A Hot Take on the AMC/Universal Pact
Universal and AMC Theatres, the world’s largest theater chain, today announced a major deal that could fundamentally and forever alter the landscape of the film industry. While the “full terms of the deal are confidential and are not being disclosed,” a few details were revealed:
This is an multi-year agreement that will give AMC Theatre’s American cinemas at least 17 days of exclusive theatrical access to new films from Universal and its subsidiaries, including Focus Features. Per the release, the two will soon begin negotiations regarding the theaters that AMC’s operates outside the U.S.
(It’s worth remembering that exhibitors like AMC have fought a pitched battle for many years to preserve the traditional “theatrical window” that kept studios from releasing their films anywhere but theaters for the first three months of a film’s life.)
After this newly agreed-upon and exclusive 17-day window (which is designed to give AMC three full weekends of theatrical grosses for new titles), films can transition to Premium Video-on-Demand (PVOD) access across an undisclosed number of streaming services, including AMC’s own PVOD platform. (Most PVOD titles are currently offered at $19.99 for a limited-time viewing.)
This is the first time that a major exhibitor has capitulated to a studio’s desire to shorten the theatrical window, and most likely signals a sea-change in the way Hollywood does business.
Here are a few thoughts:
PRECARIOUS FINANCES — It’s interesting to consider that last month AMC revealed it might not be able to avoid filing bankruptcy, because of the extended closure of its theaters worldwide due to COVID-19. But in a reversal, three weeks ago the company announced it has secured $300 million in financing to ensure its survival, or at least forestall disaster. Before this latest financing deal, AMC announced on March 31 they already had $4.69 billion in debt. Serious questions remain about when theaters will reopen because of the pandemic, and it’s far from certain whether audiences will even feel comfortable returning to theaters before a vaccine is widely available. My point? This is a company in a very precarious financial position facing major uncertainties about the future of the industry. This is an interesting pivot, but nothing should be taken for granted. Depending on which way the wind blows, there’s a very real possibility that AMC could be out of business by this time next year. At the same time, if things break the right way, they could be leading the industry.
WHAT’S THE MARKET POTENTIAL? — In October 2019, AMC launched its own premium streaming service – AMC Theatres On Demand – where customers could rent or buy films that had already run their course in theaters (ie. transactional VOD). The timing of that launch feels particularly prescient now.
This new deal with Universal clearly expands its business squarely into the PVOD lane for the first time. Obviously, AMC is banking on being able to capture enough new revenue to make up for the lost box office receipts that come with shorter theatrical windows. Unlike theatrical grosses which are reported to a third-party service and regularly reported to the media like sports scores, on-demand revenues and PVOD grosses are mostly hidden from view. Distributors and streaming services occasionally volunteer some limited information, but most consider VOD and PVOD revenues to be proprietary. And so there’s a fog of uncertainty around the possible upside to AMC entering the PVOD landscape, and whether they’ll be able to capture a big enough slice of the pie to justify the trade-off for shorter theatrical windows.
WHAT WE DO KNOW ABOUT PVOD — All things being equal, today’s news isn’t entirely surprising. That’s because this past April, when practically the entire globe went into quarantine, Universal fired the first major shots at the traditional theatrical window when it chose to bypass theaters entirely with a PVOD release of “Trolls World Tour.” Exhibitors were outraged. Outraged, I tell you! AMC even announced a global boycott of Universal’s films. And yet, only three weeks after it debuted online, Universal announced that its gamble had paid off: “Trolls World Tour” grossed more than $100 million in POVD revenues. (The original “Trolls” made $120.8 million in the first three weeks of its theatrical release.)
“The results for ‘Trolls World Tour’ have exceeded our expectations and demonstrated the viability of PVOD.”
– Jeff Shell, CEO of NBCUniversal, to the Wall Street Journal.
