The Impact of COVID-19 on the Movie/Theater Industry
Economic crises, natural disasters, and other long-tail events tend to accelerate underlying trends, exacerbate balances of power, and unravel businesses, business models, and business practices that were sustained by a robust economy. COVID-19’s effect on the media and entertainment sector looks like it will be consistent with this history. Note, too, that the longer/worse the pandemic, the stronger the impact.
This essay covers the impacts of the Coronavirus on the theatrical film business. I’ve also written on how video gaming/our digital lives and the Pay-TV/OTT video space will be affected.
PRE-COVID TRENDS:
1. Declining Attendance: In 2019, the average American went to the movie theater less than 3.5 times, down from 3.7 a year earlier and a record 5.2 in 2002. Although last year’s consumption levels were more than a ticket below the median from 1960–2000s, not to mention a century low, it was no aberration. For close to twenty years, per capita admissions have declined an average of 1.6% per year. This is despite numerous improvements to the movie-going experience (e.g. VIP seating, reserved seating, larger seating), flat inflation-adjusted pricing and the advent of All-You-Can-Eat subscriptions such as MoviePass and AMC Stubs A-List. There are also no signs this trend will soon slow let alone halt. To point, the greatest drops in attendance have come from the most consumptive and youngest demographics.
2. Reductions in Major Studio Theatrical Output & A Shift to Direct-to-SVOD: For years, the major film studios have continually reduced the number of films they release in theaters. Fifteen years ago, for example, the Big Six released 20-25 major films. By 2019, some were releasing as low as nine. Although this was a necessary response to changing consumption volumes and in-theater tastes, it is obvious that reductions in the number of major films released in theater, as well as their diversity, will only worsen attendance. However, this reduction looked likely to continue long before COVID-19 as the major studios continued to shift their focus to their SVOD platforms. Disney, for example, removed Noelle from a Christmas 2018 theatrical release to a November 2019 Disney+ exclusive. More recently, three feature films disappeared from the company’s 2023 theatrical slate. It’s likely these, too, were shifted to Disney+. And after years of shrinking their annual output, many film studios, such as Warner Bros., are now re-growing them – but with the intent to premiere these films on their parent company’s SVOD services (e.g. HBO). As these efforts grow, theatrical attendance is likely to erode further.
3. Shrinking Theatrical Windows: The major studios have been shrinking the theatrical-to-home video/SVOD windows for years. At first, the goal was to better leverage enormous theatrical marketing campaigns to drive the increasingly lucrative home video market of VHS, DVDs, Blu-rays and Digital Downloads. However, as the box office has become more ruthless, marketing budgets more costly, and home video revenues more modest, this strategy has become increasingly necessary. Accordingly, windows are now shrinking faster than ever and outright exceptions continue to occur. Disney, for example, released Avengers: Endgame on Disney+ a month early in response to “fan demands” and to help launch the service. This was a smart and fair exception, but such moves add up.
Netflix, meanwhile, had its best ever film slate in 2019, including two of the nine “Best Picture” nominees. However, both of these films essentially skipped theatrical releases. And after years of vowing to protect the traditional theatrical window, Amazon Studios announced in 2019 that it would be shifting some features to direct-to-SVOD releases, while others would have only a few weeks of exclusivity in theaters, rather than months. The Aeronauts, for example, premiered in theaters on December 6th, 2019, and Prime Video only two weeks later. Notably, the film stars Eddie Redmayne and Felicity Jones in their first co-starring appearance since ‘The Theory of Everything’ (which netted Redmayne a Best Actor at the Academy Awards and Jones a Best Actress nomination)
4. Declining Exhibitor Fundamentals: Despite considerable and ongoing consolidation, the major exhibitors have shown signs of decline and distress for some time. Since 2015, for example, AMC’s revenue has grown from $3B to $5.5B, while income has dropped from +$100MM to ($150MM), with a nearly $500MM loss in 2017. In addition, total liabilities increased from $3.6B to $13B, in large part due to investments designed to improve the movie-going experience. It is hard to thrive in a business where your consumers buy less each year, and in which your most important suppliers are becoming ever stronger. Twenty years ago, a movie distributor would have taken an average of 55% of a movie ticket, with the theater keeping 45%. Disney now commands 65% or more for its top titles — and it had eight of the ten biggest films of 2019.
5. An Increasingly Polarized Box Office: The biggest franchises and studios are getting bigger, while smaller studios and less beloved franchises are struggling for oxygen:
Over its first five years (“Phase 1”), the Marvel Cinematic Universe released an average of 1.2 films per year and grossed $291MM (inflation adjusted) per film domestically. Since 2016 (“Phase 3”), the MCU has released 2.75 films per year and averaged $450MM per film. In 2021, the MCU will expand to four films per year.
