Why Hollywood Studios Won’t Buy Theater Chains Despite Lifting of Antitrust Rules

Though a judge has now approved the termination of the antitrust rules that, for 71 years, have prevented major Hollywood studios from taking control of theatrical distribution, experts say studios are unlikely to swoop in to buy cinema chains. The theatrical business, now undergoing potentially significant changes amid the coronavirus pandemic, faces an uncertain future. According to B. Riley FBR analyst Eric Wold, there’s no telling what the major theater chains, mainly AMC, will look like in a couple of years. When asked what he thinks the chances are that a studio could buy a theater chain, Wold said he believes it’s unlikely. “I don’t see the benefit outweighing the risk,” he said.  The major benefits to studios would be the ability to have full control over how many screens their films play on and how long they’re in theaters before heading to streaming. They could also mine the data collected on moviegoing habits and gain the ability to sell merchandise in the theater. The pandemic has put a spotlight on the vulnerabilities of the exhibition business. AMC CEO Adam Aron has said that while the theater closures are temporary, “some of our cost-saving initiatives will not be.” Cinema bosses have acknowledged the need to scale back physical locations, especially those that don’t perform as well as others. Rent and lease payments while business has been shut down have been a source of strain. Any buyer would also have to be OK taking on the debt that cinemas have accrued. At the end of the most recent quarter, Cinemark reported more than $2 billion in long-term debt, and AMC had nearly $6 billion in debt. The ban on theater chain ownership by studios emerged after the Justice Department’s antitrust division filed a 1938 lawsuit against the major studios that prevented a number of practices by studios, including the purchase of theater chains, setting minimum ticket prices and bundling of movies, among other restrictions. “The demise of the Paramount decrees suggests studios as potential players, but I just don’t see them taking that risk in the immediate future — especially with the impact of the pandemic — considering they are juggling the launch of in-house SVOD platforms, a completely restructured home entertainment ecosystem and additional financial challenges in production and distribution,” Box Office editor Daniel Loria said. Proponents of terminating the decrees have argued that the advent and growing importance of streaming lessened the need for the regulations. Most of the major studios now operate their own streaming services, and in the months that theaters have been shut down, studios have even further experimented with theatrical windows and how they distribute films. Disney, for example, is releasing its much-delayed live-action reimagining of “Mulan” to streaming first in the U.S. And other blockbuster content meant to draw audiences back to theaters, like Warner Bros.’ “Tenet,” will open overseas first to capture the international market before a slower rollout in the U.S. On top of that, last month Universal struck a deal with AMC that gives the studio the ability to make films available for streaming after just 17 days in theaters, as opposed to the typical 90-day window. That deal, if it does indeed become industry-standard as Aron believes, could throw a big wrench into the idea that a traditional studio would want to buy a theater chain. However, there is still the possibility acquisitions may emerge in the exhibition space. Wold, who is confident the theatrical business will rebound, wrote in a recent note to clients that it’s possible AMC files for bankruptcy protection depending on its ability to secure additional financing. “Circuits are certainly listening to offers, and further consolidation would follow a trend that predates the pandemic. One of the biggest questions we’re tracking at our publication is whether COVID accelerates that consolidation or introduces new buyers into the mix,” Loria said. “What is most likely is something like what Netflix has done with The Egyptian in L.A. or The Paris in New York, not too dissimilar from Disney and El Capitan, where an iconic cinema ends up being a studio’s showcase location for premieres, guild screenings and commercial runs during awards season.” To that end, Wold said it could make sense if a streamer like Netflix, Amazon or Apple wanted to buy a theater chain. Netflix, which for all intents and purposes has morphed into a full-fledged studio, still only generates revenue from subscriptions. Another revenue source could prove beneficial. “Let’s say you’re making $1 billion, then you want to buy a chain and add an additional stream of revenue. Something like that could make sense,” Wold said. “You’d have to buy someone with a big enough footprint.” In May, there were reports that Amazon had conversations with AMC about buying the beleaguered cinema chain, whose theaters include AMC and Odeon in the U.K. Bruce Nash, founder of the box office data website TheNumbers, said he didn’t see theater acquisitions happening, but that it wouldn’t be “completely crazy” to think Amazon might show an interest in purchasing theaters or a chain. “They could release movies pretty much however they wanted to,” Nash said in May. “I don’t quite buy that this makes sense for them. It raises an interesting question as to what the future of Amazon’s distribution strategy is, but at this point, the business for theatrical is just so much in doubt.” The ability to own a theater chain is only one part of what terminating the decrees does. It also outlawed the setting of minimum prices for movie tickets; bundling multiple films into a single theater license (“block booking”); entering into a single license to cover all theaters in a circuit (“circuit dealing”); and granting unreasonable clearances, or exclusive rights to movies for specific geographic areas. All of those practices will end following a two-year sunset period. Block booking was actually one of the more contentious decrees. The practice would allow, for example, a major studio to tell a theater that it has to book an entire slate of films, including potential box office duds, in order to secure rights to a blockbuster. That could leave less room for other studios’ films. “Requiring a key group of marquee theaters to show all of Defendants’ films — one after the other — tied them up for weeks or months, thus, foreclosing independent distributors from the first-run theaters they needed to successfully launch and distribute their films,” U.S. District Judge Analisa Torres wrote in a ruling last week. “In today’s landscape, although there may be some geographic areas with only a single one-screen theater, most markets have multiple movie theaters with multiple screens simultaneously showing multiple movies from multiple distributors. “There also are many other movie distribution platforms, like television, the internet and DVDs, that did not exist in the 1930s and 40s,” she continued. “Given these significant changes in the market, there is less danger that a block booking licensing agreement would create a barrier to entry that would foreclose independent movie distributors from sufficient access to the market.”