The New Normal? – Did Universal and AMC Change the Theater Industry Forever?

Within a matter of days, it will have been 5 full months since the silver screens went dark across the United States. The COVID-19 pandemic continues to rage on with only the faintest view of the light at the end of the tunnel emerging, and we still don’t know if and when it will be safe to go back to the movies.  My optimistic outlook on the summer movie schedule for this year sadly didn’t pan out, and for the first time ever, the Summer Movie Season did not happen.  Once the launching point for some of the biggest blockbuster openings of the year, the Summer this year saw not one single theatrical opening.  Sure, the odd independent film did make it to a Drive-In here and there, but those were done at the same time as a day and date Video on Demand release, where the actual money was being made.  It’s a sad reality, but one that is unavoidable.  It’s just not safe or possible right now to cram people into a dark confined room and expect them to return in the same numbers as they have before.  As a result, the entire theatrical industry has had to completely restructure itself just to be able to survive.  The largest chains in America, AMC, Regal, and Cinemark have had to take out massive loans just so they can cover the substantial rental fees that their un-opened theaters require to remain standing.  AMC in fact is verging on the edge of bankruptcy and may even begin subtracting their reach in order to survive into next year.  All the while, the theaters are struggling with the ever increasing threat of streaming and VOD taking their business away for good.  This led to the very contentious showdown between AMC and Universal over the decision to release Trolls World Tour early , in breach of Universal’s long-standing contract with AMC.  This led many to believe that AMC would no longer run any Universal film as retaliation.  But, as we learned this week, the two parties came to a new agreement, and it is one that shockingly may forever affect the theatrical industry forever.

Here’s what you need to know about what this new agreement.  Upon the release of any new film under the Universal umbrella, the movie will play first theatrically in theaters like AMC exclusively for a period of 17 days.  Then at the end, it has the option of offering the same films as a VOD rental, thereby allowing the studio to make money off of audiences who prefer to stay at home much sooner than they have before.  What this does is close the previous window of 75 days (or roughly 2 1/2 months) that existed between theatrical and home video releases; a previously agreed upon deal that allowed theaters to benefit much more from the long tail lingering box office runs that have helped to keep ticket sales strong long after opening weekend.  With AMC and Universal closing that exclusive window down to just 2 1/2 weeks, it means that movie theaters only have that short amount of time to make the most of a movie’s opening box office before they lose to competition from on demand.  Now, the deal also gives AMC a bigger slice of the VOD rental revenue on Universal films as well, but upon looking at the deal as a whole, it’s hard to see where AMC really benefits at all.  Ticket sales alone aren’t what keeps the theater afloat; its the concessions sales that actually brings in the profit.  And with a still raging pandemic making concessions sales a harder sale even if the theaters reopen right away, it almost looks like AMC is the losing party in this, because that window of exclusivity is so much smaller.  But at the same time, AMC no longer had any solid ground to stand on.  The thing that makes this new deal between the two entertainment giants so eye-opening is the fact that it is in complete contradiction to what has been the norm in the theatrical machine of cinema for most of it’s history.

With Universal and AMC’s new distribution deal, we see an unprecedented shift in the dynamics between the theaters, the distributors and the studios.  The thing that has drawn so much attention is that this 17 day window is not standard across the industry; it’s just between Universal and AMC.  Naturally, other studios like Disney, Warner Brothers, and Paramount complained to AMC about them giving this special consideration to their competitor rather than them.  And Regal and Cinemark raised concerns as well, saying that AMC was changing a norm across the industry that is going to hurt their long term futures as well.  Sure the pandemic has led to drastic measures to be taken to allow for movie studios to be able to still make revenue during the closure of theaters across the country, but no one thought that Universal and AMC would shorten it by so much.  As of right now, Regal, Cinemark and many other smaller chains maintain contracts with all the studio distribution departments that enshrine that long-lasting tradition of a wide theatrical window.  With AMC’s supposed capitulation, it puts the pressure on the other chains to reconsider their own contracts, as the other Hollywood studios are demanding shorter windows like Universal has gotten, so that they too can remain competitive.  This has led many to believe that this change in the length of exclusivity for theatrical runs may be part of the new normal that we are likely to see after the pandemic has run it’s course.  And it is a new normal that will forever change what we think of as the theatrical experience.

