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Shattered theatrical window creates opening for bigger changes in film

A recent streaming-window deal between AMC Entertainment Holdings Inc. and Universal Pictures may have shattered the theatrical release window, but analysts say it will take more than one agreement between two companies to shift the foundation of the traditional film exhibition model.

Under the multiyear deal signed between AMC and Comcast Corp.'s film studio, Universal Pictures films must run at least three weekends over 17 days in theaters before the studio may put the title on premium video-on-demand platforms, including AMC's own AMC Theatres On Demand digital service. The 17-day requirement marks a huge shift from the longstanding theatrical window model, where studio films have traditionally been required to run on big screens exclusively for roughly the first 90 days after release in order to get any theatrical release at all.

Despite the narrowed window, film and exhibition analysts said without more companies getting on board, the deal may turn out to be more of a symbolic gesture, the value of which is a display of cooperation between Universal and AMC. But if more exhibitors and studios do get involved, it could fundamentally change the film business.

"This will definitely keep the conversation going, but it's going to depend on more than one studio and more than one exhibitor," Shawn Robbins, chief analyst at BoxOffice Pro, said in an interview. "It sets the stage that they can compromise and reach agreements that are beneficial to both."

The impact of the deal is essentially moot in the current environment, where U.S. theaters remain closed, Wedbush Securities analyst Michael Pachter said in an interview. Further, even if theaters were open, executing on the deal would require all the major theater chains to agree to Universal Pictures' early PVOD window arrangement, or else the studio would have to forgo releasing films on the roughly 75% of screens AMC does not control.

Following news of the agreement between AMC and Universal, Cineworld Group PLC CEO Mooky Greidinger told multiple news outlets that the company did not see "any business sense" in a 17-day theatrical window. "We clearly see this as a wrong move at the wrong time," the CEO said.

Cineworld is the parent of Regal, which operates more than 7,100 screens in the U.S. AMC, by comparison, operates more than 8,000 screens in the U.S.

Just how beneficial the arrangement would be for AMC and other exhibitors depends on the revenue shared with AMC from the PVOD releases, a detail also yet to be disclosed. AMC said it is participating in the deal because it is benefiting from the entirety "of the economics of the new structure, and because premium video on demand creates the added potential for increased movie studio profitability, which should in turn lead to the green-lighting of more theatrical movies." However, neither AMC or Universal Pictures provided details on shared economics or an outlook for increased theatrical film productions.

Any permanent changes to the industry windowing model on PVOD will also depend on other studios participating, which Pachter believes is unlikely.

"I think they are coming up with a band-aid for a mortal wound, trying to capture some revenue in an environment where theatrical exhibition is unlikely for the next six months," the Wedbush analyst said. "When the results are in, the other studios will adopt the model if successful, and will criticize Universal if not. I don't expect it to succeed."

SNL Image
"Trolls World Tour"
Source: Universal

Universal Pictures' rationale is largely driven by the success of recent PVOD titles like "Trolls World Tour" and "The King of Staten Island," which debuted on PVOD after U.S. theaters shuttered amid the coronavirus pandemic lock-down period. While those titles "exceeded expectations," according to July 30 earnings commentary form NBCUniversal Media LLC CEO Jeff Shell, analysts have questioned how successful those releases would have been if theaters were operating normally and if consumers were not under strict stay-at-home orders.

However, some analysts are more bullish than others. While he cited the economic unknowns, MoffettNathanson research analyst Michael Nathanson echoed Shell in a July 29 note, calling the deal "groundbreaking."

"If consumers are trained to wait only a few weeks to watch the movie at home, especially while increased COVID-19 risks still exist, we worry that the near-term impact on attendance can be more substantial and consumers in the long run will continue to opt to watch more nonblockbuster films in their homes going forward," Nathanson said in the note.

Nathanson said if the arrangement becomes the status quo, U.S. theater operators will likely be forced to downsize. Already the U.S. exhibition industry was "in dire need of restructuring," with screens growing slowly over the past decade even as attendance shrank, Nathanson said.

The COVID-19 closures and subsequent economic fallout, coupled with new distribution agreements like this PVOD deal with Universal Pictures, could act as forcing functions to accelerate that restructuring. As theater closures have continued, AMC's heavy debt load has become more of an issue, with the company citing "going concern" risk as it attempted to restructure its debt profile.

"It may not have happened under different circumstances given the pandemic. I think Universal was probably able to force their hand on that, especially given AMC's financial position," Kagan analyst Wade Holden said in an interview. Kagan is a media research group within S&P Global Market Intelligence.

Holden agreed that the deal is groundbreaking, but the impacts will depend on other exhibitors and studios getting involved. He does not see much incentive for a studio like Walt Disney Co. to participate, as it gleans most of its film revenue from large theatrical productions from brands like Marvel and Pixar that would not benefit from an early PVOD window.

However, the model could create an incentive for studios to produce more middle- and small-budget films. The share of theatrical releases in the comedy, romance and drama categories have declined over the years as big-budget, billion-dollar box office releases have increasingly dominated both screens and profits. If an early PVOD window becomes the norm, studios could find a home for more middle-budget fare, Holden said.