Analyst: Q2 Box Office Down 100%

When sales decline 100%, it can’t get much worse for a business. But that’s the reality facing movie exhibitors. Through May 21 of the second quarter, the box office is trending down 100% year-over-year as the industry remains shut down due to the coronavirus.

Wedbush Securities media analyst Michael Pachter expects “very minimal” box office revenue in the current quarter, with most domestic theaters likely remaining closed through June 30.

The first-quarter domestic box office ended down 25.4% $1.79 billion as most theaters didn’t shutter until March. The North American box office in 2020 is trending down 58.1% compared with 2019.

“We do not expect attendance levels to begin to normalize until the end of the year at the earliest,” Pachter wrote in a May 26 note.

The analyst says theaters and studios have some incentive to release new content before a return to normalcy, as a theater would be able to show a single film on all of its screens thereby allowing for social distancing while still providing the studio with the opportunity to drive box office revenue.

Director Christopher Nolan’s Tenet (Warner Bros.) is poised to be the first in line to take that risk, although Pachter doubts the international espionage thriller will be able to hold its current release date target of July 17.

“Our estimates are clearly subject to change given the fluidity of the release slate and the mood on social distancing as stay-at-home orders begin lifting across the country,” the analyst wrote.

He thinks it unlikely consumers will return to cinemas with any semblance of normalvy before a vaccine is widely distributed. Additionally, the dearth of newly produced content may negatively impact theatrical attendance in 2021, while streaming services will be competing at the highest levels for content to bolster their offerings in an extremely competitive environment.

There are now 68 films that have been moved or pulled from the release slate, worth an estimated $7.5 billion. Of these films, seven moved to a streaming platform, worth an estimated $358 million in box office dollars. Fifteen have yet to be rescheduled or slated for streaming, worth an additional $652 million in potential box office dollars.

“All 15 are likely to be moved to streaming platforms, in our view,” Pachter wrote. “When taken together, we expect the negative impact to 2020 domestic box office to be $3.1 billion, only partially offset by a positive impact to 2021 domestic box office of $1.5 billion.”

NPD: April Video Game Disc Sales Up 8%

Sales of packaged-media video games for consoles and hand-held devices reportedly topped $251 million in the four-week April retail period, ended May 2, an increase of 8% from $232.4 million during the previous-year period.

The uptick in software sales was largely driven by stay-at-home gamers buying content on the Internet due to the ongoing coronavirus pandemic shuttering most retailers, including GameStop.

The two top sellers in April were Nintendo’s March release Animal Crossing: New Horizons for the Switch and Square Enix’s new release Final Fantasy VII Remake, exclusively for PlayStation 4. Another popular title, NBA 2K20 from Take-Two Entertainment has reportedly sold more than 12 million units since launching on Sept. 6, 2019 — up 33% from the previous title, NBA 2K19.

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“We believe that robust Internet spending was largely offset by store closures and curbside service across much of the country, with room left over for year-over-year retail growth in April following a breakout March performance,” Michael Pachter, media analyst with Wedbush Securities in Los Angeles, wrote in a May 22 note.

Pachter, who disclosed the NPD data, revealed that about 411,000 PS4 consoles were sold in April, exceeding his estimate of 235,000 units. Consumers bought 329,000 Xbox One units, topping the analyst’s 175,000 unit estimate.

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The popular Nintendo Switch device continues to lead the market with 808,000 units sold — double Pachter’s 400,000 unit estimate.

“The Switch’s status as a must-have item among many stay-at-home consumers drove a terrific April figure that would have been meaningfully higher if not for widespread sellouts throughout the month,” Pachter wrote. “The Switch led industry unit sales for the 17th consecutive month.”

Sony and Microsoft plan to launch new-generation PS5 and Xbox Series X consoles, respectively, this fall/winter.

Analyst: No Virus Vaccine, Netflix to Flourish, Theaters Languish

As local and statewide economies slowly re-open businesses in the face of a COVID-19 pandemic that has killed more than 50,000 Americans, movie theaters today (April 27) will officially be allowed to open in the state of Georgia.

While Georgia Governor Brian Kemp’s order may be wishful thinking, the reality for movie exhibitors is far less rosy with staffing shortages, a dearth of content and a weary consumer, according to media analyst Michael Pachter with Wedbush Securities in Los Angeles.

Pachter expects the 2020 box office to end down 47.1% from 2019 to $6 billion, and 2021 to end 59.5% higher than 2020. He expects minimal box office revenue in the current Q2, with ticket sales down a staggering 96.8% compared to the previous-year period.

