Description

We think the Movie Theaters and particularly AMC is in for a far more challenging environment than the market is pricing in. Our research suggests that 70% of Movie Theaters' (MT) revenue is from exclusive content. We believe Movie windows for exclusivity are in process of declining by -60 to -70% OR more...from 2017-2019 levels. Moreover, many Movie Studios are going to a ZERO exclusivity and Day 1 releases both in theater and on their streaming platforms. It appears to us, that US Movie ticket sales will struggle to hit 300 million this year. AMC has roughly 33% market share in the US and 20% in markets outside the US. As a perspective, in the US we are up to a whopping 173 million tickets sold YTD vs. 1.2bn in 2019 (We will reference 2019, as that is what analysts believe MT can grind back up to over the next few years). We believe that AMC will need to sell around 260 million movie tickets a year to reach fcf b/e or roughly 90% of this US domestic movie sales while holding 33% market share. In addition, we think streaming/vertical integration math vs. MT is nearly a 20x more attractive (e.g.: Streaming gets a 10x multiple in public market of revenue w/o a 40-50% revenue share w/ MT's: effectively $11 in value vs. $.50-.60 cents). Furthermore, we think the following are additional headwinds a) Streaming: Is easier, as good, and far cheaper than an MT (with $29.99 you can have 4-10 people watch, w/o $5 in popcorn/drinks) b) Day 1 simultaneous release for Streaming and MT appear to be accelerating (again exclusivity is very important for MT), c) What is the future of MT monetization when NFLX generates in just 21-30 days what 100% of US MT's generate over an entire year? d) AMC already owes $475 million in rent deferrals that are coming due over the next couple years plus $3.4 bn in net debt, and $5.5 billion in lease obligations e) EPR is AMC landlord and they have 6x Debt/EBITDA with 20% of their business from AMC f) For every $1 in ticket sales there are 50 cents in 80% gross margin food/beverage sales g) AMC has very high fixed costs and is largely dependent on the exclusivity of content which is declining at a rapid pace h) The business cannot be disaggregated whereby AMC would start selling popcorn, candy, soda at 5x convenience store prices w/o the content so if ticket sales go, so does the business unless they can convince patrons to dine in the dark. We believe the exclusivity moat is draining very rapidly and at 5x sales AND 50x EBITDA, we think it will be unlikely that AMC will generate FCF in its current form. (Notes: Streaming refers Streaming Video on Demand (SVOD) and Premium Video on Demand (PVOD, and MT= Movie Theaters)

(Source: https://www.the-numbers.com/market/2021/summary)

(Source: https://www.natoonline.org/data/windows/)

There are usually about 100 widely released needle-moving potential movies per year. Just as a reminder, that Movie Theaters derive 70% of their revenue from exclusive content. We believe the industry is increasingly turning to both Streaming/MT’s for Day 1 releases AND decreasing the exclusivity window from historically 90-100 days to in some cases simultaneous to 17-45 days.

Most analysts believe the Movie Theater industry is poised to grind back to 2019 revenue over the next few years post COVID. We question what will improve MT monetization if Movie windows for exclusivity appear to be declining by -60% to -70% from the glory days of 2019... and approximately 50% of consumers are agnostic to watching in MT or to Stream Movie?

(Source: https://baskinwealth.com/an-ernest-opinion/the-future-of-the-movie-theatre-industry-part1/)

CEO of HBO/Warner Media - July 2021: 

“In terms of the things in terms of where things go in the future, I think it's fair to say that -- and I've said this before publicly. I certainly don't anticipate us going back to the way the world was in 2015 or '16 or '17, where windows were quite lengthy between theatrical and home exhibition, whether it was an a la carte transaction or something else. So we'll have shorter windows for a portion of our slate, 45 days specifically. But then Warner Bros. is also going to be producing for 10 motion pictures that will be on HBO Max on Day 1. And so I think that what you're going to see is this industry continue to evolve and to continue to innovate in ways that not only works for consumers and fans, but also works for our business partners.” 

Streaming vs. Movie Theater: 

AMC/Studios have approximately 40/60 revenue share deals with Studios. We believe Studios through streaming keep both the full $1 w/o a revenue share and earn public market valuation of roughly 10x multiple of revenue. So, we believe this gives the Studios are stark choice: Keep 0.60 cents on the $1 with AMC or $11 by Streaming(or both $1+$10 public market value from a 10x multiple). If this is directionally correct, this is nearly 20x differential in incentives that will continue to incentivize Studios to push for less exclusivity for MT's. The other major challenge for MT's is the explosion in content creation for SVOD which is alone $40 bn a year just from NFLX, AMZN, and D+. How should studios think about MT's as monetization partners when MT industry YTD in 2021 is at $1.6bn with a 40% revenue take rate. Movie Theaters typically lease content from studios whereby the first week is typically 15/85 Theater/Studio then hits roughly 50/50 after the first month (roughly 75% of a movie revenue comes in the first 17 days) but the long exclusive time periods are obviously great for AMC. With shorter exclusivity windows and SVOD co-releasing movies on day 1, movie theaters will suffer greatly.

