Analyst: Lackluster Weekend Box Office Could See Studios Further Delay New Releases

With Warner Bros.’ Tenet generating $30 million at the domestic box office over two weekends, and Disney’s Mulan almost surpassed by a local sci-fi film (The Eight Hundred) at the Chinese box office, the jury remains out on the state of the theatrical market’s return to normal from the coronavirus pandemic.

The third-quarter domestic box office is trending down 96.8% quarter-to-date to $101.1 million compared with the previous-year period, as theaters nationwide only recently began re-opening — and at reduced capacity. The latest box office weekend was 89% lower than the comparable weekend last year, according to industry figures.

The sluggish re-start, coupled with a majority of screens still dark in major markets New York and California, suggests studios will reconsider bowing major new releases in any great numbers in the near future, according to Michael Pachter, media analyst with Wedbush Securities in Los Angeles.

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Indeed, Warner just pushed back again the theatrical bow of Wonder Woman 1984 from Oct. 2 to Dec. 25 — more than a year after the sequel’s original launch date. Subsequent release dates included June4 and Aug. 14.

Sony Pictures Entertainment CEO Tony Vinciquerra last week told an investor event the studio would delay all major releases until 2021.

“What we won’t do is make the mistake of putting a very, very expensive $200 million movie out in the market unless we’re sure that theaters are open and operating at significant capacity,” Vinciquerra said.

Pachter says that trend will only grow as nervous studios contend with wary moviegoers and local government restrictions.

“We think the relatively lackluster second theatrical week for Tenet juxtaposed with the difficulty Disney has faced with Mulan has made film releases seem like a risky business in the current environment,” Pachter wrote in a Sept. 14 note.

The uncertainty is bound to increase pressure on studios to shorten the 90-day theatrical window and seek alternative distribution channels such premium and transactional VOD. The COVID-19 era has produced unusual circumstances (and opportunities) for studios, including dabbling in direct-to-consumer distribution.

The ongoing interest for at-home content could impact long-term decisions by studios regarding which content they send to theaters and which goes direct to streaming platforms, according to Pachter.

“This is particularly compelling for the studios that have launched or will soon launch their own subscription/ad-supported streaming video platforms,” he wrote.

 

Analyst: Netflix Could Lose 2 Million Subs Quarterly Without New Content

Throughout the coronavirus pandemic Netflix has shattered the odds and competition attracting more new subscribers in six months this year than it did for the entire 2019. The service ended June with more than 190 million subs worldwide.

Retaining those subs is another story — and challenge. While subs flock to market pioneer Netflix in droves, keeping them entertained without a steady supply of fresh content is problematic in a COVID-19 era that has effectively shuttered or significantly slowed content production.

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Michael Pachter

Michael Pachter, media analyst with Wedbush Securities in Los Angeles, says Netflix has very high levels of consumption per subscriber (an average of 30 to 40 hours per month pre-pandemic and likely 50 to 60 hours per month now). In contrast, most of Netflix’s competitors have much smaller subscriber bases (Disney+ at an estimated 75 million, Hulu at an estimated 35 million, and the other competitors significantly lower). While a high level of consumption is desirable, it drives a need to constantly replenish the content consumed, and Netflix’s extraordinary level of consumption multiplied by its large subscriber base suggests to Pachter that some meaningful percentage of subscribers will drop Netflix before a large quantity of new content can be produced.

Specifically, the analyst believes Netflix could lose upwards of 2 million subs per quarter going forward without a significant return to normalcy within the studio industry to create content. Netflix is projecting 2.5 million new subs in the third quarter (ending Sept. 30), while Wall Street is projecting 5.27 million.

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“We suspect that this [sub decline] phenomenon has already begun and led to the company’s lackluster guidance for Q3 net sub additions,” Pachter wrote in an Aug. 24 note. “Once the pace of its delivery of new content begins to wane, we expect Netflix to see higher churn and much slower subscriber growth.”

While production slowdowns affect all streaming video services, with many operating on the studio coat tails of corporate parents, content shortages at NBCUniversal’s Peacock and WarnerMedia’s HBO Max are less severe due to their respective deep catalogs of content.

All of Netflix’s competitors are similarly disadvantaged. None will be able to produce content at a meaningfully faster pace than Netflix, and all streaming services will be challenged to produce new content for the first half of 2021. This is likely to create a competitive disadvantage for Netflix, Pachter says, given that the company’s library of owned content is relatively thin, while its competitors have been producing original content for decades.

“Of course, [Netflix] can bid for library content, but its competitors are similarly likely to bid on the same content, driving up the cost of library content and contributing to a return to negative free cash flow next year,” Pachter wrote.

