AMC In More Danger On Warner’s Bid To Boost HBO Max
WarnerMedia will release its 2021 films on its HBO Max streaming service and in theaters simultaneously. That bombshell announcement sent theater stocks plummeting.
Will this change in distribution strategy shift huge amounts of cash from theater owners to Warner? If so, should you buy stock in WarnerMedia’s parent company AT&T? If not, is now the time to load up on lower priced movie theater shares?
Simply put: No, no, and no. Theater owners were not going to get much cash in 2021 anyway thanks to the pandemic. WarnerMedia’s potential revenue gains next year from the shift are too small to move AT&T’s top line.
What’s more, publicly traded movie theaters are in such precarious financial shape that they could run out of cash before people begin to consider whether to share a darkened room and sticky floors with others.
(I have no financial interest in the securities mentioned).
Warner Brothers To Simultaneously Release 2021 Films Online and In Theaters
Since Netflix proved that people would watch movies at home on their smartphones and giant TV screens, the goliaths of the movie industry have been hoping that consumers would come to their senses and only watch movies in theaters.
At the same time, those movie makers hedged their bets. As I wrote in my new book, Goliath Strikes Back, those goliaths spent many years testing the waters for how they might make money through online streaming.
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The pandemic has emptied out those movie theaters of paying customers. And for WarnerMedia, competition from other streaming services has made it tough for its HBO Max service to win enough subscribers.
So on December 3, WarnerMedia announced that 2021 will be the perfect time to give its online streaming business a boost by releasing its 17 big budget films simultaneously on HBO Max and in U.S. movie theaters, according to the Wall Street Journal.
Outside the U.S., WarnerMedia will stick with its traditional model of releasing the films “exclusively in movie theaters and [typically 10 weeks] later move to streaming,” noted the Journal.
This economics of this move appear neutral at best. If those big budget films draw in enough subscribers willing to pay $14.99 a month for HBO Max after they’ve had their fill of these big budget films, it could be a good investment.
WarnerMedia can invest about $150 million or more in these big budget films and then spends millions more to convince people to go into the theaters to watch them. Therefore, such films much gross many hundreds of millions to break even.
WarnerMedia is paying a price for the right to release these films simultaneously on HBO Max. Its licensing fee for the 30-day window will be shared in part “with the stars and top creative talent who have deals entitling them to a cut,” the Journal reported. WarnerMedia hopes this approach will simplify the calculation a movie’s financial success through both distribution channels.
By paying talent up front, WarnerMedia aims to avoid complicated formulas to determine the financial success of a particular movie based on its performance on its streaming service.
Kicking Movie Theaters When They’re Down
The pandemic has dealt a near fatal blow to the movie theater market in the U.S.. According to the Wall Street Journal, for the first eleven months of 2020, domestic box office is about $2 billion — a whopping 82% below the $11 billion industry average over the previous five years.
Warner Brothers has felt the heat from this plunge — it spent $200 million on Tenet — which went into theaters on September 3 and three months later had grossed a mere $54.7 million.
WarnerMedia’s announcement was bad news for investors in movie theaters. Shares of AMC fell by as much as 16% while Cinemark stock dropped 22% on the news, according to CNBC.
Both companies have had very bad 2020 financial results.
In the third quarter, AMC’s attendance figures were down even more than industry revenues. According to AMC CFO Sean Goodman, “Domestic attendance was 97% below the prior year’s third quarter, and international attendance was 82% below the prior year’s third quarter. [Attendance numbers] in the U.S. were between 10% and 20% of 2019 levels,” according to AMC’s earnings call transcript.
AMC’s cash position does not appear very robust. At the end of September, AMC had $418 million of cash ($11 million of which is restricted) while it burned $324 million in cash during the quarter, according to Goodman.
Cinemark is also suffering. Its third quarter revenue plummeted 96% to about $35 million and it posted a loss of nearly $148 million, according to its 10Q.
Its cash position appears stronger than AMC’s. According to Cinemark COO and CFO, Sean Gamble, the company ended the third quarter with about $826 million in cash and it burned through a “normalized” $50 million in cash which was “consistent with the second quarter,” according to its third quarter earnings call transcript.
HBO Max Is A Tiny Fraction of AT&T’s Revenues
HBO Max’s revenues are not reported but they are likely a tiny fraction of Warner Brothers revenues which are in turn a mere 6% of AT&T’s total revenue.
How so? AT&T — whose shares have fallen 25% this year — generated revenue for the third quarter of $42.3 billion — down 5.2% from the year before. Warner Brothers revenue tumbled 28% to $2.4 billion due to “the postponement of theatrical and home entertainment releases as well as lower revenue from TV licensing and productions,” according to Variety.
Meanwhile, it is difficult to estimate revenues for HBO Max. Legacy HBO and HBO Max subscribers topped 57 million worldwide at the end of September, according to Variety.
However, it’s hard to tell how many HBO Max subscribers are paying and how much they pay each year.
While 28.7 million customers were eligible to get HBO Max at the end of third quarter, only 30% of HBO’s existing subscribers who have access to HBO Max at no extra charge have even bothered to activate the service. 25.1 million HBO Max users have come to the service through the likes of Comcast, DirecTV, and Hulu.
Meanwhile, AT&T has been investing heavily in HBO Max — about $600 million in the third quarter with a total investment of around $1.3 billion so far in 2020, according to Variety.
If there is any investment opportunity here, it could come from betting that shares of AMC — which has already lost 51% of its value in 2020 and has a whopping short-interest of 34.6% — will decline further.