This article is part of a Fortune Special Report: Business in the Coronavirus Economy—a look at the impact of the pandemic on more than 50 industries.
Like most non-essential businesses in the U.S., movie theaters were forced to close their doors in mid-March because of the coronavirus pandemic, leaving them with the all-too-common financial problems that come with staying shuttered for an indeterminate amount of time.
But this industry faces a unique set of problems, including competition from streaming and on-demand releases, film studios reconfiguring their own release slates and delaying major blockbusters, and the uncertainty of how long it will take customers to return to sitting in a crowded, enclosed space, even when given the all-clear from health officials. That’s on top of the uncertainty that’s come from the federal stimulus bills, all the snags associated with the Paycheck Protection Program, and whether there will be any rent or mortgage relief for both the large chains and the small independents.
There are reasons to be optimistic, though, based on studios’ eagerness to keep their blockbusters on the big screens and to hopefully offer up some old titles cheaply so the theaters have something to show when they reopen. Here’s a breakdown of the issues theaters currently face and what might happen to them in a post-coronavirus world.
The financial hardships
Obviously, the financial situation of each theater business, chain or individual, going into the pandemic will be the biggest determining factor of whether it survives the shutdown, with bills coming due and no revenue coming in. After years of acquisitions, liquidity is a huge issue for AMC Theaters, the world’s largest chain, a problem that led S&P Global to downgrade its credit rating from B- to CCC- because it will likely default on its loans without any assistance.
“They’re definitely in the most precarious position of exhibitors because they’ve got the most debt for making the three $1 billion acquisitions a few years ago [for Carmike, UCI and Odeon, and Nordic],” says Eric Wold, a senior analyst at B. Riley Financial. “The biggest unknown for them, as well as the industry, is what happens to rent costs and how flexible landlords can be. Right now, AMC is looking at $250 million a quarter of rent expense, so if they’re closed from mid-March to mid-June, that’s a big nut to have to pay. So, do landlords get flexible, defer some payments, stick it on the back end, amortize it? We don’t know. The value of the equity could disappear if they can’t get something in place and that something can come from landlord help or part of a stimulus package. I don’t see traditional lenders adding to their debt load to let them get through this thing. There’s enough risk already.”
When it comes to rent, AMC is likely in a better place with most of its landlords than most businesses. Wold says many landlords have been paying 25 to 40% of the capital expenditures associated with improving AMC’s theaters with upgraded seating and better concessions. “They want the theaters to look better, to be an anchor tenant to bring more consumers in their shopping mall, so I’d be surprised if the landlords wouldn’t do something to help them get through this versus seeing those investments go to zero,” he says.
Or, as Patrick Corcoran, vice president of the National Association of Theatre Owners, points out, there aren’t going to be many businesses looking to lease an empty movie house: “If you evict your tenant for non-payment, who are you going get into your movie theater? It’s going to be another movie theater company and they’re all in the same situation.”
The other big issue is payroll. The big chains like AMC, Cineworld, and Cinemark furloughed thousands of employees while small theaters have dealt with it in varying ways. “Do you keep them on payroll and hope that the PPP comes through and gets you past where you can reopen? Or do you lay them off and hope that they get unemployment?” asks Bill Campbell, chairman of the Independent Cinema Alliance and owner of Orpheum Theatre, Inc., which has nine screens over three locations in Wyoming and Montana. “I’m trying to keep my staff. A lot of our part-time kids are dependent on their parents and might not be eligible for that type of program. Everybody’s really struggling with that.”
Some theaters have tried to raise money to keep staffers via other means, such as Alamo Drafthouse’s At-Home film series, which promotes rentals of independent movies, and certain theaters selling popcorn curbside to garner some concession revenue. “I haven’t jumped into that but I think that’s cool,” says Campbell. “To keep your theater in the public’s view while it’s closed is important. You remind the public that you’re still here and you’re not gonna go away.”
Competing with streaming and VOD
As theaters began shutting down, several studios announced they were going to make current and upcoming films like Trolls World Tour, The Hunt, Emma., Artemis Fowl, and The Invisible Man available to rent via video on demand. While many homebodies might have thought this would be a permanent shift in movie releases, Campbell, Corcoran, and Wold say studios are not going to skip cinemas going forward.