In the 2000s, the top three franchises of each of the top seven studios collected 13% of the total annual domestic box office. In 2019, this share is expected to cross 40%.
Only five years ago, 20th Century Fox, Paramount, and Lionsgate had 19%, 10%, and 7% market share, respectively. In 2019, they had 5%, 5% and 7%. Disney’s slate of Marvel + Star Wars + a Pixar sequel + Live Action Remakes + Animated Sequels alone captured 35% of the market.
6. An Unexpectedly Hostile Box Office: 2019 delivered the largest box office in history (before inflation) and the biggest film of all time (before inflation). However, it was also the most unforgiving year in Hollywood’s history. An unprecedented number of films failed at the box office, several of which lost upwards of $100MM or $150MM. Many, many others underperformed despite great reviews, such as Booksmart or Rocketman (which grossed barely a quarter of Bohemian Rhapsody despite much greater praise). Other still technically blockbusters fell well short of expectations, such as Detective Pikachu (less than $450MM, having once been expected to cross $1B) and Fast & Furious Presents: Hobbs & Shaw, which hit a ten year and six film low in the franchise. Studios have learned for years that the threshold for what can work at the box office continues to rise. 2019 made it clear this threshold was much, much higher than believed.
7. An Emphasis of Vertical Integration and Ancillary Exploitation: The strongest film studios tended to be part of much larger, multi-category/media businesses and have franchises best suited to such applications. This had several interconnected benefits, including increasing the upside from a hit film, reducing the minimum required performance for “break-even”, and helping to grow love for this IP.
COVID-19 IMPACT
A. Forever Lost 2020 Revenue (And a Squeezed 2021): The audience’s appetite for theatrical releases tends not to “flex” to the size or quality of a film slate in a given month or quarter or year. As a result, the rescheduling of films such as Mulan, Fast & Furious 9, Black Widow, and James Bond: No Time to Die to Q4 2020 through Q2 2021 will likely result in significant cannibalization from other films in that same window. Some of the movie tickets that would have been sold from March–June 2020 will, of course, just be shifted to later in the year. But most are just gone forever. In addition, it’s likely that even after governments relax restrictions on movie theaters, there will still be lingering fears about sitting in a dense theater breathing recirculated air for three hours. For an industry coming off of a 5% decline in per capita consumption, this is devastating. This will lead many studios to test non-traditional release models even after theaters re-open.
B. Exhibitors Are in Distress: Few businesses can withstand months without revenue, especially those with enormous leases (rent is 18% of AMC’s revenues), depreciation expenses (8%), and thin margins (AMC’s operating income was $136MM on $5.5B in revenue last year, before taxes, interest, and other income). Accordingly, the National Association of Theater Operators, as well as leading filmmakers, have already called for government support via loans or bailouts to ensure major exhibitors survive a multi-month shutdown. Yet even if these theaters are bailed out, it’s likely the Coronavirus will accelerate cost saving programs that include shutting down less popular theaters and reducing reinvestments in seat and theater upgrades. This will mean the average American will need to travel farther to watch a film and, when they do so, have a worse experience than might have otherwise been the case. Neither is good for attendance.
C. Weaker Studios Are Being Destabilized: No studio is having a good time, including those with ancillary businesses and product lines such as Disney (which is being hit on nearly every business unit). However, those with more modest balance sheets and weaker franchises are being hit hardest. Paramount, for example, had already spent its entire pre-release marketing budget for A Quiet Place Part II before removing it from its schedule. This was the company’s biggest release and likely biggest profit driver of 2020. The company will now need to redo much of this marketing campaign (which will eat away most of its profits) and release it in a more densely packed schedule (reducing revenue). After cancelling the April 3rd release of Lovebirds, which had also started its ad campaign, Paramount instead decided just to sell the film to Netflix.
Disney and Universal have also lost marketing spend on Mulan, Fast & Furious 9, and Black Widow, but these titles will thrive at any release date, require less marketing to stimulate interest, and their parents aren’t relying on the titles’ successes to float the companies. Lionsgate’s current debt-to-equity ratio is over 100x, with 2019 losing $300MM after interest, taxes, and depreciation. 2019 was the first year Paramount booked a profit in three years, but with only $78MM on $3B in revenue, margins here are slim. Meanwhile, former Hollywood giant MGM exited bankruptcy only years ago and reportedly was in talks to be acquired by Apple. The six-month delay of No Time to Die doesn’t help. After all, Universal (which distributes the film) will have to re-market the film, thereby increasing the film’s recoupment threshold (by some reports, this will cost MGM $30-50MM). In addition, the film will now face considerably greater competition in its release window – and come out seven months after its Billie Eilish-led theme hit #1 on Billboard’s download charts and 16th on its Hot 100 List. Note, too, that delayed releases means delays in downstream licensing revenue, such as home video or Netflix syndication.
