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Movie theaters face new windowing challenges as they lift post-pandemic curtain

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Movie theaters face new windowing challenges as they lift post-pandemic curtain

The credits may soon be rolling on the COVID-19 pandemic lockdowns, and cinema analysts are on the edge of their seats for the sequel.

The country's two biggest theater markets, Los Angeles and New York City, are raising their curtains again, as vaccine distribution ramps up and many areas of the United States relax their pandemic restrictions. AMC Entertainment Holdings Inc., the nation's largest cinema chain and one of COVID-19's biggest balance sheet casualties, offered an upbeat outlook on a recent earnings call. Cineworld Group PLC also announced that it would be reopening its U.S. Regal Cinemas chain in April.

But new strategies on the part of studios and new consumption habits on the part of consumers could leave a lasting mark on the industry, changing the face of a business that has resisted change for decades. Shorter windows and streaming film debuts could be here to stay, according to analysts. And with theaters reopening at limited capacities, cinema operators still have plenty of ground to cover before a new normal emerges.

Teaser

"Reopening is not the same thing as full capacity. For these films to really benefit from being back in the theaters, you have to have the opportunity to fill the theaters," Moody's debt analyst Neil Begley said in an interview.

He was referring to films like "Black Widow," Disney's next big Marvel Studios blockbuster. When Disney announced its intentions for its upcoming slate, including the exclusive theatrical window of "Black Widow," theater operators and investors found relief in the Mouse House's commitment to the big screen. But in a surprise shift, Disney on March 23 said it would hold "Black Widow" for a release in July and debut the film on its Disney+ streaming platform the same day it opened in theaters.

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"Black Widow"
Source: Disney

The digital competition for debut films as well as capacity limits around reopenings make the prospect of filling theaters unlikely in the foreseeable future, Begley said. Further, he expects the industry will see more shake-ups as studios look to hold premium content until more certainty emerges.

Kagan analyst Wade Holden agreed. By his count, 2021 will not likely get near the numbers registered in a pre-pandemic box office year.

"It's going to be another slow year. I don't think there is any two ways about it," Holden said.

Holden has tracked some uptick in nationwide box office receipts in March as New York reopened, but his data does not show a significant surge from LA's first weekend of reopening. The U.S. box office tracked $22.5 million in ticket sales for the week ending March 21, directly in line with the $21.7 million collected the week before and $27.9 million in the week before that.

Digital divide

Studios may also be loath to give up their new pandemic-induced distribution strategies.

Disney, the top studio by box office gross in the years preceding the pandemic, as well as AT&T Inc.'s Warner Bros. and Comcast Corp.'s Universal Pictures, are attempting to split their film debut model between theaters and their new streaming platforms. For instance, besides "Black Widow," Disney also said it will debut "Cruella" on its streaming platform the same day as in theaters and shifted Pixar's "Luca" to a streaming-only debut.

This strategy has paid dividends for the company during the pandemic in terms of its stock price. While Disney's box office, theme park and advertising revenue all took a hit during the pandemic, the company's shares still rose, largely on the growth of Disney+. While company executives have repeated their commitment to the theatrical debut model, valuation multiples for streaming platforms are inflated compared to those for traditional media businesses.

"The company so far has been hugely successful with their streaming launch, and anything they can do to keep that momentum will only help their stock price," Begley at Moody's said.

Since the start of the pandemic, Disney's share price added 65.8% as of March 29, compared to a 37.8% gain for the S&P 500 broad market index.

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The next showing

While the growth of streaming platforms could make theater operators anxious about the future of their most coveted supply line, Disney's strategy may not represent a permanent shift. It is more likely an experiment with its Disney+ platform, an attempt to determine what type of content best fits a streaming debut and which films will benefit most from a theatrical curtain, Holden at Kagan said.

Investors may value streaming over the time-worn silver screen, but movie theaters deliver too much gold to leave on the table, analysts said. Disney drove $4.28 billion in box office receipts in 2019, with "Avengers: Endgame" alone collecting $858.4 million during that year, according to Kagan, a media research group within S&P Global Market Intelligence.

Moreover, studios are holding a stockpile of films that were slated for release during the pandemic months, and they can fill the country's silver screens with blockbuster titles at a moment's notice, Wedbush Securities equity analyst Michael Pachter said in an interview.

"I think you're going to see good quality and good quantity and high demand," the analyst said.

That will depend on a successful coronavirus vaccine rollout, where Pachter believes movie attendance, and cinema revenues, will directly correlate to the number of vaccines administered.

Change is coming

Nevertheless, analysts agree the traditional business models for theaters are set to change significantly — specifically in terms of windowing and the total number of theatrical releases.

While theaters have historically enjoyed a 90-day exclusive window for new films, that window all but vanished amid the pandemic. Disney's push to release films on its streaming platform day-and-date with theaters is a clear example of that shift, as was Warner Bros.'s announcement that it will release all its 2021 slate of films on HBO Max day-and-date. Universal Pictures was an early mover on that strategy, striking a 17-day window deal with AMC earlier in 2020.

"I do think the window is destined to shrink. But to be honest, it was artificially wide already," Begley at Moody's said.

Begley expects big tentpole blockbusters will get a compressed exclusive theatrical release, while more middle-budget titles will go directly to streaming.

That is not necessarily bad news as there is only competitive space for a fraction of the number of films released each year. Kagan's Holden tracked 641 films released in 2019, the last pre-pandemic year, but only 65 are estimated to be profitable.

Pachter believes the industry will revert back to a 90-day exclusivity window once the market recovers from the pandemic, but Holden, like Begley, says the genie is out of the bottle when it comes to new windowing strategies.

"I think we're going to see a lot more film-by-film windowing," the Kagan analyst said. "Technology has always shaken up the film industry, and [studios] are very good at recognizing the shakeup and being able to capitalize."