Bold or Reckless? Movie Business Debates AMC and Universal’s Early VOD Deal

Brent Lang, Rebecca Rubin and Manori Ravindran
·10 min read

AMC Theatres and Universal Pictures’ deal to dramatically shorten the amount of time that movies play exclusively on the big screen is resounding like a thunderclap across the film business.

The alliance, once considered improbable, is challenging long-held prejudices, while leaving executives and creative talent to navigate a new topography. It’s already inspiring a fierce debate over whether or not AMC and Universal’s partnership is a bold and necessary move for uncertain times or a reckless play born out of desperation.

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One thing everyone agrees on is that it’s historic.

The pact has emerged despite an often contentious battle between studios and exhibitors, who been debating windows — the industry term for the timeframe before movies are available on-demand — for years. But coronavirus shutdowns put the discussions on a fast track, surprising many with the speed with which it was decided.

“I can’t underscore how big and monumental this is,” says Rich Greenfield, a media analyst with LightShed Partners. “I think [NBC’s CEO] Jeff Shell will be remembered for what everyone thought was impossible.”

The pandemic dramatically shifted the power dynamics between studios and exhibitions, giving content creators more leverage in the debate over how films are made, marketed, and distributed. Since movie theaters were shuttered in March, Universal has circumvented cinemas to put “Trolls World Tour,” Judd Apatow’s comedy “The King of Staten Island” and other titles on premium video on demand, finding a winning model to capture audiences at home.

“Pre-coronavirus, we were marching toward shorter windows,” said Erik Gordon, an associate professor at University of Michigan. “Covid changed the balance of power so now we’re racing toward shorter windows.”

The ceasefire between AMC and Universal is surprising because for a long time, exhibitors have argued that shortening the window will cannibalize their business. They believe it will encourage consumers to avoid theaters, no matter how compelling a new release may be, in favor of waiting a few weeks to stream it in their homes. But AMC has bargained that this was a risk it had to take and it will be compensated for its willingness to take the plunge, according to insiders. The theater chain could earn as much as 10% of the revenue from any film that Universal puts on premium video on-demand. In return, Universal has the option to make any film it distributes available for rent three weeks after it debuts in AMC’s theaters. The studio has to charge a minimum of $19.99 for the rental, which lasts 48 hours.

In the short run, however, Universal’s competitors are proceeding with caution. AMC has reached out to the other major studios to offer them slightly different terms from what Universal has agreed to, but has yet to find any takers. Universal is believed to be getting more generous terms because it made the deal first. Under its proposal to other studios, AMC would receive 20% of gross revenue from the rentals. It would also have to pay 2% less for each film it distributes from a particular studio. That means that if the theater chain and a studio split the box office returns, AMC’s take would be 52%, netting it millions of dollars on top titles. In return for being able to release their films on-demand earlier, studios would have to contribute an additional $2 million annually for marketing.

Universal and AMC declined to comment for this article.

So far, the pitch is receiving some skepticism. Disney is particularly dismissive of the idea, because it fears that the shorter windows will jeopardize the profitability of family-friendly titles. Theoretically, parents would save a great deal of money on tickets and concessions by skipping theaters and paying $20 to rent an animated hit instead of shelling out for individual tickets. And in recent years, Disney’s dominance over the box office has been unparalleled. The studio commanded nearly 40% of the domestic market — doubling that of its closest rival studios, Warner Bros. and Disney. Thanks to an arsenal of intellectual property ranging from Star Wars and Marvel superheroes to Simba, Woody and Buzz Lightyear, the studio has consistently been able to squeeze juice from ticket sales.

Of course, just a few months ago hardly anybody would have expected that AMC and Universal would be the first to forge such a landmark pact. Up until their joint announcement, the two were engaged in a public spat that unfolded in April after AMC’s CEO Adam Aron banned the studio’s movies from playing in his theaters because it had debuted “Trolls World Tour” on-demand.

Industry experts are also shocked by how drastically the window was slashed. Less than 12 months ago, AMC refused to show Martin Scorsese’s splashy crime drama “The Irishman” because Netflix, its distributor, wouldn’t play the movie exclusively in theaters for more than 30 days. Now, Universal has the option to debut movies on premium video-on-demand after 17 days on AMC screens. The argument, at least on the behalf of Hollywood studios, is that movies generate most of their revenues during the first three weekends in theaters. But if audiences believe there’s more cost saving in waiting for a film to land on digital rental services, the loss for theaters could be incalculable.

“We expected a 30-day window, and were surprised to see AMC agree to only 17 days, which increases the risk many consumers will wait a few weekends to see films in home rather than going to the theater,” Andre C. Rosenblatt, an analyst at Credit Suisse, said Wednesday morning in a note to investors.