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“We think some areas may open in June, but we do not expect attendance levels to begin to normalize until there is a vaccine, or the end of the year at the earliest,” Pachter wrote in an April 27 note. “Studios have no incentive to release new movies until all theatres are open and will be reasonably well-attended, which is not likely until there is a vaccine.”

The analyst says there have been 62 movies either moved or pulled from the release slate, worth an estimated $7.2 billion. Of these films, 17 have not yet been assigned a new release date, worth an estimated $830 million. Of those, The Lovebirds, Scoob! and Artemis Fowl have been slated for streaming or VOD debuts.

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“We expect this list to expand in the coming weeks,” Pachter wrote, adding the negative impact to 2020 domestic box office would be about $2.9 billion.

With Netflix adding an impressive 15.8 million subscribers across all geographies in Q1, the SVOD behemoth expects to add another 7.5 million subs in the current Q2 June quarter — or just below combined Q2 sub additions in 2018 and 2019.

“We think that Netflix will continue to thrive in a shelter-in-place environment, and our best guess is that its current and future subscribers will continue to find themselves spending the majority of their time at home for at least the balance of the current quarter,” Pachter wrote. “We can only conclude that Netflix will continue to deliver outsized subscriber additions for the balance of the year.”

Pachter: Movie Theaters Can Profit on 20% Capacity; Industry to Lose $2.25 Billion in 2020

With movie theaters worldwide shuttered due to the coronavirus, domestic exhibitors in the second quarter are expected to lose upwards of 92% of their revenue in the current fiscal quarter compared with the previous-year period, according to Michael Pachter, media analyst with Wedbush Securities in Los Angeles. The industry is projected to lose $2.25 billion in 2020.

The analyst contends the industry is facing a “perfect storm” of challenges that render it a sitting duck without some kind of government assistance. Buy how essential movie theaters are in a world of digital distribution and streaming remains to be seen.

“Those screens that open as early as June will likely show classic tent-poles at a discount to drive attendance,” Pachter wrote in an April 15 note.

Major summer titles are slated to hit theaters beginning in mid-July. Several films have yet to be rescheduled, and it is not yet clear which will be pushed to later in the year, 2021 or later. It’s also not clear how many titles will move straight to SVOD facing a dearth of content as productions have halted across the industry with stay-at-home orders in place.

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Citing Cinemark’s investor call, Pachter said the chain (and possibly the industry as well) has received positive news from theater landlords willing to “negotiate a deferral of rent under a variety of contract agreements.”

Indeed, media reports say AMC Theatres has already told landlords it cannot pay the rent on its 11,000 screens worldwide. The chain is reportedly in early Chapter 11 discussions.

“This could be a significant positive as the exhibitors’ ability to weather the closures depends to varying degrees on the flexibility of landlords,” Pachter wrote.

The analyst contends that when theaters re-open and social distancing seating is mandated, exhibitors could still be profitable with theater utilization as low as 20% to 30%.

“That’s tertiary positive, at least for Cinemark if not for the group, which bodes well in the case where social distancing is upheld for an extended period,” Pachter wrote.

Analyst: Home Entertainment Consumers to Get Bored With Stale Video Content

The death toll from the coronavirus may be declining, but millions of Americans remain working and spending greater amounts of time in the home due to statewide shelter-in-place regulations.

At the same time production of most streaming and commercial broadcast content has ground to a halt while consumption of existing content has increased, creating a dilemma for streaming services.

“We think it is unlikely that content creation will keep up with consumption for the next several months, and expect many consumers to become dissatisfied with the programming over time, particularly if the shelter-in-place regulations persist for more than several weeks,” Michael Pachter, media analyst with Wedbush Securities, wrote in an April 6 note.

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This finding underscores in part the current fascination with Netflix’s new original documentary series “Tiger King.”

In a proprietary survey of 1,338 consumers from March 27 to 29, Pachter found more than 93% of respondents reported practicing greater social isolation and distancing, and roughly 68% reported somewhat higher or significantly higher use of streaming services since the start of the coronavirus pandemic.

As expected, the survey found that SVOD services benefiting the most in terms of recent subscriber additions appeared to be Disney+, Netflix, Hulu and Amazon Prime Video. Overall, the pandemic has made subscribers to both SVOD and pay-TV less likely to cancel — although not driving cable/satellite TV sign-ups either.

