How Disney Just Did Movie Theaters A Big Favor

| About: The Walt (DIS)
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Disney won the box office in a big way last weekend with a record-breaking haul for its live-action “Beauty And The Beast” remake.

The film not only drew in audiences from a key demo but also lured in audiences who rarely come out to the movies in general.

Disney is helping theaters prove they still have value in the wake of attempts by the industry to switch to a new model that relies more on digital home viewing.

Theaters are also benefiting from a run of quality films which is baked into the DNA of Disney as a company which has no shortage of anticipated upcoming releases.

Well that beast can roar.

As expected Disney's (NYSE: DIS) Beauty And The Beast took a bite out of the box office with a record-setting total over this last weekend. However while that's good news for the studio and the industry overall it's an even bigger win for theaters.

In this new age of media we talk a lot about the "traditional" model. Essentially the old way of doing things before Netflix (NASDAQ: NFLX) became a streaming sensation. What's interesting though is that while TV has evolved and streaming and time-shifting are the new normal, film hasn't advanced by the same leaps and bounds.

Yes, you can now easily stream a movie and the windows between when a film hits theaters and hits pay cable has shrunk considerably, but the old model is still king. Now on the studio's end that's not from a lack of trying as the traditional film model is under attack - even as you read this article.

Over the last few years investors have struggled in this sector to put their money in the next emerging technology. It's not as easy saying to invest in Netflix or Apple as those are still very niche areas. While both touch nearly all aspects of entertainment and you can make the argument both don't fit in just one box, the reality is Netflix is still mostly associated with TV and Apple is still mostly associated with music.

Again, that doesn't mean you can't stream a movie off either and that's not meant to degrade either company, but the only way to see a brand new Hollywood blockbuster opening weekend is to go the theaters. And I'm not talking about movies like Will Smith's upcoming sci-fi actioner Bright, which Netflix hopes will tilt the model in its favor. I'm talking films like Kong: Skull Island, Beauty And The Beast and the upcoming The Fate of the Furious.

That is a very important distinction.

Investors need to be aware the reason why there hasn't been a movie paradigm shift is because of the theaters. Hollywood built its business on these movie chains and now that there is less of a need for them there is a desire to short-change them.

Good luck with that.

Hollywood built this machine and it is not going quietly…nor should it. The magic of the movies is that shared experience and it will always be an integral reason as to why we as a culture embrace films. The problem is that it has gotten more cost effective to look at other avenues for distribution.

Yet then comes a film like Beauty And The Beast where the film's estimates just kept going up with ranges starting from around $70 million to as high as $120 million. Of course when actual returns came in those numbers adjusted up to a staggering $170+ million and an even more stunning picture began to emerge.

When something like that happens and the public says "I want to see that" and THEN THEY ACTUALLY DO, it's hard to discount the traditional model. A large part of Netflix's TV success is that the studio is taking a different approach with its content - namely its quality is radically different than the junk the big broadcasters are churning out.

Quality will always win.

It's the same thing here, except the degree to which movies have lessened in quality is nowhere the level of TV. Disney knows the importance of quality and that's why it's big four properties (Disney classic, Pixar, Marvel, Star Wars) all are lovingly crafted down to the last detail.

As I wrote earlier last week Beauty And The Beast didn't need to do anything different to be a success, but Disney realized it had a unique opportunity to build on the iconic tale. Remember at one point this adaptation wasn't even going to have music and at another it was going to be done like Maleficent and be told from a brand new perspective (i.e through the eyes of the Beast).

Then Frozen happened.

The Oscar winning film reminded executives what audiences wanted and the rest is history. That's the fun part of this model, yes it is old but it is also very detail-centric. Take for example what we learned from Beast.

A massive amount of the audience from this weekend was comprised of audiences aged 18-34. That's the audience Hollywood is tripping over itself to target. Although there's more, and I personally love this stat, 60% of those seeing the film saw it in 2D.

While 3D is the rage, audiences still want good old fashioned two-dimensional pictures where the story is more important than the effects. The stat also shows two things, one audiences don't feel a third dimension (and its ridiculous upcharge) is needed to get them into theaters. In addition it also shows how diverse this audience was in general. Usually it takes a religious film to drag certain people to their local Cineplex, which is an impressive feather in the cap of Beast, but it is also true that when this demographic comes out they usually always go for the lower-price option (i.e. 2D).

But wait…there's more! And this is where investors need to really pay attention.

As part of its data, PostTrak asked audiences who saw the film if they wanted to see it again and through which method. Only 6% said they'd want to rent it digitally or on a VOD type service. 24% said they wanted to see it again in theaters while 25% said they wanted to buy it on Blu-Ray.

So when a service like The Screening Room, which offers a same-day VOD video option for a premium price, comes along and claims it has the silver bullet for change you can see the hesitation. Not only are audiences lukewarm to the idea but Disney has basically given theaters the ammo to go back to the other studios and say "the current model still works and here's your proof."

And given its success Disney has no reason to want to change the model either as its movies make money hand over fist. What's a few extra percentage points where all of your films are just breaking records set by your company's previous films?

Though at least the studios aren't completely dismissing the theaters as under The Screening Room proposal $20 of the $50 price tag (per download) goes back to the theaters, which is likely the only reason a chain like AMC Theaters (NYSE: AMC) considered backing the idea.

AMC is one of the more progressive chains as the theater also was one of the few to agree to partner with Paramount in October 2015 when it released its Paranormal Activity: The Ghost Dimension and Scouts Guide To The Zombie Apocalypse experiment over two back-to-back weekends.

The hook was those films would go to VOD in a fraction of the time a new release normally would, but again the theater would then get a share of those earnings to make up for lost revenue. Still other chains opted against the change and boycotted the films.

Both methods are better than what Netflix did when it came in and just said theaters are outdated and therefore we don't need them. Conversely Amazon (NASDAQ:AMZN) told theater owners what they wanted to here and that is why their entry into films was smoother. The e-giant kept the windows largely intact and realized having the films come to its service after it made a theatrical smash was still valuable. That model runs closes to the old Hollywood adage that a strong box office success story will carry the film further in the long run.

Back to Disney though as the studio continues to do theaters ANOTHER big favor by putting out new types of movies like Beast. This new budding line of live-action adaptations has created a sub-genre aside from just comic book films and franchise sequels. Those still help of course but anything to get audiences into theaters and keep them coming back (and buying concessions) keeps the traditional approach alive and well…for now.

It may be a model as old time but as proven by Beauty And The Beast sometimes that's not a bad thing.

Credit: Disney

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.