the clearest of crystal balls.

"Any measurements of [premium video-on-demand] and the impact of shortened windows will have a giant asterisk next to them at least until such time as the theatrical marketplace is back up and running under near-normal circumstances with consistent releases of high-profile, widely appealing new films," Shawn Robbins, chief analyst at Boxoffice Pro, said in an interview.

However, he added that these deals at least "hint" at a middle ground between studios and exhibitors on windowing in the future.

SNL Image
"Wonder Woman 1984"
Source: Warner Bros.

That middle ground has been hard to come by before 2020. Studios have repeatedly sought more control over the distribution of their new films, and theaters have been reluctant to compromise. As recently as April, AMC, Cinemark and Regal Cinemas operator Cineworld Group PLC said they would boycott Universal for its direct-to-streaming strategy during the pandemic.

Despite that threat, studios have continued to release films on streaming platforms. Shortly after the agreement between Universal and AMC, The Walt Disney Co. made clear its plans to debut "Mulan" on its Disney+ streaming platform. Directly following Cinemark's agreement with Universal, AT&T Inc.'s Warner Bros. also said it will debut blockbuster title "Wonder Woman 1984," which had been scheduled to release in theaters in June, on AT&T's streaming service HBO Max at the same time it debuts in U.S. theaters Dec. 25. That follows a failed attempt by Warner Bros. to recharge the box offices with "Tenet" in September.

"Agreements reached now offer some precedence for an evolution of windowing in the near future when the market is fully competitive again. There isn't necessarily a one-size-fits-all option for every studio or every cinema operator, though," Robbins said.

Given the pandemic's outsized impact on both theater and studio earnings, Robbins said these agreements may be a "stopgap" to ensure that there will be some product on screens in the coming months. AMC executives for their part have been touting the favorable economics of the Universal windowing deal, but there is limited data on exactly how films are performing financially under a streaming debut model.

B. Riley Securities analyst Eric Wold noted the studios and exhibitors ultimately are all looking for the same thing in this market.

"What they all want is comfort," Wold said in an interview.

Wold believes these windowing agreements will stick in some form or another, largely because they seem to serve both parties. Films typically make about 75% or more of their revenues in the first three weekends, so a revenue-share deal between studios and exhibitors that allows underperforming titles to go to streaming lets exhibitors open screens for better performing titles and provides studios a potentially more lucrative distribution platform for those titles, the analyst said.

"If a film is doing poorly, both sides want to get it out of the theaters," Wold said.

But Wedbush Securities analyst Michael Pachter said in an interview that he does not expect other studios to take the deal. Further, once business returns to normal, the agreements will not be renewed and the theatrical windowing market will likely return to normal, he said.

Pachter estimated that under the new windowing agreement, exhibitors would split at most 25% of the premium video-on-demand proceeds should a film go that way, or $6 per stream on a $30 debut. Assuming that split is divided based on footprint, that could be as little as $1 per stream to each exhibitor. So under generous assumptions, if 2 million viewers stream a premium debut title, and that happens with five films before business returns to normal, that would be about $10 million for an exhibitor before consumers go back to cinemas.

By comparison, AMC alone is looking to raise about $60 million in equity financing to stay operational into the first half of 2021.

"It's immaterial," Pachter said. "This new window ... will be discarded as soon as things are back to normal."