- Movie theaters are facing an uncertain future in 2021 due to the pandemic, while streaming services continue to thrive. Take a look at this next chart. It compares the performance of the theater chains versus streaming companies. Andriy, walk us through this chart and help us understand what the impacts the pandemic has had on the movie theater business.
Hi, Tony. As you mentioned, this chart compares performance of movie theaters to streaming stocks over the past year or so. And at the bottom, you can see three lines that are down significantly, and those are the movie theater stocks in North America that are down between 50% and 80% over the last year. And if you think about it, it makes perfect sense, because in a pandemic scenario movie theaters are the businesses that are most impacted, because the business model is based on attracting large crowds of people into indoor places for a significant period of time. So obviously, that business model in the pandemic those are businesses that are among the first to be shut down, and the last three open during the lockdown.
So if you look at the performance of the companies and their financials, box office revenue for major studios in 2020 declined by over 90% in second and third quarters.
- So I think the question that people are asking themselves as we continue to see vaccines being rolled out worldwide, what is the outlook for movie theaters in 2021?
- I think as the economy reopens and vaccines are rolled out, there probably should be a rebound at some point in next year. But that will largely depend on how effectively countries can bring COVID under control and when that happens. So if we assume that by the middle of this year, vaccines are widely distributed and available to anybody who wants it, I think movie theaters are reopened sometime during the summer. And then we should see a strong rebound in their performance in the second half of the year.
- And what about the threat from streaming services? Disney+ and others, do you see consumers coming back to theaters to pre-pandemic levels?
- Well, that's a good question. And if you look at history over the past decade or so the number of tickets sold per person in North America has been declining every year. So as consumers have more options like DVDS, video on demand, now streaming, they tended to watch more in the house versus going to theaters. Having said that, I think that it still remains to be seen if there's an acceleration in that trend. But my view is that in 10 years from now people will still likely be going to movie theaters, there just won't be as many of them and attendance will be lower for sure.
- So given what we know today, looking at over the longer term, will the COVID-19, pandemic result in permanent changes to the movie industry business?
- I think that the quick answer is, yes. There will be permanent changes to the business model. And one reason for that, is that movie theaters are dependent on studios for release of new exciting movies during each year. And what movie studios realized during this year, is that they have options. They don't have to go to movie theaters. They can release movies directly on internet platforms and the streaming platforms.
One example of that is Warner Brothers, which announced that all 17 movies in 2021 will be released simultaneously in movie theaters and on streaming platforms. So that's one headwind, because movie studios will have advantage and better negotiating position against theaters in the future. And second part of that, a lot of the landlords and lenders to movie theaters that provided some relief during this crisis, they will be looking to get better terms in the future. And all of that will pressure margins in the long term.
- What are the investment implications for these sectors going forward?
- Well, I think in the short term, movie theaters should benefit from reopening of the economy. I think the key unknown in the short term, is just the human psychology. We don't know if people will be cautious to go to movie theaters when COVID is still around, or maybe people will be very excited to go out and do things that we've been deprived of for a year. So we don't know that. But in the long term, I think the issue for the industry is that business economics is becoming less attractive, revenue is under pressure, margins are under pressure and these companies have a lot of debt as well.
- Andriy, thank you very much for your time.
- Thank you, Tony.