Cinema stocks: a blockbuster with a bad ending

Annoyed that a movie ticket and popcorn will set you back $35? You're not alone. Annual cinema attendance per capita in North America has dwindled from 5x in 2002 to <4x today. Despite falling attendance, box office ticket revenues have risen as cinemas hike up their prices. We believe their days of price hiking are numbered as more movies are released on streaming platforms than to traditional cinemas. With falling attendance, cinemas face secular challenges ahead.

The revenue stream for cinemas is roughly split 60%/35%/5% between admissions/food & beverage/other. The largest cost by far is film rent whereby movie studios take a cut of admission revenues (50-55%). Following Disney's recent acquisition of the Fox film and tv assets, there are now only five major Hollywood movie studios who collectively control >80% of US box office sales. This concentration provides them with increased supplier power to negotiate higher film rent and squeeze cinema margins further. The remaining costs for cinemas are largely fixed (eg. property rent, utilities, labour, depreciation), which leaves them with little room to adjust their cost structure.

Streaming providers (think Netflix, Disney+, Stan) are now ubiquitous and have fundamentally changed the value proposition of going to the cinema. Why would a family spend +$100 to watch a 2hr movie when they could do the same with Netflix for $10/month from the comforts of their own home? This shift to streaming will only intensify with A grade stars and directors being attracted to making films for streaming platforms. 

Compounding this problem is that streaming providers are increasingly being linked to studios (eg. Disney has Disney+, Warner Bros' upcoming HBO Max, Universal Pictures' upcoming Peacock); studios can now completely bypass cinemas and release films on their streaming service to drive increased subscriptions (eg. Lady and the Tramp was launched on Disney+). Less movies available to cinemas = less revenue for cinemas. Take for example the 2018 Netflix movie Bird Box starring Sandra Bullock, this was viewed by 80m households in the first four weeks (as a comparison Star Wars: The Last Jedi sold <60m tickets in US cinemas).

To be clear, we are not saying that the complete demise of cinema is forthcoming; studios will continue to maximise their profit potential by releasing blockbuster movies at the cinemas; however cinemas' influence in the distribution chain has forever diminished.

Global box office revenue hit a record $42bn in 2019, however, this growth was driven by select countries in Asia, Europe and Latin America, and masks weakness in other regions. Box office sales in North America actually faced its steepest decline in 2019 despite the release of multiple blockbuster titles (eg. Avengers: Endgame, Frozen 2, Captain Marvel, Aladdin, Toy Story 4 and Star Wars: The Rise of Skywalker). Looking forward, the movie pipeline for 2020-2021 looks comparatively bare which should send attendance even lower in 2020.

Recognising the challenges facing cinemas is all well and good, but how can we as money managers profit from this? We think that shorting pure-play cinema exhibitors with high gearing and large exposure to the mature US markets is the best way to play this theme. If we are right, revenues will fall and with high fixed costs and stretched balance sheets, earnings will fall disproportionately more. Ultimately driving the share prices lower. So while 2019 was supposedly a blockbuster year for cinema, the share prices of the biggest cinemas suggest otherwise - a trend we believe will continue.