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A majority of respondents (54%) continue to have a cable TV or satellite TV subscription, and over three-quarters of cable/satellite subs report having their subscription bundled with their Internet service. Among pay-TV subs, respondents said cable access was the most important feature (41%) of their pay-TV subscription, followed by live news (22%), DVR (18%) and live sports (18%).

“Our survey results suggest outsized streaming subscriber growth in recent weeks, along with more depressed churn [subs not renewing] than would typically be seen during this period,” Pachter wrote.

Home Entertainment ‘Social Distancing’ — Boon or Double-Edged Sword?

With movie theaters shuttered and government officials calling on people not to congregate in groups larger than 10, home entertainment, including transactional VOD and packaged media, is getting a boost from consumers sequestered at home during the spread of the coronavirus pandemic.

Universal Pictures said it is releasing select theatrical titles concurrent with home entertainment following a weekend box office that saw its five releases generate a paltry $11.7 million in collective ticket sales.

Warner is putting Harley Quinn: Birds of Prey early into digital retail channels. It’s not a big gamble considering the movie has been out in theaters since Feb. 7.

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“Yes, they will see increased usage in home entertainment distribution,” said Michael Pachter, media analyst with Wedbush Securities.

While no studio is going to admit it might profit from home-confined consumers, Wall Street analysts are less concerned about optics and more motivated by trends and cost/benefit analysis, among other factors.

Pachter cautions that any uptick in transactional purchases, Redbox rentals and subscription streaming is limited in its “attractiveness” as investments. Indeed, after Universal and Warner, no other studio has announced expediting retail channels. Box office king Disney has heretofore resisted altering the theatrical window for obvious reasons.

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“There are other things going on out there that limit their attractiveness as investments,” Pachter said.

Home entertainment spending in the fourth quarter of 2019 increased 9% to $6.8 billion, from $6.3 billion spent in the final three months of 2018, according to DEG: The Digital Entertainment Group.

The analyst contends any increased revenue studios make from DVD will be “far less” than the “normal” revenue they would generate from theatrical exhibition. A noted Netflix bear, Pachter says the SVOD behemoth remains an overvalued stock, “but less so now due.” He says Disney will benefit from releasing its movies on Disney+, but will still “lose mightily” on theme parks and cruise ships — both of which are shut down.

“Redbox definitely benefits, but it’s a private company,” Pachter said. The kiosk vendor and its former corporate parent, Outerwall, were acquired by a private equity group in 2016 for $1.6 billion.

Richard Greenfield, media analyst with Lightshed Partners, said the elimination of live sports on TV makes SVOD a valuable alternative.

“To the extent consumers are increasingly working from home and refraining from out-of-home activities, without sports to watch on TV, we suspect streaming services such as Netflix will see increased subscriber additions and higher utilization per account (leading to higher ARPU plans that enable more users per household and lower churn),” Greenfield wrote in a March 12 note.

Analyst Laura Martin with Needham was one of the first Wall Street pundits to predict a home entertainment gold rush as a result of the pandemic. Martin cautions that with the pandemic now centering in Europe, international  Netflix subscriber growth will stall.

“In distressed times, people will give up their Netflix subscriptions,” Martin wrote in a note.

Greenfield disagrees.

“Netflix appears incredibly well-positioned to entertain consumers as [other] entertainment options dry up, especially if more movie theaters close globally,” he wrote.

 

Analyst Adds Amazon, Facebook to ‘Best Ideas’ Company List During Coronavirus Pandemic

Wedbush Securities media analyst Michael Pachter has compiled a list of publicly traded companies he says are good bets (for investing in) during the ongoing coronavirus pandemic. With people encouraged to stay indoors in their homes and avoid large gatherings, companies catering towards consumers confined indoors are gaining traction with investors.

“We view Amazon as uniquely-positioned to gain meaningful market share across a number of verticals in a multitude of countries driven by coronavirus-related changes in consumer behavior,” Pachter wrote in a March 17 note.

Beyond its market-leader status in ecommerce, Amazon’s Prime Video streaming video service, Prime Channels (third-party SVOD platforms), Instant Video (transactional VOD) and packaged media offer a cross-platform variety of home entertainment options.

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With consumers in the near term appearing to spend more time and money shopping online to avoid crowds, limit time wasted searching for products sold-out at brick-and-mortar outlets, and, in some situations, to adhere to the rules implemented by different governmental bodies, Pachter contends companies like Amazon and Facebook are well-positioned to deal with the situation.