D. The Studio Raptors are Testing the Theatrical Fences: As a result of the Coronavirus, several major releases such as Pixar’s Onward and Blumhouse’s Invisible Man have moved immediately from theaters to into at-home rentals, thereby skipping both the traditional theatrical window and the “available to buy but not rent one”. Other large releases, such as Trolls II: World Tour, have skipped the theater altogether. Each of these films is an exception. Having released early in the COVID-crisis, Onward and Invisible Man had their theatrical legs cut off. An accelerated home video release therefore cannibalized no theatrical revenue and has likely lifted home video revenue. The decision on Trolls II, which could have been rescheduled like Mulan or No Time to Die, is more significant. However, the first Trolls film grossed a modest $350MM in 2016, and the box office in 2020 is far more hostile, irrespective of the effects of COVID. In addition, pre-release marketing spend was essentially complete. As a result, it made sense to try and lever this spend into the home video window and take advantage of kids cooped up due to COVID, rather than reschedule and re-market the film at a later date and with a more competitive schedule.
At the same time, such moves continue to normalize and accelerate this collapse. Consumers now know they can get major theatrical films early and/or while in theater. They will soon demand this, too. Digital stores, such as Amazon Video and iTunes have unveiled new branding and sections for such releases (“Prime Cinema” and “Home Premiere”). And Disney has done more than just accelerate the theatrical window. Onward will also go from a $20 home video rental to Disney+ after only two weeks, rather than many weeks later. This means the standard model of selling $20 purchases and $6 rentals is being skipped outright. And while the numbers achieved during the COVID-19 crisis won’t be reliably applicable to post-COVID release strategies, it will help inform them. Historically, studios considering such a direct-to-home-video strategy could only speculate as to likely performance or the potential ceiling. Now they will have at least some idea, not to mention experienced sellers. This doesn’t mean the theater is over or that tent poles like The Avengers might skip the box office, but it does mean the future we were headed for in 2023 or 2024 might arrive as early as 2021.
These “Premium Video on Demand” offerings also show how terribly the major theater chains have misplayed their hand and further endangered their future. Years ago, the major studios wanted to offer much higher priced PVOD rentals and share portions of that revenue with exhibitors. Today’s tests are considerably lower ($20 v proposals at $50-80) and according to reports, share nothing with the theater operators. Should PVOD return after COVID-19, both of these points may change. However, Hollywood will have a strong anchoring position (and one consumers are already trained around), while theaters will be desperate for additional revenues and several years deeper into secular decline. And the lower the PVOD price, the greater the cannibalization threat to ticket-buying (note that theaters take 40-45% of a ticket, while iTunes keeps 30%)
More importantly, PVOD is re-emerging at a point in which Hollywood has mostly moved beyond optimizing for home video revenues. In 2020, the priority of every major media company is to build a fully owned video service with recurring subscription revenue, not selling higher-priced one-off movie rentals at higher prices a few weeks early and through a third party. This is why the films Disney once intended for the theater but since shifted to Disney+ didn’t first hit iTunes, and why Disney is rushing “Onward” from PVOD to Disney+ after two weeks – and was concurrently running ads telling customers it would soon be on Disney+. [Update: Disney has now announced that its would-be summer blockbuster, “Artemis Fowl”, is not being rescheduled as a result of COVID-19, but going direct-to-Disney+ and with no home video window]. There was a time in which PVOD could have been a “thing” – a lucrative one, even. That time has probably passed. Theaters delayed so many battles they lost the war.
E. The Direct-to-SVOD Services Are Getting Stronger: Netflix and Amazon, which love to acquire non-blockbuster films for direct-to-SVOD releases, will likely be largely unaffected by the COVID crisis. This places them in a relatively stronger position to acquire leading films in a post-COVID world. In fact, as Netflix’s acquisition of Paramount’s Lovebirds shows, it doesn’t even need to wait until the pandemic subsides.
This essay covered the impacts of the Coronavirus on the theatrical film business. I’ve also written on how video gaming/our digital lives and the Pay-TV/OTT video space will be affected.
Matthew Ball (@ballmatthew)