In the theatrical business, studios mostly dictate the terms and get a percentage of the grosses, while exhibitors keep the rest. Often, the terms are in the 50/50 or 60/40 split range. (The more popular a title, the stronger terms a studio can demand.) With PVOD, however, Universal was able to keep 80 percent of the total revenues – which meant that because of the more favorable split, it’s entirely possible that they made more from the online-only release of “Trolls World Tour” than the entire theatrical release for “Trolls.” Clearly, from a studio standpoint, that’s a compelling argument to move some films to PVOD as quickly as possible. But “Trolls World Tour” is an imperfect case study, because it was released on the heels of a major marketing campaign for the originally-planned theatrical release. Plus, it was a kid-friendly film landing at a time families were desperately looking for new home-based entertainment options. If we knew more about the film’s eventual PVOD grosses – or more about the PVOD grosses of other films released in recent months – more could be said about the actual upside that AMC has in this deal.
As a side note: At the same time the major studios are trying to figure out their way forward, the independent film community has struggled to pull in any revenue it can during the pandemic. Many independent distributors have released their new films in partnership with local theaters, typically offering a 50/50 revenue split. But the numbers haven’t been entirely convincing. For instance, Kino Lorber reported that between March 19-April 30, eight of their films grossed $316,000 via online release. But those grosses skew toward high performing titles – and venues. For instance, “Bacurau,” a 2019 Cannes award-winning Brazilian film, grossed about $100,000 online with 233 theatrical partners. But Kino also reveals that 10 of those theaters accounted for 40 percent ($126,400) of the total grosses, leaving the remaining 223 theaters with a “per screen” average of about $850. As an indie success story, that’s not much to write home about, nor enough to keep theaters afloat. Certainly, major releases from the studios will gross more than indie titles, but exactly how much more remains to be seen.
AMC’S (NEW) COMPETITION IS FIERCE — Whereas AMC’s principal competitors in the pre-Covid era were other large theatrical exhibitors like Regal and Cinemark (neither of which offer their own on-demand services), now AMC is positioning itself on the PVOD playground to compete against the likes of Amazon Prime, Apple’s iTunes, the Microsoft Store, and Google Play. On one hand, AMC is definitely better positioned than most of its major theatrical rivals to capture a slice of PVOD revenue. But when you consider that their newest competitors are massive tech innovators that have huge cash reserves and a steady-stream of market-making innovations and partnerships – one has to wonder how little ol’ mostly-bricks-and-mortar AMC can ever hope to actually compete.
Also worth considering is that American audiences are already inundated with subscription-based streaming services (Netflix, Hulu, Disney+), with new ones debuting every few weeks (to wit: Quibi, HBO Max, Peacock, etc.). And on top of that, there’s no shortage of PVOD services. In addition to the ones already mentioned, on-demand veterans Vudu and Fandango play a role, as does the Dish-backed Sling. In this environment, AMC’s bet that it can capture attention and revenue over its new competitors feels… speculative… at best. If AMC is banking on customer loyalty and the idea that ticket buyers will simply choose to bypass every other streaming option and watch new films with them instead, then it sure feels a lot like a “wishful thinking” business strategy. It also places a premium on the importance of in-theater promotion and the ability to convert in-person customers to online viewers – something that remains entirely unpredictable in a post-Covid era.
WILL THIS SET OFF A SCRAMBLE? — All that said, AMC is best positioned among its traditional theatrical competitors to grow its market share once the pandemic ebbs. So, how quickly might Regal and Cinemark scramble to launch their own on-demand services and strike similar deals with studios? Many of AMC’s smaller competitors have already launched their own on-demand services, including Alamo Drafthouse. It’s a safe bet that every exhibitor with their own proprietary PVOD service will try to get access to studio titles. What’s unclear is how successful they’ll be. (More on that in a bit.)
Also, I’m guessing that negotiations are already underway between AMC and other studios to set up similar terms. As previously mentioned, studios have wanted to shake up the theatrical window for years, and this new model may provide the best of both worlds – a guaranteed, highly visible theatrical release, followed by an immediate PVOD “window.” The major question that studios still have at this point, is to what degree other down-the-line revenues generated in a film’s lifespan might be affected by shortened theatrical and increased on-demand. For instance, will cable companies and airlines still be willing to pay the same rates for access to hot titles if they’ve been available on-demand for extended periods. Maybe not. We could eventually see the “long tail” of content deals shorten somewhat if and as studios move the priority to shortened theatrical and extended PVOD grosses.