Indeed, despite Amazon disclosing delivery delays last weekend due to the consumer crush for select items (i.e. toilet paper), Pachter says this amounts to a “high-class” problem only.

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“We expect Amazon to absorb the learnings from this difficult period and adapt its supply chain and delivery network best practices accordingly,” Pachter wrote. “In addition, we expect consumers’ increasing reliance on the company at present to result in the acceleration of market share capture that should benefit Amazon and its investors for the next several years.”

The analyst believes Facebook has likely seen significant upticks in user engagement and hence ad impression growth across multiple properties driven by coronavirus fears. Given the seemingly unprecedented and unrelenting volume of news related to the global pandemic, the reliance that a large percentage of the world’s population has on Facebook as its primary source of information, and an increasingly-pervasive stay-at-home attitude accentuated in some instances by the government, “we believe that many Facebook users have been accessing its properties at meaningfully elevated levels over the last several weeks.”

Pachter expects the “positive” momentum for Facebook to continue through the remainder of the first quarter in many of Facebook’s most important geographies.

“When factoring in these recent trends, the company’s high-level Q1 top-line growth guidance and consensus expectations for the fiscal year appear overly conservative,” he wrote.

 

Analysts Keep Piling on Apple TV+

The late Steve Jobs infamously called streaming video (i.e. Apple TV) a “little hobby,” dismissing the medium despite the burgeoning rise of Netflix and Amazon Prime Video.

Perhaps Apple should heed Jobs’ apparent indifference.

The tech giant is now diving into the SVOD deep-end with its hordes of free cash hoping a rebranded Apple TV+ app and upwards of $6 billion in content spending will compete with upstarts such as Disney+, HBO Max, Peacock and Quibi.

While the $4.99 monthly service is free for a year if you buy any new iPhone, iPad, iPod Touch, Apple TV, or Mac computer, analysts and op-eds are tripping over themselves criticizing Apple TV+ in comparison to Disney+.

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London’s Ampere Analysis, which claims Apple TV+ has more subscribers than Disney+ and Hulu, suggests Disney+’s “Star Wars” spinoff “The Mandalorian” remains a “key driver,” with viewership dwarfing Apple’s original programs, “The Morning Show” and “See.”

“‘The Mandalorian’ maintained a higher relative interest level than ‘The Morning Show’ throughout its entire run, despite Disney+ being available in only six markets,” analyst Tingting Li wrote in a post.

Indeed, Apple TV+ launched Nov. 1, 2019, in 100 markets worldwide, yet interest in “Morning Show” and “See” dropped off after the first two weeks, according to Li.

“The Mandalorian” has the same critical rating as “Friends,” based on Ampere’s proprietary quality measure. Li says future Disney+ series will include more spin-off shows such as “Star Wars: The Clone Wars” from Lucasfilm and “WandaVision” from Marvel Studios.

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Wedbush Securities analyst Michael Pachter contends that despite a major marketing effort around Apple TV+, which included signing up Jennifer Aniston, Reese Witherspoon and Steven Spielberg for original content, the finished product thus far has been underwhelming.

“[It] only had a handful of shows at launch,” Pachter wrote in a post.

Logan Purk, analyst at Edward Jones, said the streaming service would remain a “cash drain,” due to the investments required to produce original shows.

“They are leaning towards big stars and high production values,” Purk told IndieWire.

D.A. Davison & Co. analyst Tom Forte contends that while select Apple TV+ programs are “compelling,” from an investment standpoint he doubts the content is worth the investment.

“Apple is risking brand damage by offering the service at such a low price and even giving it away for free,” Forte said.

Forbes analyst John Koetsier goes one step further. He says Apple TV+ is doomed and the sooner the Cupertino, Calif.-based company realizes that the better.

Koetsier says that after unrivaled success with iPhone, iPad, Apple Watch and Mac computers, the company is stumbling with TV+ and a sudden focus on original content.

“Apple: you are amazing at hardware. You are one of the best in the world at combining hardware, software, and services,” he wrote. “You are not a media production powerhouse.”

 

Analyst: Expect Netflix Q4 Sub Growth Miss

In recent months, Netflix critics have focused on the streaming giant’s stagnate domestic subscriber growth as evidence of cracks in the Wall Street darling’s veneer.

Longtime Netflix bear Michael Pachter, with Wedbush Securities in Los Angeles, suggests the service is going to miss meeting fourth-quarter (ended Dec. 31, 2019) domestic subscriber growth projections of around 600,000. Netflix is projecting 7 million new subscribers outside the United States.

