AMC is at war with Universal Pictures. Is it a fair fight?

May 1, 2020, 12:00 PM UTC

Jeff Shell was trying to celebrate a victory. He ended up starting a new fight.

In Tuesday’s Wall Street Journal, the NBCUniversal CEO touted the success of the digital release of its animated film Trolls World Tour. He had every good reason to: The movie, which Universal made available on digital platforms such as Apple TV for $19.99 per rental, made the studio $95 million in fees from nearly 5 million customers over the course of three weeks—more money than Universal’s first Trolls movie reportedly earned in a five-month theatrical run in the U.S.

“The results for Trolls World Tour have exceeded our expectations and demonstrated the viability of PVOD,” Shell told the paper, using the acronym for the industry term “premium video on demand,” meaning a film release direct to digital platforms. “As soon as theaters reopen, we expect to release movies on both formats.”

Shell’s statement seemed to enrage Adam Aron, the chief executive of AMC Theatres, the world’s largest theater chain. In a letter to Universal sent the same night, Aron said his theater group would no longer screen movies from Universal, which, in addition to Trolls, is home to several billion-dollar franchises including Jurassic Park and Lego. The studio’s statement of intent to engage in more PVOD releases was “categorically unacceptable to AMC Entertainment,” Aron wrote. “Accordingly, we want to be absolutely clear, so that there is no ambiguity of any kind. AMC believes that with this proposed action to go to the home and theaters simultaneously, Universal is breaking the business model and dealings between our two companies.”

Cineworld, the world’s second-largest theater chain, echoed Aron’s explosive comments the following day. “Universal was the only studio that tried to take advantage of the current crisis and provide a ‘day and date’ release of a movie that was not yet released,” CEO Mooky Greidinger said in a statement. He added that his theaters would not show any movies that “fail to respect the windows, as it does not make any economic sense for us.”

The war of words between longtime partners stunned many Hollywood observers and revealed unease about the future of movie-watching and the evolving relationship between studios and theaters. “Like any company, Universal is trying to find new streams for revenue right now,” says Jeff Bock, a box office analyst at Exhibitor Relations. “But they gloated about it. I just don’t think what Jeff Shell said was necessary. Not in front of the media, not when theaters’ backs are against the wall.”

Two days later, Shell retreated slightly. New movies released directly to digital platforms would be “complementary” and “not a replacement” for a traditional theatrical release, he told investors during Comcast’s quarterly earnings call. In the wake of the coronavirus pandemic, “I would expect that consumers will return to theaters, and we will be part of that,” he added. (NBCUniversal did not respond to a Fortune request for comment.)

In truth, tension between movie theaters and film studios has been simmering for some time. Theater attendance has been in gradual decline even as box offices grosses have been on the upswing. Digital streaming services have become ubiquitous. Their parent companies have launched full-fledged production divisions and recruited acclaimed directors and actors who went on to win the industry’s top prizes—including Academy Awards, in the case of Netflix and Amazon Studios. All of these developments are squeezing long-established relationships and revenue streams, says Paul Dergarabedian, a longtime movie industry analyst at Comscore.

“I’ve never seen this in all my years. It’s a stress test on the industry. We are in a pressure cooker right now,” Dergarabedian says. “Who knew it would be this movie that would become the center of a major discussion surrounding the dynamics of the big screen and the small screen? It’s been something people have talked about for years, but the pandemic and this situation put a fine point on it—a spotlight.”

Cinemas have been hit especially hard by the effects of the novel coronavirus pandemic. Theaters remain closed in many parts of the world as social distancing measures continue. AMC is feeling the pain in a number of ways. Its shares plunged from $15.16 a year ago on April 30 to $4.72 today. AMC furloughed 25,000 of its 26,000 employees, including chief executive Aron, as news reports earlier this month evaluated the company’s likelihood to declare bankruptcy. Since then, AMC has announced plans to raise $500 million—enough to last into the fall, with hopes of a July reopening.

There is no guarantee that target can be met. Several health officials have estimated that coronavirus impacts will linger well into 2021. Beyond that, it remains to be seen if audiences are willing to rush back to theaters. In China, where the box office was poised to overtake the U.S. this year as the world’s largest, “attendance was very, very weak” when the country briefly reopened its theaters in March, studio head Steven Xiang of Huanxi Media told Fortune.

That has some people questioning if theater chains like AMC and Cineworld are really in a position to make threats about streaming to major studios like Universal, which is sitting on numerous unreleased titles such as the latest Fast and Furious installment F9 and Minions: Rise of Gru, a sequel to the original that grossed over $1 billion globally in 2015.

“Theaters need studios’ content. They absolutely don’t survive as a business without it,” says Bock, the box office analyst. “The truth is that content wears the crown, and Universal has the content. Billion-dollar content. Three to four franchises that theaters need. Universal has been right that there is this streaming revolution, and certainly some genres of film could translate to PVOD.”

Others view the dispute as more evenly matched. “At the end of the day, the studio-exhibitor relationship is symbiotic, they rely on each other,” says Shawn Robbins, chief analyst at BoxOffice Pro. “The loss of theatrical revenue on a major blockbuster would be devastating for a studio’s bottom line during its initial run. I see this as a balanced argument. Long term, what we’re seeing right now is a very public negotiation.”

Worldwide box-office revenues in 2019 reached a new record of $42.5 billion, according to Comscore, even as new streaming services expanded their footprint with the arrival of Apple TV+ and Disney+. Still, studios like Universal remain tempted by PVOD because of favorable economics: Roughly 80% of digital rental or purchase fees are retained by the studio in a streaming rollout, compared with just 50% of box office sales.

Ultimately studios need theaters to show their content, just as theaters rely on studios for business, Comscore’s Dergarabedian says. “Without the theater component, some of these films may never become profitable. And also the prestige and exclusivity of a theatrical run around the world makes it that much stronger for the home video,” he says. “It’s all about the positioning and the perception.”

Whatever the balance of power, analysts agree that both sides will come to a truce as tactics for battling the COVID-19 virus subside. “We’re kind of in a vacuum right now with PVOD because there’s not a competitive market for theatrical out there,” says Robbins. “It really just feels like a messaging issue.”

And theaters will likely stand together in solidarity—such as perennial rivals AMC and Regal—because an industry move to PVOD would fundamentally threaten the exhibition industry as a whole, analysts say. “At least now theaters have a chance to regroup, talk about it behind closed doors, and hammer out new guidelines,” Bock says. “Both for safety and for a deal with the studios.”

And if they don’t? “I think we all know how close theaters were to shuttering,” Bock adds. “They have to fight. This isn’t boxing—this is MMA. This is for everything.”

More must-read stories from Fortune:

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China’s movie theaters are closed again, causing anxiety for studios
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How movie theaters can make a comeback after the coronavirus pandemic has been contained

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