What will change most is the way that we judge a movie by the revenue that it makes.  Particularly in the last decade or so, box office became the barometer of a movie’s success.  If a movie didn’t open well in the first week, or even in the first couple days, it would be labelled forever as a box office bomb, which for some movies becomes a stain that is hard to wash off.  Sometimes, movies would benefit from long theatrical runs, and become a box office hit steadily over time.  Remember, neither Titanic (1997) and Avatar (2009) opened to record-breaking box office, but they continued to build their audience over successive weeks and eventually became the highest grossing movies of all time.  But, with the exclusive theatrical window shortened, that long tail effect is far less likely to happen.  The movies will still be able to generate profit with the VOD option being made available sooner, but box office numbers will likely plummet after that 17 period.  And at that point, we may have to reconsider what we label as a flop and a hit, because many movies make money on different scales.  Something big like a Marvel movie no doubt has a huge front loaded opening weekend, which helps to cement a reputation for being a box office champion, but there are sleeper hits that quietly become profitable long after they’ve left the silver screen.  With a shorter window, the terms box office hit and box office flop become far more relative.  Do we begin to combine these two revenue generators together, or do we abandon the entire notion of judging a movie by how many tickets it sells?  This is one of the things that is likely going to change dramatically with this new normal that is likely going to take place, and it’s one that puts far more pressure on the theatrical market than it does the studio.

What this also means is a huge reversal of established law that prohibited the studios from having too much influence over the theatrical market.  Here’s a history lesson for you:  the United States Supreme Court made a landmark decision in the Hollywood Antitrust Case of 1948, otherwise known as United States vs. Paramount Pictures, where it was stated that film studios could not own movie theaters, nor hold exclusive rights on which theaters would show their movies.  This decision effectively ended a practice known as block-booking, which is where a studio sells to a theater a collection of films as a unit, to which the theaters had to screen, regardless of the quality of the films themselves.  This benefited the studios, because they then could ensure the profitability of their movies regardless if they were good or not, which itself caused an unfair advantage towards what was known as the Big Five of the time (Paramount, Warner Brothers, 20th Century Fox, MGM, and RKO) all of whom owned the same theaters.  The smaller independent studios like Republic, United Artists, Columbia and yes Universal (the ones who didn’t own theaters) complained that block-booking squeezed out business for them and they took the majors to court for what they saw as a violation of Antitrust Laws.  The Supreme Court ruled in their favor and the theatrical and distribution machine that ensured profitability for the major studios were completely upended.  Theaters now had to run independently, and it was now upon the studios to reassess what kind of movies they would be making for theatrical release.  It was a time of significant upheaval, because the studios no longer force theaters to buy nearly 400 movies in a given year, and it led to many layoffs and closures of theaters across the country.  At the same time, television emerged to fill that gap, and the studio system became effectively a shell of it’s former self.  But out of this emerged new innovations like Widescreen and surround sound, which made going to the movies again a special engagement.  And movie theaters likewise adjusted.  The newly formed independent industry grew, and eventually evolved to create multiplexes across the country, creating more theaters than before.  But, under the circumstances that we are in now, a lot of consideration is being given to reexamining that past decision.

