The Business Of

Movies | Cineworld | Outlook

Morning All!

It is Friday - thank goodness! And I think we need it after the week Cineworld has put us through. We’ve seen highs and lows. The good, the bad and the ugly. Strong pricing power and consistent margins have been blown away by a bad acquisition + bad COVID timing. And we ended the newsletter yesterday with the info that Cineworld filed for bankruptcy back in August 2022…

… so, as a natural follow-on from yesterday. What on Earth is happening to Cineworld now that it’s filed for bankruptcy? Will the cinemas shut down? Do I need to hurry up and book my final Cineworld outing soon?!

R.I.P Cineworld?

Well, the first thing to note about bankruptcy is that it sounds a lot worse than it actually is. A lot of people - myself included until recently - think that when a company files for bankruptcy, it means that the company is bound to shut down. And whilst that may be a possible outcome, bankruptcy actually offers companies a second chance. A fresh start for firms who can no longer afford to pay their debts. So no, Cineworld may not have to close forever…

As this Investopedia article explains nicely, bankruptcy offers businesses the chance to start fresh by forgiving debts that they can’t repay. And it gives creditors (the people who gave them those loans) a chance to get some repayments based on the company’s assets.

Okay, well what about shareholders? Do they get their investments back? Ah, well it’s not so rosy for them! As I’m sure some of you are aware, debt holders take priority over equity holders when a company is liquidated. And so equity holders only recover whatever is left - after debt holders have reimbursed themselves. And earlier in Feb 2023, Cineworld said that it’s unlikely shareholders will get anything back! It’s no surprise then that the Cineworld share price looks like this!

So how do creditors (the companies who gave Cineworld their loans) get some of their money back? (It’s $5bn in total they’re owed by the way!) Well, as we said - it’s through the company’s assets. And what are Cineworld’s assets? Their cinema operations. And this is how Cineworld may well shut down. Because in order to pay their creditors back, Cineworld will have to find a buyer to buy their company (or parts of their company, like their Eastern European business). Then use the money from the sale to pay back creditors. And if they can’t find a buyer, they might have to sell off their cinemas in order to raise the money to pay back creditors. But what is a cinema chain without cinemas…

However, we saw an update just earlier this week, that Cineworld aren’t going to look for buyers anymore. No one wanted to pay the $5bn the company was after. But there is one more alternative and this is the route they’ve gone down - debt restructuring. Cineworld have been able to restructure their debts with their creditors.

This means that creditors may say to Cineworld - ‘hey, instead of paying us that money back over 5 years, we’ll give you 10 years’. OR ‘hey, I know the original interest rate was 6%, but now we only want 4%’. Both these modifications make it easier for Cineworld to stay in business and pay back the debt. And it allows creditors to walk away with at least some of their loan recovered. So for now… Cineworld does live to fight another day!

But Won’t Netflix and Streaming Platforms Just Wipe Out Cinemas Anyway?

So this has been a very hyped up topic over the last few years. And maybe some of you reading this have had the same question. I definitely did. With more of us watching shows/movies at home, won’t this continue to bring down cinema attendance? And what about the shrinking release window? And also… wait slow down. What on Earth is the shrinking release window?

Good question. Well the release window is the time between when a film is released in cinemas to when it can be distributed elsewhere. Like on DVD, or TV, or streaming platforms. Pre-1980s, the average release window was 5 years! This meant that the only place you could go and watch a new release was in the cinema. Or you had to wait 5 years to watch it on TV! Sounds alien to us now!

But for the film studios, this worked well because they could maximise their revenue from selling tickets in cinemas for years. And then they could sell their film to be watched on TV. And cinemas were happy - because they were the exclusive channel for new releases. If someone wanted to watch that film - it had to be at the cinema. However, this window has been shrinking. And shrinking fast…

Since the 1970s, the window has shrunk from 5 years to anywhere between 17-45 days now! Now why’s this happened? And the answer is that film studios now have more channels to distribute their films. We said earlier that cinemas used to be the exclusive channel for films for the first 5 years. But then in the 1980s, more homes started to have TVs. And film studios realised that a lot of people prefer watching films from the comfort of their own home. So the window came down to a year. Then in the 1990s, along came DVDs. And studios saw DVDs as an extra revenue stream. And so the window shrunk again to about 3 months.

