THB #243: What Happens Next? - State of Cinema, Pt 2

Greetings. Yesterday’s column was rough for me. It’s hard to get my head around the reality that things may not actually be getting any better in 2023 for movie exhibition.

Once I get past the idea that there may be no turning back… even though it has absolutely NOTHING to do with the market or the desires of the many consumers who will pay an otherwise irreplaceable premium for an individual ticket for a theatrical movie experience… I have to push aside emotional and aesthetic arguments for a moment and start taking a serious look at the bottom line of where this could all be going.

I’m going to try to start with some simple math on the domestic theatrical front…

$11 billion was the pre-COVID domestic norm.
45% is roughly the average exhibition cut.
44,000 screens at 5,798 cinema sites

On a very broad basis, that means that every screen in America used to average $250,000 in box office revenue to the exhibitor each year.

And now, that stat is $147,727. A 41% haircut.

How many businesses

could afford a 41% haircut?

To discuss this, one needs to play a bit of 3D Chess. There is the year ahead (or 14 months) and there is the 5 - 10 year horizon.

The ugly reality for exhibition is that they have been given the shaft by distributors multiple times over these last 4 decades and figured out strategies to survive. While film writers whine about the quality of movie theaters, often decades out of date in their observations, exhibitors keep evolving to make the experience better for consumers and as follows, for distributors.

They converted big single screens into mostly-bad multiplexes in the 80s. They launched (and overbuilt) megaplexes in the 90s into the 00s. They added digital projection in the mid-00s. And they started making a real push into Premium Cinema, whether IMAX or Dolby or their own configurations in the 10s and now, even more aggressively, in the 20s.

Part of what is happening now is that distributors are assuming that they can keep tying exhibitors to the railroad tracks and that the exhibitors will keep escaping, creating a safe space for those distributors to take advantage in whatever way they think might suit them next.

So if you are our good friends at Disney, you have Wakanda Forever and Avatar For Water coming and you are expecting billions to happen in the next 3 - 4 months. You’ll take a shot at animation with Strange World because you can throw it on Disney+ for Christmas and hope it overcomes its tepid release, like Encanto did. Then you hop from Ant-Man to Guardians to Little Mermaid to Indiana Jones to The Marvels to Haunted Mansion, all the while demanding more and more one-sided revenue splits because, “Why not? Our $6 billion worldwide year is keeping you alive and selling popcorn, so eat what we let you eat and enjoy it!”

Why doesn’t it matter to them that in 2019, Disney grossed over $11 billion in theatrical and that even with six Big-IP franchise titles in a year, they won’t get close to that?

You know who feels that $5 billion less at the cinema worldwide and maybe $2 billion domestically? The exhibitors. That’s their shot at paying for the brick & mortar and employees that make that other $6 billion possible for Disney.

What are exhibitors doing in response? Building more Premium screens, even as a friend noted, in what are smaller indie-style theaters. Post-COVID, ticket buyers have shown a willingness to spend the extra money, when they are spending money, to have that premium experience. So exhibitors, especially the ones smaller than the Big 3, are true believers in the church of cinema and keep fighting for better days. (Less poetically, they are doing the math and seeing that upside of Premium, as they intend to stay in business.)

What are landlords doing in response? Aside from the weird lack of movement in the Arclight/Cinerama Dome situation in Los Angeles, landlords seem to be willing to make deals as many exhibitors consider using bankruptcy to dump their weaker locations and avoid old COVID-period debt. After all, what are the landlords going to do with all that space in an era where brick & mortar retail is also under a ton of pressure? The last big multiplex closure and conversion I read about turned the space into an Amazon distribution center.

The last time a lot of chains filed for bankruptcy was the late 90s… ushering in the era of stadium seating and eventually digital projection. Who never had to file for bankruptcy? Distributors. (At least over these issues… as opposed to consolidation, which brought a whole bunch of indie distributors into studios, which then killed all but 3 of them.)