The general reason these titles went straight to the home is because the advertising and other promotional money was already spent. In the case of Artemis Fowl, Wold says it’s likely that Disney didn’t see it making a huge amount of money anyway and, after pushing Mulan and Black Widow back, its slate would be too crowded down the line. “It’s interesting to talk to Cinemark. The CEO and the CFO both come from the studio world and they say you can’t make the numbers work, releasing a big-budget film straight to home. I don’t think, long term, we’re going to see anything of substance go straight to home.”
Corcoran agrees, adding that most people still flock to theaters for both the big-screen experience and because they just want to get out of the house, and not just turn to Netflix or something they’ve paid for. “The basics of home distribution are that people want really inexpensive, broad packages of content. People aren’t looking to add an expense. You can, of course, see a huge increase in how much people are watching at home because they’re home more. Once theaters are open and people feel safe about it, they’re going to turn out in crazy amounts.”
Reopening with older movies
Because of COVID-19’s closures, studios have delayed surefire blockbusters including Mulan, No Time to Die, Wonder Woman 1984 and Ghostbusters: Afterlife, some for a few months and some a full year. This could be due to the need to promote the films as planned or because production or post-production could not be completed. Reasons aside, it leaves theater owners wondering what they’ll be able to show if they reopen early in, say, June or July.
Wold sees a sign of hope in the planned July 24 release of Mulan. “What got me a little more optimistic is Disney, which dominates 40% of the box office and has a lot of sway, is willing to put one of their top films of the year, if not the top film of the year, in a July slot. It’s an indication that they believe that if theaters can open, there will be enough attendance to open the film and have it do well.”
But with so much of summer blockbuster season in disarray, how will theaters fill up? The solution, it appears, is to rerelease old movies, such as the films that had their runs cut short due to the pandemic and classic blockbusters. The National Association of Theatre Owners and the Independent Cinema Alliance are in talks with the studios about what titles those would be and at what cost, as it would make the most sense for owners to charge less as people get more comfortable coming back.
“What I’d really like to see is maybe some of the absolute classics like Jaws, some of those big, big movies that they fell in love with as young people,” Campbell says. But he also acknowledges it will all be tricky, given the safety concerns surrounding the virus and how easily it can spread. Before closing on St. Patrick’s Day, he reduced ticket sales to 40% of his auditorium capacity so customers could distance themselves and he increased the time between showings so his staff could sanitize the seats. But that will also depend on getting the all-clear from health officials and hoping they get it right, too, rather than announce a reopening and have that decision get quickly reversed, which happened in China in late March. And even then, what else would they have to do to make sure nobody sick is coming through the doors?
“You’re seeing things like airports in Asia where they have these infrared fever monitors where if you walk into the place, you have a fever, you get pulled out of line and sent home,” Corcoran. “So, in the early days when we come back, whether that sort of precaution is necessary to build confidence with the audience or whether that will actually turn them off, who knows?”
Campbell says he doesn’t want to do that unless directed by a local authority as he thinks it would cause unease among his patrons, like how metal detectors remind people of mass shootings. After all, he says, a movie theater is a place where they’re supposed to go to forget about these problems.
“You’re spending your 10 bucks per person or whatever, paying that willingly to know that you can sit down for two hours and not have your refrigerator run or cell phone ringing. You can just escape reality and enjoy yourself. That’s why theaters are so much better for watching movies.”
More must-read stories from Fortune:
—What to watch on Netflix, Amazon Prime, Hulu, and more while social distancing
—When jazz musicians aren’t live-streaming owing to coronavirus, they’re scrambling to rebook lost gigs
—Hollywood showrunners assist the assistants amid coronavirus pandemic
—The coronavirus pandemic is changing broadcast and streaming TV as we know it
—MusiCares’s COVID-19 Relief Fund gets all-star help for donations, concerts
Subscribe to Outbreak, a daily roundup of stories on the coronavirus pandemic and its impact on global business, delivered free to your inbox.
