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It was only a little over a month ago that I last checked in on AMC Entertainment (NYSE:AMC) and ordinarily I wouldn’t be writing about it again so soon. But there have been a few recent developments that I wanted to take a closer look at because they relate directly to my thesis on the company: that AMC is not a good investment unless it successfully adopts a radical new business model for moviegoers.
With its latest initiatives, has it done that?
A Roaring Run Up
To be sure, the past month has not been kind to my prior prediction. A month ago, I wrote a bearish article arguing that AMC was not a good investment; since then it’s, up 50%.
However, turn that very same question around for a minute. With a market cap now approaching $10 billion, AMC needs to generate $500 million a year in profit to reach a 20 P/E ratio. At the moment, it’s still bleeding red ink.
Which brings us back to the fundamental question of whether AMC has made the sorts of changes that should reassure investors that its business model has been repaired.
AMC Is A Gold Mine … Literally
The most recent announcement actually has nothing to do with moviegoing at all. Last week we found out AMC was purchasing a 22% stake in a gold and silver mine for $28 million. CEO Adam Aron made it clear he sees this as just the first in a series of acquisitions outside AMC’s core movie theater industry, as the company looks to put its $1.6 billion cash hoard to work.
The analyst reaction to the announcement was mixed at best. While some merely called it ‘surprising’ or ‘bizarre,’ a few couldn’t resist calling it ‘a serious misuse of shareholder capital’ or even just ’embarrassingly stupid.’
I don’t know that I’d quite go that far, though it certainly is surprising. The way Aron explained it, AMC sees a situation where it feels a company’s stock is selling for less than the value of its tangible assets, so it wants to buy in on a severely undervalued company. I don’t entirely buy into that, but it’s not the worst idea I’ve ever heard.
What made me uneasy, however, as Aron explained his creative new approach in what must, for a movie theater company, be considered a side project of sorts, is how much that same creativity is desperately needed in AMC’s core business … and is desperately lacking.
The Need For Change …
One of the few things AMC bulls and bears agree on is that the old way of doing things isn’t going to cut it anymore: something in the movie business has to change. Even Aron has said so. And yet, whenever someone tries to make that change happen, you can usually count on Aron and AMC to try to torpedo it, and preserve the status quo, which they themselves have already admitted can’t be preserved.
And Changing
Consider, first of all, the biggest revolution in moviegoing this century, the original MoviePass. When it first launched, it was offering to pay full price on customer’s movie tickets for a subscription fee that cost a fraction of the tickets they were buying. Was Aron duly thankful for this free bonanza of subsidies?
Actually, AMC Theaters consulted lawyers to try to find out the best way to legally bar MoviePass users from seeing films in their theaters – and were promptly told there was no such option available to them, at least not a legal one.
I’ve never understood why they were looking for one in the first place. MoviePass was offering AMC a way out of the central conundrum of all movie theaters – their suppliers products have become sufficiently non-fungible that theaters have lost virtually all negotiating leverage with them.
Unfortunately for AMC, its competitors weren’t so inflexible. It was only three months after MoviePass’s big reveal that Cinemark (CNK) first launched its own subscription service, called Movie Club, which offers one free ticket a month for $8.99 a month, as well as additional tickets for a flat $8.99 per ticket price. Essentially, protecting them from surcharges on evening and weekend titles. It also offers 20% off concessions and no-fee online ticket ordering.
Still AMC management said no. A little while later, however, reports were that AMC executives were increasingly open to it, despite calling MoviePass’s identical business model “unsustainable.” The process culminated in the launch of AMC A-List. Today, almost all theater chains have a subscription product of some kind, some of them priced almost as low as MoviePass. But AMC was last to get there.
Trolling Universal For Trolls
Of course, MoviePass itself didn’t last, so the argument could be made that management was at least partly vindicated. But the issue is the consistency with which this pattern repeats. During the COVID crisis, many studios felt they had no choice but to adopt new distribution models, since theaters were virtually all closed. The first to move was Universal Studios, which released its slate of films ‘day-and-date’ – simultaneously on streaming and video-on-demand along with in theaters. Shortly thereafter, Comcast (CMCSA) reported that its new Premium VOD strategy was actually generating a lot of money. Comcast would be launching further such titles.
Many would have argued that with movie theaters, after all, shut down, they had no choice. But AMC released a very sharp reply which after a few COVID-themed pleasantries delivered its bombshell: AMC was immediately cutting all Universal movies out of its screens at all of its locations. AMC, Aron insisted, would not “meekly accept” Universal abandoning the 90-day industry window standard. And, Aron went on, he really, really meant it: “This policy affects any and all Universal movies per se, goes into effect today and as our theatres reopen, and is not some hollow or ill-considered threat.” AMC, Aron insisted, had to draw a line in the sand.
Well before AMC theaters had widely reopened, AMC and Universal cut a new deal … with a minimum theater exclusive of 17 days. And Aron had this to say:
We cannot just live in the past, [f]ear change and hope that it will never take root. Sometimes one has to stare change in the face, recognize that it has or soon will arrive and reshape it to one’s own benefit.
Sure, some hope that this is merely a short-term coping with closed theatres during the virus. But we saw a changing industry where we at AMC needed to figure out how to be included…
It was a through the looking glass moment if there ever was one.
