Movie Theaters Are Reeling and It’s Only Going to Get Worse

Most studios have delayed their big-budget film premieres while the nation’s theaters are closed due to the coronavirus pandemic, but Universal opted to keep the “Trolls” sequel’s original release date, and shift to a digital premiere instead. 

That made it the first major studio film to forgo Hollywood’s standard theatrical window, where movies spend 90 days in the theaters before moving online or to cable. The theatrical window is — or was —the last stand of the theater industry, which has been ceding ground to digital distribution and streaming services for more than a decade. 

Hollywood wasn’t happy about it, least of all Mooky Greidinger, the CEO of Cineworld. Greidinger said Universal’s decision to release “Trolls” direct-to-video was unfair, in an interview with Deadline: “You do not change the basic rules of the game … especially when your partner is in its worst situation,” he admonished.

Universal’s move is an indication that for the movie exhibition business, which is reeling as its screens remain dark, there might never be a return to normal. Even once theaters reopen, and audiences return, the preference for online distribution over theatrical releases could be difficult to undo.

And the fallout could hit theater landlords hard. Movie theaters take up a lot of space and can’t be easily replaced, and while theater attendance has been declining for years, with a five percent decline in 2019 according to the National Association of Theater Owners, entertainment is still considered a safer sub-sector than consumer retail, or at the very least, a welcome diversification to it.

The largest theater companies in the country are facing financial difficulties, especially as there’s no guarantee as to when they’ll reopen, and which films, if any, will be premiering when they do. In China, movie theaters began to reopen in March as they were shutting down in the United States, but a week later the country reversed course, and all theaters were ordered closed, according to the Hollywood Reporter. 

AMC Entertainment, the largest network of theaters in the country, is especially vulnerable. The firm skipped rent in April and is potentially facing bankruptcy after closing all its 1,000 theaters globally in March and furloughing 26,000 workers in the United States, or 96 percent of its workers. 

“Ours is an industry that’s in real trouble,” AMC CEO Adam Aron told Fox Business News in March. “We literally do not have a penny of income coming in,” he said about AMC.

AMC drew down the $325 million it had available in lines of credit, and sent a letter to landlords informing them that they wouldn’t pay rent for April, which was published by Deadline. They reportedly hired restructuring lawyers, a pretty good sign that they’re considering bankruptcy, according to the Wall Street Journal. 

In a report from MKM Partners, cited by Variety, analyst Eric Handler estimated that theaters would remain closed until August, but AMC only had enough liquidity to last until July at the latest, given their fixed costs. “we expect the company will soon be faced with filing for bankruptcy,” he wrote.

The U.K.-based Cineworld, which owns Regal Entertainment and recently went into contract to buy the Canadian Cineplex for $2.1 billion, began laying off people in March. Greidnger told Variety in March that he was negotiating with landlords, and that given the 15- to 20-year terms of their leases, there was some flexibility.

“If there are three or four months that we will not be paying rent, it is really not a big impact on the general deal,” he said. 

Cinemark Holdings, the third-largest theater chain in the United States, laid off 17,500 people, furloughed many more, and executive staff are taking pay cuts, according to a presentation from the company to investors. Cinemark also said that it had enough cash on hand to make it to 2021 even if theaters remained closed and that it was drawing down on a $98 million credit facility. 

Manus Clancy, a senior managing director at Trepp, said they were watching AMC and Cinemark closely, and that CMBS debt with high exposure to either one were trading at deep discounts because of the impact their distress could have on real estate.

“Anytime you see restructuring moves like these, in movie theaters or other retail, the first thing they do is close underperforming locations and reject leases,” Clancy said.

And in the case of a bankruptcy, landlords have little recourse if a tenant suspends rent or returns a space. “Landlords will be at the mercy of the bankruptcy courts,” said David Feuerstein, a litigation attorney and partner at Feuerstein Kulick.

What’s particularly concerning is the recent precedent, set by Modell’s Sporting Goods, that has accelerated the timeline, said Clancy. Usually, while the debtor works out a bankruptcy plan with its creditors, it is still required to meet its obligations, including rent, until the plan is finalized. 

