AMC is in more jeopardy over Warner’s bid to power HBO Max

WarnerMedia will release its 2021 movies on its HBO Max streaming service and in theaters simultaneously. That bomb announcement sent shares in theaters plummeting.

Will this change in distribution strategy move huge amounts of cash from theater owners to Warner? If so, should you buy stock in AT&T, WarnerMedia’s parent company? If not, is now the time to load up on lower priced movie stocks?

In short: no, no and no. Theater owners weren’t going to get much cash in 2021 anyway thanks to the pandemic. WarnerMedia’s potential revenue gains next year from the change are too small to move AT & T’s top line.

What’s more, publicly traded movie theaters are in such dire financial straits that they could run out of cash before people start considering whether to share a dark room and sticky floors with others.

(I have no financial interest in the securities mentioned).

Warner Brothers to Simultaneously Release 2021 Movies Online and in Theaters

Ever since Netscape proved that people would watch movies at home on their smartphones and giant TV screens, the goliats of the movie industry have been waiting for consumers to come to their senses and only watch movies in theaters.

At the same time, those filmmakers hedged their bets. As I wrote in my new book, Goliath Strikes Back, those goliats spent many years testing the waters to find out how they could make money through online streaming.

The pandemic has emptied theaters of paying customers. And for WarnerMedia, competition from other streaming services has made it difficult for its HBO Max service to gain enough subscribers.

So on December 3, WarnerMedia announced that 2021 will be the perfect time to give its online streaming business a boost by releasing its 17 big-budget movies simultaneously on HBO Max and in US theaters, according to the Wall street journal.

Outside of the US, WarnerMedia will stick to its traditional model of releasing movies “exclusively in theaters and [typically 10 weeks] then move on to broadcast, ”noted the Journal.

This economy of this movement seems neutral at best. If those big-budget movies attract enough subscribers willing to pay $ 14.99 a month for HBO Max after they’ve had their fill of these big-budget movies, it could be a good investment.

WarnerMedia can invest around $ 150 million or more in these big-budget movies and then spend millions more to convince people to go to theaters to see them. Therefore, such films raise many hundreds of millions to break even.

WarnerMedia is paying a price for the right to release these movies simultaneously on HBO Max. His license fee for the 30-day window will be shared in part “with the stars and top creative talents who have deals that entitle them to a cut,” the Journal reported. WarnerMedia hopes that this approach will simplify the calculation of a film’s financial success across both distribution channels.

By paying talent up front, WarnerMedia aims to avoid complicated formulas for determining the financial success of a particular film based on its performance on its streaming service.

Kicking the cinemas when they’re down

The pandemic has dealt a near fatal blow to the movie theater market in the United States. According to the Wall Street Journal, for the first eleven months of 2020, the national box office is approximately $ 2 billion, 82% below the industry average of $ 11 billion in the previous five years.

Warner Brothers has felt the heat of this drop – it spent $ 200 million on Tenet – which hit theaters on September 3 and three months later had grossed just $ 54.7 million.

The WarnerMedia announcement was bad news for movie theater investors. AMC shares fell as much as 16%, while Cinemark shares fell 22% on the news, according to CNBC.

Both companies have had very poor financial results in 2020.

AMC entertainment

In the third quarter, AMC’s attendance figures declined even more than industry revenue. According to AMC CFO Sean Goodman, “National attendance was 97% lower than in the third quarter of the previous year, and international attendance was 82% less than in the third quarter of the previous year. [Attendance numbers] in the US they were between 10% and 20% of 2019 levels, ”according to the transcript of AMC’s earnings call.

AMC’s cash position does not seem very strong. At the end of September, AMC had $ 418 million in cash ($ 11 million of which is restricted) while burning $ 324 million in cash during the quarter, according to Goodman.

Cinemark

Cinemark is also suffering. Its third-quarter revenue plummeted 96% to about $ 35 million and it posted a loss of nearly $ 148 million, according to its 10Q.

Its cash position appears stronger than AMC’s. As Cinemark’s chief operating officer and chief financial officer, Sean Gamble said the company ended the third quarter with about $ 826 million in cash and burned a “normalized” $ 50 million in cash that was “consistent with the second quarter.” based on your third quarter earnings. call transcription.

HBO Max is a small fraction of AT & T’s revenue

HBO Max’s revenue is not reported, but is likely to represent a small fraction of Warner Brothers’ revenue, which in turn accounts for only 6% of AT & T’s total revenue.

How is that? AT&T, whose shares are down 25% this year, generated third-quarter revenue of $ 42.3 billion, down 5.2% from a year earlier. Warner Brothers’ revenue fell 28% to $ 2.4 billion due to “the postponement of theatrical and home entertainment releases, as well as lower revenue from licenses and television productions,” according to Variety.

Meanwhile, it’s hard to estimate HBO Max’s revenue. Subscribers to Legacy HBO and HBO Max surpassed 57 million worldwide at the end of September, according to Variety.

However, it is difficult to know how many HBO Max subscribers are paying and how much they pay each year.

While 28.7 million customers were eligible for HBO Max at the end of the third quarter, only 30% of existing HBO subscribers who have access to HBO Max at no additional charge have even bothered to activate the service. 25.1 million HBO Max users have reached the service through companies such as Comcast, DirecTV, and Hulu.

Meanwhile, AT&T has been investing heavily in HBO Max – about $ 600 million in the third quarter with a total investment of about $ 1.3 billion so far in 2020, according to Variety.

If there is any investment opportunity here, it could come from betting that AMC shares, which has already lost 51% of its value in 2020 and has a whopping 34.6% short interest, will continue to fall.