The 17 number is somewhat illusory, since Universal doesn’t really have any incentive to pull a movie from theaters after 17 days if it is doing well, and AMC doesn’t really care if a movie is pulled if it is doing badly… but Universal probably would keep a bad movie in anyway, since it wouldn’t do any better on PVOD than in theaters.
The shift to shorter windows was real, however, even if it wasn’t quite as drastic as the Universal announcement made it seem. Warner Brothers new deal with AMC calls for a 45-day window, as does Paramount’s (PARA) new deal – though that deal calls for some to be available as little as 31 days after, and all of these new arrangements will see certain titles bypass theaters entirely. Most other studios now have similar arrangements.
A Troubling Pattern
You could try to make reasonable arguments for how AMC handled these and other issues in isolation. The problem is the pattern is consistent: someone launches a new approach to some aspect of the movie business, AMC management belittles it, threatens it with either economic or legal action, insists it will never work, and then a few months later desperately scrambles to copy it.
Given this history, it is more than a little incongruous to see management, when buying a gold mine of all things, try to put itself forward as some sort of visionary maverick, boldly going where no one has gone before. In point of fact, CEO Aron and his team almost always have to be dragged kicking and screaming to new ideas. At least in their core industry.
That doesn’t mean that so-called “outside the box” ideas like this one can’t succeed, of course. I don’t claim to be an expert in the gold mining business and I don’t know what’s going to happen with this particular investment AMC has made. But an abundance of creativity in side projects cannot make up for the lack of it in the core business.
Meanwhile, Back At The Ranch…
Turning back, then, to the actual moviegoing business. As I’ve argued in my previous research, AMC’s challenge is to find a new business model that doesn’t rely on blockbuster franchises to produce veritably the entirety of the industry’s profit… because when studios know it’s their blockbusters doing the heavy lifting, they have every incentive to extract all that profit for themselves and leave theaters with little to nothing. I argued for either a major push into a cheaper, comprehensive subscription offering – something closer to MoviePass than AMC’s $24 per month A-List offering – or a major live event push into NFL, college or other rights.
AMC hasn’t ruled out the NFL, though they still badmouth lower-priced subscriptions every chance they get. Meanwhile, they are considering one possible business model change: variable pricing, though not too variable.
A New Experiment
This past month, AMC charged an extra $1.50 to see the quarter’s top title, The Batman, over and above its regular prices – matinee discounts were still available, however, with the $1.50 still added on as a surcharge. Overall, AMC’s average ticket price was roughly 10% higher on Batman than its other tickets
Contrary to some predictions, the surcharge did not produce an outpouring of customer hostility. That’s probably at least in part because AMC wasn’t alone; Cinemark and Regal also charged extra for the blockbuster film, but unlike AMC they’ve refrained from boasting about it.
The Limits Of Success
But while the surcharge has gone about as well as it could, that doesn’t mean that investors should see it as a turning point in AMC’s business operations.
Studio Reaction
First, while customers took it in stride, there’s the question of studio reaction. Surcharges on some films necessarily imply that other films are not as deserving, which can set off confrontation with different studios and even different creators within the same studio. At the same time, some who do have surcharges attached to their films can object that such charges reduce foot traffic into the movies, which they may be planning on monetizing in other ways, like Disney’s (DIS) theme parks and consumer products. Avoiding such disputes is precisely why theaters have historically charged the same prices for all their fare.
The Limits Of The Surcharge
A more serious problem, though, is simply the math. Surcharges are, like most of the industry’s approach over the last few years, a tweak that fails to come to grips with the depths of the problem.
AMC confronts an industry roughly half the size of its pre-COVID years, and that is with the hauls of Batman and Spider-Man propping it up. Q1 box office this year will probably come to a little over $1.3 billion as compared to $2.4 billion in 2019. Assuming an average 50/50 split, the theater industry is responsible for $550 million of this shortfall.
How much of this gap will the surcharges fill? In 2019, the last “normal” year we have records for, roughly 40% of tickets sold were sold for the top ten movies at the box office. Assuming that all those films had a roughly 15% surcharge added on, it would boost total revenues by roughly 6%.
AMC could always try boosting the surcharge, of course, or expanding it to more films. But the more films it applies to, the more it ceases to be a selective surcharge and starts to look more like just another broad-based price hike. Which we already know doesn’t work, since “keep hiking prices and don’t change a thing” has pretty much been the industry motto for the last two decades, and there’s been precious little profit to show for it the last five years.
It is simply not easy to foresee any way in which a surcharge approach fills the revenue hole.
Who Keeps The Money?
Finally, even if surcharges do somehow plug a meaningful portion of the revenue hole, how exactly does that help AMC? As I said, the whole reason the theater industry is in trouble – putting aside COVID attendance issues – is that it has become increasingly dependent on blockbusters, which the studios know and now use as leverage to extract virtually all profit they generate. If it does turn out that blockbusters are capable of generating even more money than they already are, how exactly will AMC prevent Disney, Warner and the others from extracting that profit as well?
Investment Summary
I don’t object to the mine investment, exactly, so much as I can’t help but bemoan the sharp relief into which AMC’s creative side ventures throw the utter lack of it in its core industry.
I can’t deny AMC’s strong stock performance over the past month, but I respectfully submit it is unwarranted. The holes in the business model have not been fixed. Even if this surcharge does portend another revenue opportunity, the beneficiaries are far more likely to be Disney, Warner and Paramount than AMC.
I maintain a Sell recommendation on AMC.
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