WHAT’S LEFT UNSAID — One sentence in particular in the AMC/Universal press release really bothers me: “The agreement includes at least three weekends (17-days) of theatrical exclusivity for all Universal Pictures and Focus Features theatrical releases.”
What exactly does exclusive mean in this context? Will Universal be allowing OTHER theatrical exhibitors the chance to show their films in theaters for 17 days (or more)? If other exhibitors launch their own PVOD services, will Universal provide access to their titles, or restrict them to current partners? How exclusive exactly is this deal? With the Department of Justice moving to terminate the Paramount Consent Decree, which for generations has protected against unfair theatrical practices that once proliferated, protected monopolies, and hindered competition, it’s an open question how aggressive Universal and AMC are intending to be in blocking out exhibition competitors with this deal.
(Un)INTENDED CONSEQUENCES — It’s hard to see around corners in this world, but there are a number of possible outcomes from this deal. All of this is purely speculation, but it’s all within the realm of possibility.
For starters, if AMC strikes more “exclusive” partnerships with studios, independent theaters and smaller chains may find themselves having more difficulty obtaining key titles. And those that previously got them might suddenly lose access, while those that aspired to play Universal films could be shut out entirely. Are we headed for a world where you can only see Universal films in an AMC theater?
It seems likely that partnerships between exhibitors and distributors that include new revenue share opportunities like this one could expand further. The end result, however, is that AMC will be the primary and immediate beneficiary, while independents and smaller chains won't have the leverage to strike a comparable deal, and will suffer as a result. Might some theater chains begin to feel pressure from their shareholders to explore a sale to AMC?
Moving films to PVOD after three weeks in theaters will further transform the market for new films into consumable goods with a shelf life. Already streamers are competing brutally against one another to capture market share. When all new movies are suddenly available within three weeks for $19.99, it’s not hard to see how all but the most anticipated titles will lose a bit of their luster. Annual revenues of major distributors could see declines – which may actually be acceptable to them, if they’re capturing a greater share of the revenues via PVOD than from traditional theatrical.
Additionally, for many years the marketing effort for most theatrical films has principally been focused on goosing opening weekend grosses. With only three weekends of theatrical available, this trend could be pushed to the extreme... and I wonder if marketing campaigns for films will reflect the shortened attention span that this move seems to encourage.
FINAL THOUGHTS — As a former head of an independent cinema, I’ve seen troubling headwinds grow in the theatrical business for years. And while reports of the death of cinemas has been greatly exaggerated, and I don’t expect a complete abandonment of the industry, in a post-Covid world, a return to “normal” seems increasingly unlikely.
And so, given that shortening theatrical windows is where movie studios WANT the business to go, it feels reasonable to predict that one way or another audiences will increasingly migrate to on-demand and streaming options, reducing theatrical revenues and reserving the theatrical experience for only die-hard filmgoers and/or the most essential films.
Notwithstanding all of the above, I’m actually a big proponent of embracing new distribution models. I really love the innovations and opportunities that new technologies provide – in the film industry and elsewhere. What I dislike is when such changes lead to consolidations that increase costs or reduce options for consumers, push out smaller companies, and concentrate resources into ever fewer hands. But that’s exactly what I fear this new AMC/Universal deal could lead to in the years ahead. I’ll keep my fingers crossed, though, and hope that increased access, greater choice, and lower costs prevail… without too much consolidation.
Lastly, I think it’s interesting to note that this deal with AMC came less than two weeks after NBCUniversal launched its own streaming service (Peacock), which offers both free and premium subscription options, and could clearly be positioned for PVOD viewing as well. So… any bets on how quickly Peacock will begin offering new releases of Universal titles, in competition with AMC, their new BFF?
Andrew Rodgers has worked in and around the film industry for 20+ years. He served as the Executive Director of the Denver Film Society and for 11 years as the Artistic and Executive Director of the RiverRun International Film Festival. He was a publicist for the Sundance and Chicago International Film Festivals… and started his career with the Chicago Tribune. Currently, he serves as a strategic consultant, living in Colorado with his wife, daughters, and dog.