Netflix ended Q2 free cash flow positive for the second consecutive quarter, at $899 million compared to negative $594 million in the previous-year period. Wall Street cares about free cash flow since it is a way of looking at a business’s finances to see what is available for distribution among all the securities holders, including investors.

 

Best Buy Stock Up Ahead of Quarterly Fiscal Results

Shares of Best Buy inched higher in early trading Aug. 24 as the nation’s largest consumer electronics retailer is set to release second-quarter financial results on Aug. 25.

Best Buy, which is one of the largest home entertainment packaged-media retailers, saw sales of DVDs, Blu-ray Disc, 4K Ultra HD Blu-ray movies, music CDs and related media increase 9.5% in the first quarter, ended May 21, compared with the previous-year period.

Best Buy continues to fill the need for stay-at-home consumers, in addition to remote-schooled children and college students.

Wall Street firm Raymond James upped Best Buy’s price target to a near market-high of $135 from $100. A price target is Wall Street’s estimation of the future price of a company’s security, which includes investment products, stocks and bonds.

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“We believe in [Best Buy’s] fulfillment capabilities, high mix of essential items, and well positioned peer services should propel [chain] to gain further market share during the COVID-19 induced retail shakeout,” analyst Matthew McClintock wrote in a note.

McClintock believes Best Buy has ample liquidity to aggressively make investments in the near-term to drive future market share opportunities over the long-term.

Wedbush Securities media analyst Michael Pachter Best Buy’s management team has found innovative ways to exploit the favorable trends within the current work-from-home/learn-from-home/play-from-home environment.

“We applaud Best Buy for its many accomplishments, not least of which is achieving the difficult financial targets it has set for itself year after year,” Pachter wrote in a note earlier this year. “We now have more faith in its ability to successfully navigate this uncertain period.”

Netflix Bear Analyst Eyes 15 Million Q2 Subscriber Growth

Wedbush Securities media analyst Michael Pachter has long rebuffed conventional wisdom when it comes to Netflix. The Los Angeles-based analyst steadfastly considers the streaming behemoth’s excessive use of free cash an underling weakness in the Netflix story.

Free cash flow is often considered an important measurement since it outlines how effective a company is at generating enough cash after funding operations and capital expenditures to pay investors via dividends and share buybacks.

Netflix has consistently been in the red with available free cash, with Pachter projecting $1 billion negative FCF for the SVOD pioneer in the 2020 fiscal year.

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But following a July 10-12 survey panel of 1,315 Americans on their current streaming and cable subscriptions, Pachter contends Netflix’s FCF situation is improving — albeit in the short term.

Michael Pachter

The analyst found that 50% of respondents cite Netflix as their favorite service, with 8% signing up for the first time in the past 90 days — a similar percentage of newbies resisted in Pachter’s previous survey in March.

“[It] suggests continued robust subscription growth,” Pachter wrote in a July 14 note.

Indeed, the analyst believes Netflix could report net sub additions of 15 million worldwide — up from Pachter’s estimated 7.9 million net sub additions. More importantly, the outsized sub growth could see a $250 million lift to FCF for the year.

“This would improve our estimated [Netflix FCF] loss of $1 billion (in-line with guidance for a $1 billion loss or better) to $750 million,” Pachter wrote, who added the improved economics portend other issues.

“We think the likely giant spike in new subscribers increases pressure on Netflix for retention.,” he wrote. “More consumption of content suggests even greater need to replace content with something new, and we expect spending and negative free cash flow to return to 2019 levels in 2021.”

Netflix reports second-quarter fiscal results July 16.

Analyst: Box Office Trending Down 71%

Despite optimism on behalf of some national theatrical chains, the 2020 box office continues to be hammered by the effects of the coronavirus pandemic mandating closure of most screens in the United States and worldwide.

New data from Wedbush Securities in Los Angeles contends the box office through the first half of the year is down 71% from the same period in 2019 — a trend that won’t improve anytime soon as studios further delay new releases due to ongoing spikes in COVID-19 infections.

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Indeed, the second-quarter box office flatlined down 99.9% year-over-year to $3.69 million, compared with Wedbush’s most-recent estimate down 99.4% year-over-year, as most domestic theaters remained closed throughout the quarter.

While major chains such AMC Theatres, Regal Cinemas and Cinemark are eyeing qualified return to normal with Warner Bros.’ Tenet on Aug. 12, followed by Disney’s Mulan on Aug. 21, senior media analyst Michael Pachter believes consumers will remain reluctant to frequent cineplexes until their is a virus vaccine or downturn in infections.

