The recent news that AMC Theatres is refusing to show Universal Pictures‘ movies in its theaters worldwide might, at first glance, seem like a temper tantrum over Universal‘s decision to release Trolls World Tour directly on premium video-on-demand (PVOD).
But the confrontation actually highlights much deeper tensions that have been building for years between movie studios and exhibitors as consumer preferences rapidly evolve. This standoff will likely be an important flashpoint in determining the future of movie distribution.
A Tension Long in the Making
While the COVID-19 pandemic has put pressure on the industry, the fissures between studios and theater chains like AMC were already forming well before it.
In 2019, the US Department of Justice made the notable decision to terminate the Paramount consent decrees that had been in place since the 1940s. These decrees prohibited movie studios from owning theaters and essentially required studios to rely on third-party exhibitors like AMC to show their films.
But with the studios now free to acquire their own theater chains again, movie exhibition is set to become more vertically integrated and consolidated between a handful of major players. This control may give the studios more leverage in negotiating shortened theatrical release windows.
According to AMC, however, the traditional 90-day exclusivity period before films can be released for home viewing has been vital to their profitability. A 2019 Ernst & Young study found that box office revenue accounted for nearly 70% of AMC‘s profits but just 17% of studio profits.
Studios have been trying for a while to meet growing consumer demand for instant digital access. COVID-19 simply accelerated studios bypassing theaters altogether.
While AMC continues to pin hopes on the theatrical experience rebounding after the pandemic, Universal made clear following Trolls World Tour that PVOD is part of its future strategy.
Premium VOD Performance Spurs Studios‘ Interest
Universal is not alone in taking notice of PVOD‘s money-making potential. The studio claimed Trolls World Tour racked up nearly $100 million just in North America rental fees over 3 weeks.
According to Variety, Universal‘s previous PVOD release of The Invisible Man also vastly exceeded expectations by generating an estimated $70 million in just 2 weeks.
The performance of titles like these has convinced other major studios to fast-track some PVOD releases. Industry data shows overall PVOD revenue in North America has grown from $100 million in 2010 to over $2 billion last year.
Meanwhile, the US box office revenue has been largely flat over the past decade when accounting for inflation. It seems likely studios would want to pursue the growth avenue.
What‘s at Stake for Movie Theaters?
If Trolls World Tour is any indication, PVOD releases of major studio films would still generate tens of millions in revenue largely from theater regulars. But it could come largely at the expense of AMC‘s ticket sales and profits.
AMC has been the largest theater chain in North America and the world for the past few years. Pre-pandemic, the company‘s 1,000+ theaters with over 11,000 screens generated nearly $1.2 billion in revenue in North America alone in 2019.
<img src="https://i.ibb.co/BwzzfHj/AMC-Theaters-Revenue.png" alt="AMC Theaters revenue chart" width="500 height="300">
A substantial amount of that revenue depends on moviegoers seeing films like Universal‘s blockbuster franchises such as Fast & Furious and Jurassic World in AMC theaters first.
If major studios start releasing more tentpole films in homes at the same time as theaters, it seems inevitable that fewer people would pay for theater tickets, cutting into AMC‘s profits. Hence their uncompromising stance.
What Comes Next?
AMC‘s promise to blackball Universal films almost certainly won‘t be indefinite, but is meant as a warning shot and negotiating tactic.
The theater chain hopes to force concessions from Universal in any future revenue sharing agreements. This could include AMC getting a cut of PVOD sales or a share of Universal‘s take once films leave theaters and enter home release.
Some analysts believe both sides still need each other and will eventually reach more of a middle ground. Studios may agree to keep certain types of films as theater exclusives for a period, while premiering others via PVOD.
For decades, the established business model was that studios relied on theater chains to make most of their profits. With that model clearly changing, the industry giants now need to figure out what the new normal looks like.
After being closed by the pandemic, AMC is also under pressure to examine its own value proposition. Pricey theater tickets and concessions may need to be rethought in light of home streaming alternatives.
AMC could also enhance the in-theater experience by investing more in premium formats like IMAX and Dolby Cinema at certain locations. These options make seeing films on the big screen more worthwhile.
Ultimately, the standoff stemming from Universal‘s Trolls release is about much more than that one movie. It‘s an early sign that disruption in how Hollywood does business is inevitable. After being shaken up by COVID-19, it‘s unlikely the old status quo returns.
