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Cineplex Inc.: Why the Box Office Pains Are Just the Beginning

Over the past few years, the box office segment has accounted for less of total revenues for Cineplex Inc. (TSX:CGX). It’s clear that the company plans to continue its move away from the traditional movie-and-popcorn business and into new entertainment areas, but this dilution of the core business is a process that will take many years. Contrarian investors looking for a sharp rebound may need to look elsewhere if quick gains are what they’re after, since the pains are likely to continue over the medium term.

You’re probably well aware that video streaming platforms are a huge problem for the movie theatre industry. These streamers are going to compete with one another for subscribers, resulting in upped content budgets and the rise of hit straight-to-stream movies.

These straight-to-stream films aren’t the “low-budget” productions that you’d typically expect with the “straight-to-VHS” releases back in the old days either. Bright, a film that went straight to Netflix Inc. (NASDAQ:NFLX) with a reported cost of ~$90 million, isn’t exactly what you’d call a low-budget movie. Given Netflix’s commitment to the production of original content, even bigger budget “blockbusters” may be skipping theatres over the next few years, leaving Cineplex and other theatres out in the cold.

Why would major movie studios choose to skip theatrical releases?

I don’t know if you’ve noticed, but many extremely high-budget films have been surprising duds over the past year. And it’s not because the movies stunk, either! This was one of the major reasons why I urged investors to sell Cineplex last year before shares took a massive plunge.

Consider Valerian and the City of a Thousand Planets or Blade Runner 2049, two major sci-fi films with estimated budgets north of ~$150 million. I went to see each film on their respective opening weekend at my local Cineplex, and I was shocked to see that the turnout was ridiculously small. The turnout was less than you’d expect from an indie production or a limited theatrical release of a National Live Theatre play.

As it turned out, both films ended up underwhelming in North America. The critics loved Blade Runner 2049 as well with its respectable 87% rating on Rotten Tomatoes, so the weaker-than-expected turnout was not due to quality. It just goes to show how rapidly consumer preferences are changing in the “stay-at-home economy.”

Fellow Fool contributor Will Ashworth is used to the “boom-and-bust” nature of the theatre industry and doesn’t think the industry’s secular decline is anything to panic about. Bad years of box office duds have happened in the past, after all. As soon as better content is released in theatres, moviegoers will return, right?

I’m less optimistic, especially when you consider how uneconomical it’s become for studios to continue along the path of theatrical releases.

Consider Paramount’s recent decision to sell its international film rights for Annihilation to Netflix. The film has a huge star in Natalie Portman and received very positive reviews from critics; however, Paramount chose to skip theatres altogether when it came to markets outside North America and China.

If moviegoers don’t go to theatres, studios are just going to assume the worst from a theatrical release, and eventually, studios won’t even bother with theatres. They’ll just sell rights to Netflix or some other streamer from the get-go. That means Cineplex will miss out on its cut, and studios will have more incentive to produce low-budget straight-to-stream films to turn out a better profit.

So, it’s not necessarily bad content that’s killing Cineplex; it appears that major studios are exploring more economical options as the industry continues to evolve. Annihilation had a solid 85% on Rotten Tomatoes but clocked in a very underwhelming $11 million on its opening weekend. Investors have to be asking themselves why such studios would bother risking their capital on a high-budget production when a low-budget streamer would have been a low-risk way to command a fatter profit margin.

It seems like only Walt Disney Co. (NYSE:DIS) movies are able to blow it away at the box office these days. So, unless other studios have a superhero movie of their own or some other family-friendly production, streaming may be the preferred release option in the future, unless Cineplex is willing to take a hit to its box office margins.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of Walt Disney. David Gardner owns shares of Netflix and Walt Disney. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of Netflix and Walt Disney. Walt Disney is a recommendations of Stock Advisor Canada.

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