“Domestic subs guidance and overall [earnings per share] guidance may be at risk given the heavy television advertising we observed in the latter half of Q4,” Pachter wrote in a Jan. 17 note.

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Netflix typically ramps up marketing efforts to drive lagging subscriptions when the number of existing subs not renewing (churn) increases.

The analyst contends marketing spending and a “solid slate” of high-profile new content released during the quarter should help dampen overall subscriber churn.

“We expect international subscriber growth momentum to continue,” Pachter wrote.

Indeed, the launch of Disney+ on Nov. 12 and the impending loss of most Disney and Fox content could cost Netflix another 25% of total viewing hours, according to Pachter, who ads that content from Comcast, Fox, Disney and Warner Bros. accounted for 60% to 65% of Netflix viewing hours in 2019.

“We expect most of it ultimately to migrate away,” he wrote.

That said, the flurry of new over-the-top video platforms does not imply the imminent demise of Netflix as Pachter expects the migration of third-party content to be relatively slow due to existing licensing contracts.

While it’s a guess whether Netflix (or any distribution channel) can replace content sufficient to subscribers and viewers loyal, Pachter think it is likely Netflix will pay whatever it takes to attract high quality content, and believe its competitors will be slow to gain scale.

Separate Wall Street reports say Netflix will spend upwards of $17 billion on content in 2020 — dwarfing all competitors, including Disney+.

“We expect the status quo to be largely maintained until the end of 2021,” he wrote. “For now, Netflix provides tremendous value for its subscribers.”

Netflix reports fourth-quarter fiscal results on Jan. 21.

 

Platforms Avoid Netflix Movies in Pre-Oscar Showcases

Netflix earned an impressive 24 Oscar nominations ahead of the 92nd Academy Awards on Feb. 9 — largely around two movies: Martin Scorsese’s The Irishman and Noah Baumbach’s Marriage Story.

Walmart-owned Vudu.com and exhibitors Cinemark, AMC Theatres and Regal Cinema have launched pre-Oscar events showcasing best picture nominated films — with the exception of Netflix’s titles.

That’s because Netflix — per longstanding policy — does not abide by Hollywood’s traditional theatrical release strategy affording exhibitors exclusive 90-day access. Instead, the streamer mandates all original movies be made available across all distribution channels (including theatrical) at the same time.

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This has angered exhibitors and industry insiders domestically and abroad (i.e. Cannes Film Festival) for years — the result being Netflix movies are largely ignored by major theater chains.

Indeed, Cinemark’s “Annual Oscar Movie Week Festival,” which runs from Feb. 3 to 9, enables consumers (for $35) to screen all nominated films — with the exception of Netflix’s titles. Vudu is taking preorders for Oscar-nominated titles, with the exception of The Irishman and Marriage Story (which have not been slated for a digital sellthrough release).

“I don’t see the utility of making a film available on VOD or in theaters, if it’s available for free to anyone with a subscription or trial account at Netflix,” said Wedbush Securities media analyst Michael Pachter. “Netflix would rather people sign up for a free trial and watch these films than it would care for the 50% to 65% it might earn from a movie ticket or VOD.”

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Last year, Netflix’s first Oscar nominated best picture title, Roma, was also ignored by major exhibitors. It went on to win for best director (Alfonso Cuarón) and best foreign-language film (Mexico’s first) — but no best picture. The movie reportedly generated about $200,000 in revenue from pre-nomination screenings over the extended Thanksgiving weekend at select indie theaters in Los Angeles.

The imbroglio made headlines when director Steven Spielberg suggested movies that forgo the traditional theatrical run should not be considered for Oscars. The Academy’s annual board of governors post-Oscar meeting nixed that idea.

Netflix responded (on Twitter) at the time stressing “we love cinema” and ubiquitous distribution. “These things are not mutually exclusive,” the streamer tweeted.

While Roma did become Netflix’s first film to be included in The Criterion Collection on Blu-ray Disc and DVD (due Feb. 11), it arguably left millions of dollars in box office revenue on the table.

“If Netflix wants to really be a movie company, and not just a highly successful television company, why won’t they consider the traditional movie business model?,” John Fithian, CEO of the National Association of Theater Operators, wrote in a 2018 blog post. “Wouldn’t Netflix make more money and establish a much deeper cultural conversation by offering a true and robust theatrical run first, and offering exclusive streaming to its subscribers later?”