Streaming (SVOD/PVOD) has gone from 33% of Box office revenue in 2016 to parity pre-covid! I think going forward will be that the MT industry does not rebound to anything like 2019. 

 (Source: https://www.pwc.com/gx/en/entertainment-media/outlook-2020/perspectives.pdf)

How much content can you consume without leaving your home? Aren't Streaming platforms competing platforms network effect based models on content exclusivity???

(Source: https://nscreenmedia.com/day-and-date-movies-may-go-short-theatrical-windows-stay/)

(Source: https://morningconsult.com/2021/02/10/amazon-prime-video-realgood-exclusive/)

If the above platforms are built on differentiated content to gain scale, why would they want to create exclusivity with a 40% rev share partner when they can vertically integrate? 

(Source: https://nscreenmedia.com/day-and-date-movies-may-go-short-theatrical-windows-stay/)

About 45% of the US is more willing to watch Movies at Home....which ties to Disney's Black Widow $60/$140 million or 42% of Black Widow's revenue was derived on Disney+ PVOD. 

(Source: https://www2.deloitte.com/us/en/insights/industry/technology/future-of-the-movie-industry.html)

We believe the THEATRICAL has been a MONOPOLY on new CONTENT....NOW Streaming is targeting this Long HELD monopoly IN ORDER to grow their streaming businesses that are valued generally around 10x sales. 

We have a new relationship with our Homes "Home is the Hub" is a term I heard that makes sense. Work/Play/Live/Invest in our homes....

Why not watch from home: $1000 TV is quite an experience. 

Barry Diller former Head of Paramount (IAC fame) "The Movie Business is Dead" - July 2021:

"I don't know anyone who thinks there'll be … let's say optimistically, 50% of theaters. I think there'll be 10% of the theaters worldwide in a few years.”

(Source: https://www.npr.org/2021/07/08/1014095135/barry-diller-headed-2-hollywood-studios-he-now-says-the-movie-business-is-dead)

SVOD offers you a large and growing base of movies for the price of roughly 1 movie ticket per month. In the past, the monetization battle never affected the front end of the content monetization, but now NFLX has effectively moved from the post MT exclusivity tail 6, 9, 12 months post MT exclusivity. We believe now to win the market share SVOD/PVOD is using newly-released content as bait/tool to both grow and retain subs and defend and grow very significant public market streaming valuations. 

(Source: https://morningconsult.com/2021/02/10/amazon-prime-video-realgood-exclusive/)

Best of Times Were Not Great:

Movie Theater Best of Times 2012-2019: AMC generated over this period: $30 billion in revenue with $185 million in free cash flow. In the worst of times, AMC has to increase its share count from 100 to 500+ million outstanding shares, managed to reduce net debt to $3.4bn in bank debt, burn $100 million a month, owes increased rents with $475 million in rent deferrals starting to come due. We believe for AMC to hit positive FCF would require 260 million in ticket sales for an industry that might sell 300 million tickets this year. AMC is 33% of the industry. Netflix is generating $83 million A DAY in revenue VS. the entire US Movie industry has generated what Netflix generates in revenue in 20 days in 2021 YTD revenue. 

(Source: CapIQ)

Scarlett Johansson vs. Walt Disney – July 2021: 

"First, Disney wanted to lure the Picture’s audience away from movie theatres and towards its owned streaming service, where it could keep the revenues for itself while simultaneously growing the Disney+ subscriber base, a proven way to boost Disney’s stock price.

 In November 2019, approximately six months after the Agreement was entered into, Disney launched Disney+, its wholly-owned flagship subscription video-on-demand (“SVOD”) service. Leading up to this launch, the SVOD market was crowded, with established players such as Netflix, Amazon, and Hulu and newcomers such as HBO Now and Apple TV+ all competing for subscribers. In order to convince consumers that Disney+ was worth the $7 (now $8) monthly access fee—and to convince investors that the service would be profitable—Disney announced that the offerings on Disney+ would include Disney’s entire library of films, a number of library television series, original content, and—crucially—that Disney+ would eventually be the go-to source to stream the MCU. 

To no one’s surprise, Disney’s breach of the Agreement successfully pulled millions of fans away from the theatres and toward its Disney+ streaming service. According to Disney’s own self-congratulatory press releases, the Picture grossed more than $60 million on Disney+ Premier Access in its first weekend alone.