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“While there are clearly many who are eager to return to some level of normalcy, there are still many more who we think will remain reluctant to attend the movies before there is a vaccine, or if the transmission rate falls significantly before then,” Pachter wrote in a note. “Simply stated, we do not expect attendance levels to begin to normalize until the end of the year at the earliest.”

Regardless, AMC reportedly has staved off possible bankruptcy in a deal The Wall Street Journal reported with a private equity group.

Analyst: Studios, Exhibitors Will Shrink Theatrical Window

With the success of Universal Pictures’ PVOD release of Trolls Word Tour, and the studio’s plan to distribute future theatrical feature films concurrent with digital retail, Wedbush Securities media analyst Michael Pachter contends a compromise between studios and exhibitors resulting in a shorter theatrical window is coming.

With studios reportedly making 80% on a movie’s digital release compared with 50% for theatrical, the incentive to go direct-to-consumer is financially appealing. At the same time, theatrical revenue and home entertainment marketing for major movie franchises such as “Fast & Furious,” “Star Wars,” “Mission: Impossible,” “James Bond” and “Spider-Man,” among others, is immense.

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Universal’s next major PVOD release, The King of Staten Island from director Judd Apatow, is slated for June 12. And Disney is expected to release smaller movies on its Disney+ SVOD platform.

“We very much believe in the value of the theatrical experience,” Disney CEO Bob Chapek said on the recent fiscal call. “But we also believe that either because of changing and evolving consumer dynamics or because of certain situations like COVID, we may have to make some changes to that overall strategy.”

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Pachter said he views Disney’s tepid approach to transactional VOD as limited in the long-term. He says Disney’s switch will spark further debate and negotiations on the existing theatrical windows and revenue share agreements.

“What we expect is that the exhibitors will make some small concessions on the windows or revenue share for these smaller films that would otherwise go to PVOD, so that all parties can maximize profitability, but the exhibitors cannot bend on simultaneous releases or they will go out of business,” Pachter wrote in a June 8 note. “The studios do not have any incentive to push the exhibitors out of business, and we believe that a mutually beneficial arrangement can be found before the studios begin releasing new content to theaters later this year or in 2021.”

Pachter: People Aren’t ‘Dying’ to See a Movie in Theaters

NEWS ANALYSIS — Wedbush Securities media analyst Michael Pachter remains bearish on the movie theater business, arguing exhibitors’ aggressive plans to re-open screens during a lull in the coronavirus pandemic is wishful thinking.

A return to moviegoing would in turn help studios market retail sales of DVD/Blu-ray Disc and digital titles — despite the fact home entertainment has fared well during the pandemic due to a larger segment of population being housebound.

Specifically, Pachter is talking about Cinemark, which plans to re-open select screens on June 19, with a national re-opening slated for July 10. Plano, Texas-based Cinemark Holdings, which closed all of its theaters on March 18 due to the virus, operates 554 theaters and 6,132 screens in the U.S. and Latin America.

“People may be eager to visit the theaters once they feel safe doing so, but we think it is unlikely crowds will return to any semblance of normal before a vaccine is widely distributed, particularly in urban and suburban markets,” Pachter wrote in a June 3 note.

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Cinemark June 3 reported first-quarter (ended March 31) domestic admissions revenue per screen was down 25.7% from the previous-year period — and up slightly (0.7%) from the domestic industry box office decline of 25.4%. For the full quarter, Cinemark attendance fell 29% to 27.9 million, while the average ticket price increased by 4% year-over-year.

In Cinemark’s Latin American circuit, admissions revenue per screen declined 32.1% in Q1, which included a 16% negative impact from currency translation and a 26% year-over-year decline in attendance per screen.

Pachter contends that with 30% of moviegoers older than 50 (according to the MPAA in 2018), a significant portion of middle-age consumers are not going to be bold enough to return to theaters. In addition, about 40% of moviegoers are under 30 years of age and losing a portion of this demo could result in studios and exhibitors delaying more releases until a vaccine is found.

“As we face a potential spike in cases nationwide after some seemingly premature re-opening schedules in addition to nationwide protests, we are less sanguine than Cinemark management that enough of the population will risk their health to support the current release slate schedule starting in July,” Pachter wrote.

He estimates the domestic industry box office will end 2020 down 97.8% from 2019, with most domestic screens likely remaining closed beyond the end of the quarter.

“Theatrical exhibition is in the middle of a perfect storm,” Pachter wrote. “Theater closures not only deplete cash reserves and sources of liquidity, but may alter consumer behavior indefinitely.”

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.”

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.”

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.