There is no doubt about it; the Paramount Case was a violation of Antitrust Law, which stifled competition in the marketplace, and by breaking up the studios from the theaters, it did open the industry up to more independent voices and renewed competition that would help it grow.  But, in a time when the very existence of movie theaters is at a precarious point of collapsing altogether, some are wondering if studios should once again take a larger role in the theatrical distribution market.  There have been exceptions over time.  Many of the major studios today can hold an interest in publicly traded companies that operate movie theaters, although not with a majority stake.  A small chain like Pacific Theaters, which owns the popular brand Arclight in some major American cities, has investors like Disney as a part of their portfolio.  And studios are allowed to have ownership of independent screens as well.  Disney owns the landmark El Capitan Theater on Hollywood Boulevard here in Los Angeles, and have used it as their home base venue for premieres and special screenings.  More recently, Netflix purchased the nearly 100 year old Egyptian Theater down the street from the El Cap, and have used it for their own screenings, while still maintaining the partnership with American Cinemateque that existed previously with the venue.  But the change that we are seeing with AMC and Universal is an unprecedented quid pro quo that we haven’t seen between theaters and studios since that Paramount Case decision.  What does that mean for the future?  The two parties are not exactly breaking the statute of the law, since AMC is maintaining as an independent body, but by giving so much leeway to Universal, it’s granting so much more power to a studio body to distribute the way it sees fit than we’ve seen in a very, very long time.  Is it going to lead to even further control of the theatrical market by the studios from here out?

One thing to consider is that changes have been made many times to the theatrical experience to suit the times, and they have been funded largely by the studios themselves.  The reason why movie theaters converted all to digital projection 10 years ago was because the studios invested in the technology.  They saw the money that was being made by 3D movies like Avatar, and they wanted to be sure that the widest possible reach of the audience could be maintained, so they helped the theaters update their equipment.  The existence of multiplexes are another example of this; when the blockbuster era emerged, more screens were needed to meet demand.  Now, with theaters closed and in need of cash flow, who else can they turn to than the movie studios for a lifeline?  Federal loans can only help in the short run; a long-term plan is going to be needed to get the movie theaters back to normal.  The question remains, do studios step in temporarily or is it time for industry to revert back to its old ways.  The Paramount decision remains in place, but it has been chiseled back over time, and with our current administration, who knows really how much oversight is in place.  Up until now, I would’ve said that the Paramount Decision ensured a far better environment for all parties; it granted more autonomy for the theaters to operate the way that they saw fit, and that put more pressure on the studios to change the movies that they make.  It was a balance that was not always perfect, but nevertheless allowed for more creative freedom to build business more effectively.  But the times call for immediate reassessment of the flaws in the system.  There’s no doubt that part of why AMC is in such a desperate situation is because of their recklessly unchecked growth.  No doubt they felt the pressure to hand more influence over to Universal.  The question is, what is Universal going to do with it?

One thing that is certain now is that enough has been done to ensure that the major theatrical chains will eventually reopen once this pandemic has run it’s course.  That is good news for people like me who greatly prefer the theatrical experience because after spending months watching movies in the home, I can say that there seriously is no substitute.  But, in the case of Universal and AMC, have we seen too much given away in exchange for these theater chains to survive the pandemic closure.  AMC’s window of profitability is much smaller now, and Universal now is able to ensure it’s financial security at the former’s expense.  Not only that, but the other chains and studios are now put into the situation that they have to reconsider their own contracts in response.  Are we now going to see a complete breakdown of the separation of powers tradition in the industry, and witness exclusive engagements between different studios and chains as a new normal?  It’s hard to believe that only 5 months of closed movie theaters could change so much in the industry overnight.  It remains to be seen if the deal made between AMC and Universal will indeed change cinema as we know it.  The next Universal release won’t even be until next year, as they’ve completely given up on the rest of 2020.  With other studios still holding onto their 2020 releases, do they make similar deals with the theaters to ensure their bottom line?  The thing that I worry about the most is that movie theaters, who were already struggling against the rise of streaming, are going to be forever relegated by this move.  We may likely see a complete reduction of the theatrical market in the years ahead, with the larger chains forced to close many of their under-performing locations forever.  Many other contractions in the past have led to periods of renewal after, and movie theaters have made resounding comebacks over the years.  But, this time is different.  The studios have a new way to make money, and it’s putting the theaters in an ever increasing position to prove their worth.  The pandemic is testing that at this very moment.  We’ll know in time what this will all lead to, but it’s safe to say whatever comes out of this time of turmoil for the movie theater industry is not what we would’ve called just a few months ago anything close to “normal.”

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