As numerous publications noted, this strategy dramatically decreased box office revenue for the Picture. According to an article from one well-known Hollywood trade journal published three days after the Picture was released: “Veteran distribution executives say it’s clear that the availability of the movie on Disney+ cannibalized box office, noting that an entire household might have gone to see the movie in the theatre but could instead pay just $30 to watch it together at home.” Another article from a different, but equally well-known and established, industry publication declared: “There’s no question that the Disney+ Premier availability of Black Widow ate into its domestic opening weekend box office.” Notably, however, Disney’s stock price jumped 4% in the days following the Picture’s release. 

Of course, this was Disney’s plan all along. Disney knew that a “day-and-date” release on Disney+ would drive up the total number of Disney+ subscribers—a key metric impacting Disney’s stock price—both by luring new subscribers to Disney+ and by giving existing ones reasons to keep paying their monthly fees, thus reducing subscriber “churn.” Disney also knew that having such a well-known film as the Picture debut on Disney+ would help it justify future price increases to the Disney+ monthly subscription fees. Moreover, Disney knew that its ability to deliver blockbuster content like Black Widow to its subscribers would perpetuate the view of many investors—as reflected in Disney’s share price—that Disney+ is the only streaming platform that has a chance to one day compete with rival streaming giant Netflix, providing another way to bolster Disney’s market valuation. In short, Disney chose to placate Wall Street investors and pad its bottom line, rather than allow its subsidiary Marvel to comply with the Agreement. 

Disney’s financial disclosures make clear that the very Disney executives who orchestrated this strategy will personally benefit from their and Disney’s misconduct. In fiscal year 2021, Disney’s Chief Executive Officer, Robert Chapek, was awarded equity grants totaling 3.8 times his $2.5 million base salary. The primary justification for that award, according to Disney’s compensation committee (as detailed in the company’s 2021 Annual Report), was that Mr. Chapek “worked to quickly program new offerings on our DTC [direct-to-consumer] and linear channels” and “launched our direct-to-consumer services in several key markets. ”The reason for his mammoth award (according to the same Annual Report) was that he “[s]uccessfully launched Disney+ and drove unprecedented subscriber growth in the first year.” In short, the message to—and from— Disney’s top management was clear: increase Disney+ subscribers, never mind your contractual promises, and you will be rewarded." 

Source: (https://deadline.com/wp-content/uploads/2021/07/Complaint_Black-Widow-1-WM.pdf)

I have read a number of reports that Disney+ is somewhere between $100 bn to $170 bn in value to Disney (or up to 50% on the higher end). If Disney+ is getting a 10x multiple on revenue, it makes a lot of sense for them to keep most of their content exclusive.

AMC Prospectus warns investors on Class A common stock – June 2021:

We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.

AMC May 2021 How many companies have you seen at 5x sales and 50x EBITDA where the CEO stated: 

"At AMC, we were within months or weeks of running out of cash five different times between April of 2020 and January of '21. There are a lot of smart people on this call, and many of you were certain that AMC would collapse. Why? To use a billiards metaphor, because to succeed, we would have had to run the table about 10 times in a row. We would have had to execute flawlessly on so many different dimensions. But that's the thing here at AMC, that's precisely what we did.

"And above all else, build up liquidity, bolster cash, cut spending, defer obligations, renegotiate theater leases from our landlord community, who I might tangentially add, heroically, really had our back in 2020 and to whom we are ever so grateful now and will be perpetually grateful to as we return to our former self. But the list continues. We had to raise equity in debt, all the while deleveraging to the tune of some $1.255 billion in debt that was either forgiven by our lenders or converted instead to equity.”

B. Riley has the highest price target at $16 and only the co-book runners asked questions on the last call. Including B. Riley Sell-Side analysts have an average target of $5.25 cents vs. $30 stock price.

During the worst of times, valuations are sky-high:

(Source: CapIQ)

 DISCLAIMER: This does not constitute a recommendation or offer to buy or sell this stock. We are short shares of the company, and we may buy shares or sell shares at any time without notice. The statements herein are the beliefs and opinions of the author. In addition, the statements herein are provided for informational purposes only. Furthermore, the graphics/charts are provided for illustrative purposes only and should not be relied on to make an investment decision. The author makes no representation or warranties to this work. 

Catalyst

• 5-6x forward sales for this business
• Shorter movie theater exclusivity windows
• SVOD co-releasing new movies along with movie theaters
• AMC cash flow constraints - very high fixed costs, deferred rent, and debt
• Shifting consumer preferences for watching movies: ~50% agnostic between theater and home; SVOD gaining significant subscriber traction
• How should Studios think about Theaters in the monetization stream with 40%+ revenue shares with $1.6bn US MT's YTD in 2021 vs. NFLX alone $30 bn in 2021