- AMC will no longer show any of Universal's films.
- This move essentially bans large titles like No Time To Die and Fast & Furious 9 from the big screen.
- The intensity of this spring offensive is weakened by AMC's precarious financial position.
The battle officially started with a sombre letter from AMC (NYSE:AMC) published by Deadline on April 28th. In the letter, AMC's Chief Executive Officer Adam Aron fires the first shot: "effectively immediately AMC will no longer play any Universal movies in any of our theatres". This blanket ban will be applied by all of AMC's theatres in the United States, Europe, and the Middle East.
A state of conflict now exists between AMC and Universal, the victor of which will get to shape the future of cinema in the years to come. It is important for readers to understand that the ramifications of this battle will extend far beyond AMC and Universal. Cinemas have long acted as anchor tenants for shopping malls, their threatened extinction will have significant consequences for the already perilous existence of the brick-and-mortar stores and restaurants.
The catalyst to this battle was Trolls World Tour, a children's computer-animated film that was originally slated to be released theatrically on April 10. While the coronavirus pandemic forced big film studios to delay the release of films such a No Time To Die (Universal), Wonder Woman 1984 (Disney) and Fast & Furious 9 (Universal), Trolls World Tour went straight to rental on digital platforms.
The apparent commercial success of this move spurred Jeff Shell, NBC Universal's CEO, to make statements alluding to a future state where films are released theatrically and on digital rental on the same day. Hence, the long-established industry practice of a 90-day theatrical release window looks soon to be uprooted.
Echoes Of A Sombre Past From The Men Of The Future
AMC is not in the best financial position for a protracted battle against Universal. The company's high debt load amassed on the back of its past acquisitions have catalysed a deterioration of its balance sheet and broader financial metrics.
Total long term debt is now higher as AMC has since raised a further $500 million to ride out the disruption brought about by the coronavirus pandemic. With revenue has been somewhat stagnant over the last four quarters, the obvious seasonality influence reduces the usefulness of revenue in measuring financial health. The level of cash generated from operations provides a better gauge as so does its stickiness as a percentage of revenue.
OCF as a percentage of revenue has seesawed over the last four quarters from 0.13% in the first quarter of 2019, to 28% in the fourth quarter. AMC generates positive cash from its operations, with $369 million generated during the last reported quarter.
The company also managed to reduce its total operating expenses to $167 million in Q4 2019, a year-over-year reduction of 9%. This was in spite of revenue being marginally higher at $1.315 billion.
Of course, the lockdowns implemented to neuter the coronavirus pandemic has essentially wiped out all revenue. This complicates AMC's offensive capability, increasing its susceptibility to any potential structural decline in the post-coronavirus consumer demand for moviegoing.
"We Don’t Have a Penny of Revenue Coming In"
Adam Aron, AMC Theatres CEO
In what will become the deciding factor of this battle and the main risk for AMC is whether household demand for the cinema experience goes through a somewhat V-shaped recovery or whether long term consumer demand for realizes permanent destruction. This would more than embolden Universal's proposed moves and would likely see AMC experience total collapse. In this scenario, Universal wins the battle with premium video on demand (PVOD) becoming the new normal for large budget films.
Shock And Awe
Shock and awe is the quick use of an overwhelming amount of force to dominate an enemy and crush their will to fight. I'm sure Adam Aron would have had this strategy in mind when he fired the first shot in a battle Universal probably did not want. Indeed, during the first-quarter earnings call for Comcast, Universal's parent company, Jeff Shell dialled down the rhetoric stating that he expects theatrical releases to remain "a central element" to Universal.
This sue for peace will likely have been influenced by Cineworld's entry into the fracas on the side of AMC. The owner of Regal Cinemas, the second-largest US cinema chain, warned Universal that it will not show films that “fail to respect” the theatrical window.
Ultimately, this is a battle that will be decided by consumers. History has shown that companies who fight against tectonic shifts in consumer preferences fail. But while the more than decade long rise in streaming bodes well for PVOD, the extent to which this rise will be material enough to support PVOD's commercial success in lieu of cinemas is yet to be tested in more normal conditions. Universal has made a significant business decision on the back of results that emanated from very unique circumstances.
Future PVOD releases will face headwinds from movie night gatherings where groups of people who previously under lockdown would have had to rent their own individual copy, now only rent one. The pre-coronavirus normal was a symbiotic relationship that worked for both sides. Consumers had Netflix subscriptions but also went to the cinema with friends to watch great films on IMAX.
The false narrative that consumers now have to pick one of the other is being festered by moonshot predictions of the post-coronavirus normal and the unique conditions that rendered Universal's PVOD pilot a commercial success. Against a future where the lockdowns and virus are distant memories, the future of cinema is likely to be an echo of the past.
This article was written by
Analyst’s 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.