Three Themes I Am Thinking About, Despite A Multitude of Implications From This Deal,

AMC Theaters

Why the AMC-Universal deal truly is a seismic marketplace development

Yesterday Universal Pictures (owned by Comcast) and AMC Theatres signed a multi-year agreement that will allow the studio’s films to premiere on premium video on-demand (PVOD) within three weeks, or as few as 17 days, of their theatrical debuts. The previous contractually agreed-to window had been closer to 70 days.

AMC will share in “new revenue streams” (one guess I saw on Twitter estimated 20% of gross revenues and “2% reduction in film rents, most likely just for PVOD titles”), which means:

Universal only has the ability to put its movies on premium on-demand, meaning the rentals that go for roughly $20 a pop. It cannot sell films or rent them for lower on-demand fees, in the $3 to $6 range, until three months after they debut in cinemas.

There are going to be plenty of takes on the implications of this deal between Universal and AMC (Deadline has a good summary of what Wall Street analysts are saying).

I think there are too many permutations of the implications of this deal to fathom, because they fundamentally change the economics of theatrical and post-theatrical distribution. So, they will play out and be felt across the entire Hollywood supply chain from hereon out. As subscription streamers like Netflix, Disney+ and Apple TV+ get roped into these negotiations – as they inevitably will – the dynamics between theatrical distribution and streaming distribution can only get more complicated.

Rather than try to wrap my head or your collective heads around them, easier to tease out a few variables from this AMC-Universal deal that reflect uncertainty in the marketplace worth focusing on.

Theme #1: The Perils of PVOD Revenue Sharing

The good news is, PVOD creates a pool of money for theaters to share in to compensate for lost ticket revenues and concessions. The bad news is, the Trolls World Tour experiment was a limited pool of money, to begin with, as this article from The Hollywood Reporter teased out back in May:

Sources tell The Hollywood Reporter that the Trolls sequel’s top voice stars, including Justin Timberlake and Anna Kendrick, also were not informed ahead of the March 16 announcement that the film would be available to rent for $20 online. This is not the sort of surprise such people usually like, and it’s a sensitive matter because compensation for big stars in animated films is largely tied to box office bonuses. The stars’ reps are now asking for them to be paid, no doubt to the tune of seven figures, but they were still game to publicize the film.

It also may surprise many people that despite NBCU’s boast that the Trolls sequel has scored almost $100 million domestically from the on-demand release, the movie is still millions in the red and, in the opinion of some industry veterans, may never make a dime. (A source with firsthand knowledge of the studio’s thinking says that despite the doubters, Universal believes it can make $40 million or more in profit from all revenue sources.)

Meaning, contractual bonus compensation for marquee star historically has been tied to box office results, and with reduced box office, contractual bonus compensation will certainly be less than in the past, and may be non-existent in some cases (as with Trolls).

So, looking ahead to that pool of PVOD money created by this AMC-Universal deal, marquee stars will have their eyes on the same pool of money as AMC Theatres will. In turn, this raises of the question of whether AMC Theatres has guaranteed itself a share of gross revenues, which protects its financial interests (and those of its shareholders),; or whether it has guaranteed itself a share of net revenues.

That little accounting detail has enormous implications for how marquee Hollywood talent is compensated from theatrical distribution going forward, because it creates uncertainty. It also has implications for the viability of AMC Theatres in a world with shorter windows.

Theme #2: Streaming Economics vs. PVOD Economics

And, it is important to remember, that marquee Hollywood talent will be getting paid upfront by streamers like Netflix. As Blumhouse founder Jason Blum revealed to Bloomberg’s Lucas Shaw back in February, this will create perverse incentives in budgeting;

I’m not interested in making expensive movies. It pulls too many levers for it to be fun.

TV is another story altogether. In the movie business, artists are financially incentivized to keep budgets low. The lower the budget, the bigger the pie of profit and whatever percentage you have is bigger. Right now, because the world is upside down and backwards, what the streamers are telling us, in the way they pay us, is to make TV series and movies as expensively as possible.

And that’s what everybody does. If you have a movie for $15 million and make it for streaming, you make it for $40 million. Why wouldn’t you? You get no percentage of the profit, and your fee is based on a percentage of the budget.

So my caveat is: For streaming, I’d like all our movies to be $350 million, which is insanity. But it’s how the world works at the moment.

Meaning, if marquee Hollywood talent will be getting less money on the back-end through theatrical distribution of movies, then as Jason Blum says they are naturally incentivized to participate in movies produced and distributed by streamers with “insane” budgets, and get paid upfront for that.

Which means, streamers can simply overwhelm the theatrical distribution model through greenmail. They will not do this because, as Netflix has realized, its movies do not get Oscar recognition without theatrical distribution. But, an externality of this AMC-Universal deal may be that it has accelerated the death of theatrical distribution model only because it has reinforced how competitive the economics of streaming are.

Theme #3: PVOD Marketing with Fandango, Vudu, and AMC On-Demand

I tweeted in response to a good Fintwit thread about the AMC-Universal deal:


Comcast owns Universal, and it also owns TV On-Demand services Fandango Now and Vudu. That means, first, it has a pool of PVOD revenue it owns and does not need to share a percentage from with other PVOD providers for distribution of its movies. Which means, both AMC and Comcast have a fantastic incentive to increase the post-17-day-window PVOD pie by marketing Universal movies PVOD  on those channels.

But, AMC also owns AMC On-Demand, creating a third, immediate PVOD channel to market Universal movies.

So, with these three services, three opportunities emerge:

  1. They may be able to exclusively window PVOD distribution of Universal movies across these three services, thereby creating the PVOD equivalent of what Disney has with Disney+
  2.  That, in turn, would create a pool of revenues which both parties can exclusively share, and would create a separate pool of PVOD revenues from other services (the latter of which I would imagine AMC may get a lesser percentage of, or none at all)
  3. This arrangement may reduce marketing costs for all three parties, with an additional kicker allocating free or reduced-cost inventory across Comcast digital and linear properties for AMC Theatres marketing

In turn, this will create conflict with, if not a separate class of, other theater chains who do not offer On-Demand services (a press release from Cineworld today says as much: “We do not see any business sense in this model”)

Conclusion

All in all, we can see how these themes encapsulate how important pieces are already starting to move across the Hollywood production and distribution supply chain.

This AMC-Universal deal truly is a stunning, seismic marketplace development. These three themes may only be skimming the surface of the impact of this deal; but, they are valuable frameworks for how to think about the impact of this deal.

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