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Wall Street analysts on Tuesday weighed in on Comcast-owned NBCUniversal’s Universal deal with exhibition giant Cinemark that will shorten the theatrical window for its films playing in the U.S., including tentpoles, even after the coronavirus pandemic ends.
Under the multiyear pact that the studio and the third-largest cinema chain unveiled on Monday, a Universal movie opening to $50 million or more at the domestic box office can be made available in the home via premium VOD (PVOD) beginning 31 days after it opens on the big screen. Cinemark is fine with all other Universal, DreamWorks Animation and Focus Features films being made available on PVOD after 17 days, similar to the deal that Universal had struck with AMC Theatres this summer. Financial terms weren’t disclosed, but the companies are expected to share in the PVOD revenue.
“Cinemark successfully improved upon the surprisingly short, all-encompassing 17-day window from Universal’s deal with AMC,” MoffettNathanson analyst Robert Fishman summarized his take on the new agreement in a report.
“Cinemark’s new deal helps mitigate much of the risk that AMC’s initial deal with Universal would lead to even higher cannibalization of box office,” he added. “Even if it was unlikely that Universal would choose to move many of its franchise tentpole releases to a PVOD window as early as 17 days, at least they had the right to do so under the AMC deal. Instead, Cinemark’s new dynamic windowing template reduces the potential impact of how much box office is at risk.”
Fishman calculated that under the terms of the Cinemark-Universal deal, “around 70 percent of the 2019 domestic box office would be covered, i.e. would have to screen in theaters exclusively for at least 31 days.”
But the analyst also warned about the potential impact of a growing PVOD business on cinema-going habits. “If consumers are trained to wait only a few weeks to watch the movie at home, we worry that the near-term impact on attendance can be more substantial and consumers will continue to opt to watch more non-blockbuster films in their homes in the long run,” Fishman said. “Of course, the lower box office attendance will also negatively impact high-margin per cap spending on food and beverages.”
What does the new windowing deal mean for studios? “In the legacy distribution model, which required a dark period of about 45-60 days post-theatrical release, marketing spending has to be restarted to rebuild awareness and drive at-home purchases,” Fishman argued. “Now, studios have one big window from theatrical to PVOD to home video to make this happen. After 31 days, we would expect less of a negative impact on downstream windows like electronic sell-through, VOD rentals, and pay 1 per title payments than if all franchise movies have the option of moving to PVOD after just 17 days. Given the higher revenue share for studios in a PVOD window, we still think it is a positive for the major Hollywood studios.”
And he argued the new deal is Universal’s “further attempt to better monetize … non-tentpole movies” generating $50 million-$100 million in box office, which the analyst said have falling from a nearly 30 percent share in 2010 to only 16 percent last year.
If replicated by other exhibitors, the new Cinemark deal could help the movie theater industry “bring more theatrical releases back to the big screens in the coming months even before a vaccine is widely distributed by reducing the financial risk to studios in the old traditional exclusive window structure,” Fishman concluded. “In addition, by de-risking future movie investments, this announcement could – optimistically – lead to more green-lighting of movies, especially independent and mid-tier films.”
And he argued: “Perhaps the biggest positive for theater owners could be using this new dynamic window to reach a similar agreement with Netflix and other subscription VOD services that are ramping up production of their own original movies, and some acquired from other Hollywood studios.”
Credit Suisse’s Meghan Durkin in a report argued that “Cinemark’s deal appears to nicely bridge the gap – providing flexibility to the studio, while protecting theaters from the threat of seeing the biggest tentpoles (the films most important to the box office) released into the home a few weeks after theatrical release.”
She also highlighted these figures: “While we found just 17 films released in both 2018 and 2019 (34 total, about 3 percent of films released) that opened to $50 million or more at the domestic box office, these films eventually contributed about 80 percent of the domestic box office in those two years. Reviewing a selection of 13 Universal films over the past several years, we found that 77 percent of the box office receipts came within 17 days, while 90 percent were recouped in 31 days. Of the eight that opened below $50 million, which would have been eligible for the 17-day PVOD window had they been released under this new deal structure, four likely would have been targeted for the early PVOD release (Pacific Rim: Uprising, Skyscraper, First Man and Cats). Of the remaining four films, two almost certainly would have remained in theaters beyond 17 days given their momentum (Sing, Get Out), and two could go either way (Dolittle and Yesterday). This suggests that the deal was structured in a way that benefits all parties.”
Meanwhile, B. Riley analyst Eric Wold on Tuesday raised his Cinemark stock price target by $3 to $14, but due to other reasons. “After two consecutive Mondays with positive COVID-19 vaccine updates, we are increasingly optimistic around the exhibition group given an increased likelihood that the 2021 film slate stabilizes starting with the all-important spring/summer release window, and companies seeking additional capital to remove any short-term liquidity concerns might now have an easier path to completing any agreement,” he wrote.
About the Universal windowing deal, he said: “Given we find it hard to believe that Universal would move a film out of the theater that is performing well and generating solid box office, we view the 31-day clause as an unnecessary amendment, but something that should help to address any potential investor concerns. And as for AMC and Cinemark, we believe these agreements not only provide an opportunity to move underperforming films out of the theater (where they are taking up valuable screens), but a new way to share in the economics of the film as it moves to the next distribution window.”
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