Studio-theater consolidation now possible but still unlikely, analysts say

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A recent decision by federal regulators means that movie studios can now own movie chains. But given the rise of streaming platforms, the rule change may be too little, too late.

In a long-awaited decision, the US Department of Justice lifted the Paramount consent decrees, a 71-year-old set of antitrust rules governing movie theater ownership among movie studios. But given how the video market has evolved over the past two years, analysts say studios are unlikely to be eager buyers.

“It’s a non-event. Nobody wants to own theaters,” Wedbush analyst Michael Pachter said in an interview.

It’s hard to show growth in the theater industry. U.S. exhibitors like AMC Entertainment Holdings Inc., Cinemark Holdings Inc. and Regal Cinema owner Cineworld Group PLC are being forced to get creative with pricing and concession stand offerings to offset ever-decreasing prices. entries. Every major exhibitor has also launched ticket subscription services in an attempt to gain market share, even at the expense of ticket markups. And AMC’s recent premium video-on-demand deal with Comcast Corp.’s Universal Pictures. is an ominous harbinger of where the box office could go: away from the multiplex.

Indeed, part of the rationale for lifting consent decrees is that they are outdated, the film industry is in decline, and regulation only impedes potential innovation. However, the restrictions are not necessarily the linchpin holding back meaningful change, analysts said.

The repeal of consent decrees technically allows movie studios such as Universal Pictures or Walt Disney Co. or Warner Bros. of AT&T Inc. to acquire movie theaters at a time when valuations are at their lowest post-coronavirus pandemic.

For example, AMC’s market capitalization, or the total value of its publicly traded shares, shrunk to just $612.2 million as of the August 17 market close, from $233.78 billion for Disney. Some analysts have speculated that a company like Disney might be interested in movie chains opening branded exhibition venues that exploit their intellectual property on a smaller scale than their theme parks.

There was also speculation earlier this year that Amazon.com Inc., with its mighty market capitalization of $1.594 trillion, might be interested in buying a movie theater chain as it continues to produce and distribute original films on its Prime streaming platform.

And indeed, analysts have said theater chains could face historic downsizing as properties close, making it a cheap time to buy.

“You’re going to have assets under siege due to the inability to operate,” Fitch Ratings analyst Patrice Cucinello said in an interview.

But with new studios testing new streaming windows, the incentive for theater mergers and acquisitions is hard to pinpoint.

“It doesn’t matter which studios can buy. That’s not where the ball is going,” Cucinello said.

Instead, studios are focusing on their direct-to-consumer offerings — and for good reason. Disney’s Disney+ platform drew 60 million subscribers in its first nine months of operation, and the company recently announced it would debut live-action blockbuster “Mulan” on the service rather than in the rooms. After launching in May, AT&T’s HBO Max platform is expected to hit 50 million subscribers and $5 billion in revenue by 2025. These studios are following the lead of forerunner Netflix, Inc., which recorded 27.3% year-on-year growth. subscribers at the end of the second quarter, even after 13 years of operation.

By comparison, admissions to movie theaters have seen a slow but steady decline. From 2010 to 2019, movie theaters saw an average annual decline of 1.0% in admissions, according to Kagan, a media research group at S&P Global Market Intelligence.

To stem these losses and show growth for investors, major U.S. exhibitors increased concession revenue 5.2% year-over-year in 2019 to roughly half of ticket revenue, making that these businesses are increasingly looking like food and drink vendors rather than movie exhibitors. Meanwhile, expenses continued to climb, eating into cash flow and margins.

“I think there will always be a place for theaters in the distribution chain, especially when it comes to big franchise movies,” Kagan analyst Wade Holden said in an interview. “But as things stand, I think we’ll see some cinemas close.”

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