But in the case of Modell’s, which had 153 stores when it filed for bankruptcy in March, a judge allowed the sporting goods company to suspend rent payments immediately, while the bankruptcy process was ongoing. And Pier 1 is in the midst of trying a similar tactic.

“It would not be shocking for AMC to go to a judge and say we want to suspend rent payments,” Clancy said, and given the circumstances, “They might have a leg to stand on.”

In New York, landlords with AMCs in their properties include Ashkenazi Acquisitions on the Upper West Side; SL Green on West 34th Street; ABS Partners in the East Village, and Millennium Partners in Lincoln Square, two of which purchased their properties from AMC within the last few years. The landlords either declined to comment or did not respond to a request for comment.

Of course, independent theaters are facing troubles as well, and some are trying to stay afloat by offering at-home programming. The Alamo Drafthouse Cinema, an Austin-based chain that furloughed 80 percent of its workforce, rolled out a program called Alamo-at-home, and New York City’s longstanding Film Forum is offering five-day rentals of its curated movie selection. With so many people stuck at home, online streaming viewership is certainly on the rise, but with an abundance of options available, it’ll be difficult for independent theaters to compete.

Given these behavioral shifts, coupled with the economic factors that are reshaping Hollywood from production to distribution, it’s unlikely that when theaters reopen in two months, or four months, or six months, the movie business will be unchanged. 

On the movie production side, studio timelines have been interrupted; the Cannes Film Festival is canceled as of last week; Sony pushed most of its film openings to 2021, and the lineup of films scheduled to premiere this spring are being pushed to the fall at the earliest.

Cinemark said it’s aiming to reopen in July, and that it would potentially show only existing movies for the first two weeks, to test if audiences are ready to spend two hours with a roomful of strangers. But if it were to open, it’s not clear when there will be new movies to premiere. 

In the meantime, “Trolls,” which cost $20 to rent, is not the only movie that’s being released direct-to-video. Disney will release “Artemis Fowl” on its own streaming channel, Disney Plus, a move partially motivated by the potential to draw more online subscribers. Movies like “The Hunt,” which premiered in mid-March, are coming online early since they were unable to finish their run.

Still, it’s hardly a wholesale rejection of the theatrical release. While Universal claimed that “Trolls” had a record digital debut, and it scored the coveted top spot on Amazon Prime, the studio released no numbers to compare it to a theater opening. And the vast majority of films like the upcoming James Bond title “No Time to Die”, which was scheduled for an April release, are waiting out the pandemic.

Still, it wasn’t long ago that Hollywood was in an uproar when Netflix (NFLX) sidestepped the theatrical release process and director Stephen Spielberg tried to exclude Netflix films from the Oscars. “I want to see the survival of movie theaters. I want the theatrical experience to remain relevant in our culture,” Spielberg later told the New York Times. 

And the theater chains had their own qualms. After Netflix’s “Roma” was nominated for an Oscar in early 2019, Spielberg conceded defeat and instead asked AMC and Regal to show the movies in theaters, but they refused. And when Netflix tried to negotiate a deal with the theater chains for Martin Scorsese’s “The Irishman,” it failed, because the streaming giant refused to capitulate and wait the 90-day window before releasing it online.

So it’s telling that this staple of the movie business is fading in primacy. That’s not to say that theater chains will simply disappear any time soon, but the odds may have turned even more in favor of digital distribution.

That being said, President Trump listed movie theaters as one of categories of businesses that could reopen in the first round of a phased economic restart. And who knows? Maybe once this is all over, there will be a digital backlash, and people will be more than willing to leave their homes, buy overpriced popcorn, and immerse themselves in a different world, within a roomful of strangers.

Or in Spielberg’s words to the Times: “I feel people need to have the opportunity to leave the safe and familiar of their lives and go to a place where they can sit in the company of others and have a shared experience — cry together, laugh together, be afraid together — so that when it’s over they might feel a little less like strangers.” 

Correction: This story was updated to reflect that Mooky Greidinger is the CEO of Cineworld, which owns Regal Entertainment and recently acquired Cineplex, not Cinemark Holdings, as was previously stated.