We also must remember… exhibitors are still recovering from the deadly years of 2020 and 2021. You may look at the 2022 numbers and think that everything is hunky dory, as the bottom line in exhibition appears to be trending back to black ink. But there is still a serious hangover (and some serious debt). The reason I am writing this now is that it doesn’t look like distribution has any interest in getting more serious about doing what is needed to grow exhibition moving forward.

We seem to be heading into a stasis with the box office chasing $7 billion to $8 billion a year domestically. This is not a realistic future for exhibition as it stands, which is not going to be getting revenue help anywhere else in the distributors’ new version of windowing. Exhibition cannot hang around, wetting its pants in anticipation of the next blockbuster when fewer than 10 films a year are grossing $200 million or more domestically and the shelf of films that used to make up a third or more of the annual business becomes more and more bare.

And I am actually painting a rosy picture.

In the 3rd piece in this series, I will make the hypothetical, but serious, argument - based on detailed factual numbers - that there is a real threat that we will see a shrinkage of the domestic exhibition ecosystem by a full third in the next couple of years. Fixed costs and reduced revenues = a dead end. The only real way to reduce fixed costs is to close theaters.

What don’t we know about the impact of shrinking the domestic exhibition infrastructure by a third? 42,000 screens to 28,000 screens in America.

A lot.

The unexpected consequences of this increasingly inevitable event should be a flashing danger sign for the entire industry.

Because, momentum. Hard to get the genie back in the bottle.

Do you know how many movies opened to $100 million in fewer than 4000 venues in the 5 years before COVID? One. Deadpool.

If exhibition is reduced by 3800 venues and 14,000 screens, it will not only take longer to get money in for the biggest movies, but many markets will simply stop being part of the domestic theatrical universe. Movie lovers in some markets will be too challenged to get to a theater once a year or even less.

I can’t foresee how exhibition strategy may shift in response.

The first run of Star Wars in 1977 was never in as many as 1100 theaters.
Batman’s high in 1989 was 2201 theaters.
Harry Potter launched in 2001 with 3672 theaters
Avengers came out in 4349 theaters in 2012.

Theater count mostly stopped growing in the last decade by design. It became what I call the accordion system, where it’s about the number of screens inside all of those theaters, not the theater count, which is pretty static. Opening weekends stopped having sell-outs, because there were so many seats made available. Then the number of screens taken up are naturally reduced as needed beyond the opening.

Actual screen counts of over 15,000 are no longer a rarity. Some who have access to more details than anyone in the media about such things believe that Avengers: Endgame, touted as having the widest opening over in 4662 venues, premiered on over 30,000 actual screens (out of 44,000) in America on opening weekend… maybe more.

Fewer theaters and fewer screens means more pressure to front-load grosses because keeping a film in theaters for more than 6 weeks will become a rarity simply because the next film is coming. A few films will turn the trick. Most will not.

So then, with box office in greater decline, the danger level in funding big, expensive movies - even with strong IP - will increase significantly. Fewer of these movies will be made… box office will decline more within the ecosystem… and more theaters will close because there is not enough product, big or middle or small, to sustain them.

There may be a boutique bottom… the LP and Betamax version of an exhibition industry.

But if we get there, The Industry will have burnt through a $40 billion revenue producer, reducing it, maybe, to a couple of billion, earned by small scale players who offer a great and unique opportunity… like Music Box in Chicago or the Dome (if it ever comes back) in Los Angeles or some resurrection of The Ziegfeld in New York.

The streaming business, like plain ol’ TV before it, will be the financially dominant medium because it comes in your home and people connect with it for 6+ hours a day. Television was a $200 billion+ domestic industry before streaming and will remain on as streaming becomes the norm.

But will The Industry regret burying money and killing off a platform that will never likely be rebuilt to anything close to the same level of strength if they bury it in the next 5 years?

For sure.

Until tomorrow… if there is a tomorrow…