The latest innovation to shrink the window further has been streaming platforms! We’ll talk more about streaming in the next section. But first, we need to ask the question - surely these shrinking release windows affect Cineworld’s revenues? Because after day 45, a lot of people would rather watch the film at home rather than in the cinema? And this would reduce Cineworld’s ticket sales after day 45? Well, yes the shrinking window does affect cinema’s ticket sales… but it’s not as bad as people may fear. And the chart below shows why.

According to industry experts - and I’ve included a research piece here - by day 45 (just over 6 weeks), most ticket sales are done! In fact, 92% of movie ticket sales happen within the first 6 weeks of release. So the 45 day window is actually a decent window for all parties involved. Film studios get to distribute their films on their streaming platforms sooner. And cinemas hold on to most of their revenues.

What about deals like Universal Studios made with AMC (the biggest cinema chain in the US)? Where they can show their films in AMC cinemas for only 17 days before putting it on their streaming platform? The chart above shows us that only 59% of cinema ticket sales are done by 2 weeks! Would cinemas lose 40% of their revenues if these agreements come into place? Well no. Because this deal between Universal/AMC includes that AMC will take a slice of Universal’s streaming revenues! Phew.

What If Film Studios Go Straight To Streaming Instead Of Cinemas?

Okay, so we’ve gone from 5 years. To 17 days. It begs the question - what’s stopping us going to 0 days?! Obviously when Netflix produces their original films, they distribute them via their streaming platform. But couldn’t some of the Big 5 film studios do that too? I mean, they all have their own streaming platforms.

And yes they could. And in fact, they have! In 2021, Warner Bros experimented by releasing all their 2021 movies on their streaming platform (HBO Max), the same day they hit cinemas. And in the same year, Disney released Marvel’s Black Widow on Disney+, the same day it hit cinemas.

How big a problem could this cause cinema operators like Cineworld? Imagine if Disney started sending all their new Marvel releases straight to Disney+ rather than to cinema operators? Surely that would be a nightmare scenario? Well yes, this would be a nightmare scenario - but this is incredibly unlikely to happen. At least for the major films that cinemas get most of their revenue from.

Why? Well, for companies like Disney and Warner Bros, the cinema is still a brilliant source of income. Some of their blockbuster films generate billions in sales. You wouldn’t get that if you just released the film for free on your streaming platform! But also, the movies are - as cheesy as it sounds - where the magic happens. Where characters come to life. Disney’s parks like Disneyland Paris are filled with Disney characters like Elsa from Frozen. Captain America from Marvel. And as we’ll see in 2 weeks, Disney makes a huge amount of money from selling merchandise related to their film characters. Would that be the case if these films weren’t shown on the big screen? Who knows…

… but Cineworld would argue no!

And That Is That!

So that brings us to the end of The Business Of Movies: Part 1. We hope you enjoyed understanding the business of Cineworld. To go back and read any of the previous newsletters from Monday-Thursday, you can find them here. You can also find newsletters for Tesco, Deliveroo, Man United, Ninety One, and LVMH there too!

But it’s not quiteee the end. Because we have another special newsletter being released imminently!

It’s the next edition of our Career Talk newsletters and this week we’re diving into M&A & Private Equity.

I’ll be chatting to my friend, José Ignacio Legorburo (Vice President @ DigitalBridge, ex-M&A @ Credit Suisse) about;

• how he got into his roles post-uni,

• what M&A and PE work actually looks like,

• what advice he’d give students wanting to get into either of these fields,

• where Cineworld went wrong with their acquisition of Regal,

• and finally, what PE firms would be looking for when acquiring Cineworld now!

It really isn’t one to miss!

7th Apr 2023

Nigel Jacob CFA