That doesn’t mean sequels “Jurassic World,” “Despicable Me” or “Fast & Furious” — three of Universal’s most successful franchises — will arrive in people’s homes in less than a month. These blockbusters have the potential to generate hundreds of millions in ticket sales, and shortening the timeframe could result in money lost for both parties. However, if smaller dramas and comedies, the kinds of movies that haven’t been box office goldmines as of late, aren’t performing as robustly as the studio hoped, Universal can attempt to capitalize on other audiences through digital rental services. It also gives studios the opportunity to take a chances without putting as much on the line. And should a movie become a breakout hit, as was the case for Universal with Jordan Peele’s “Us” and “Halloween” starring Jamie Lee Curtis, the company can wait before putting it on-demand.

“If this arrangement was structured in a way that results in higher studio profitability or less studio risk, we could see more theatrical releases (and a more diverse slate of films), which could prove a positive for theaters over time,” Rosenblatt wrote.

As far as other cinema chains, it’s unclear they will follow suit. It’s possible that other movie theater circuits will balk at Universal’s new definition of a theatrical window and refuse to play the studio’s films. However, this does ensure that the studio will have hundreds of locations at its disposal because AMC is the nation’s largest theater chain. AMC’s main competitor, Cineworld, the owner of Regal, was adamant that it would not sign similar deals with studios.

“We do not see any business sense in this model,” Mooky Greidinger, CEO of Cineworld, said in a statement, adding, “At Cineworld/Regal, we are not changing our policy with regards to showing only movies that respect the theatrical window.”

Already, rival exhibitors in other parts of the world have expressed similar frustrations. Universal communicated its plans to select global exhibitors mere hours before publicly announcing its deal with AMC on Tuesday — a last-minute gesture that bent some senior exhibition executives sorely out of shape. One European exhibitor, who spoke to Variety on the condition of anonymity, said “The level of animosity, globally, against Universal is like nothing I’ve ever seen.”

“I don’t think they care, but they seriously pissed off people in the last 24 hours, and everyone feels the same way,” the person said.

Although its influence has declined, North America continues to be the largest single market for almost all Hollywood films. But international theater owners are confused about the parameters of the plan. While Universal confirmed the deal won’t apply to tentpoles such as “No Time to Die,” where the studio is only handling international distribution (MGM will roll out the film in North America) it’s unknown exactly how many films will fall into the agreement.

“The only thing that’s guaranteed for AMC is it’s not going to drive more people into their cinemas; it will drive more people to [premium video on-demand]. I can’t see them making much money on this,” the source said.

There are anxieties about whether the Universal and AMC model can work across varied international markets, which each adheres to a different set of economics.

In France, Jocelyn Bouyssy, managing director of France’s second biggest multiplex operator, CGR Cinemas, called the windowing discussion in the U.S. a “gentleman’s agreement,” whereas in France, the strict windowing system “is the foundation of film financing.”

“It seems like a fair deal [between AMC Theatres and Universal], but I hope it doesn’t give the wrong signal because our situation is already disastrous — every day we’re hearing bad news,” she said. “The risk will be seeing studios decide to forgo the theatrical releases of films if they don’t perform well enough when they launch them on the streaming services.”

Theater owners in Spain first heard about the deal by reading it in Variety, one exhibitor there said on Wednesday, adding that to the best of his knowledge, no Spanish exhibitor has been contacted by Universal. But it seemed to him to be just a matter of time before studios did attempt shorter windows: “They need the cash, as does AMC.”

He noted that any move to shorten the theatrical window would be “fought to the death” by Mexico’s Cinepolis, owner of Yelmo Cines, one of Spain’s biggest cinema chains. The other exhibition circuit, Cinesa, may be more pliant, since it is owned by AMC Theatres.

Then there’s the issue of AMC and its finances. The company is heavily, some would say dangerously, leveraged, having ended 2019 with more than $4.75 billion in borrowing. Even though it has renegotiated its debt and improved its liquidity, there are substantial reservations about its ability to remain solvent (concerns AMC itself raised in public filings). If the company is forced into Chapter 11, will its deal with Universal or other studios survive?

Movie theater bears believe that the exhibition industry was flatlining even before the pandemic — rising ticket prices goosed revenues, but attendance was relatively flat. They question if people will come back to the cinemas in droves, having grown accustomed to the convenience of streaming services such as Netflix and Disney Plus. For them, the pact between Universal and AMC may be almost beside the point. Consumer behavior was shifting pre-COVID, it may have changed irrevocably post-pandemic.

“It’s too little, too late,” said Schuyler Moore, a partner at Greenberg Glusker, who has brokered many entertainment industry deals. “It’s irrelevant. The window has slammed shut. AMC didn’t really have a choice. The question is why did Universal even bother?”

Moore may be proven right, but others are less dismissive. For those whose lives and careers depend on movies, the decision made in C-suites in Universal City and Kansas City, where AMC is headquartered, feel very consequential indeed. The future of the theaters they run and the films they make may be tied to this 17-day window. On Wednesday, the debate around Hollywood and its various outposts was whether that will preserve the theatrical experience or hasten its demise.

Elsa Keslassy, Patrick Frater and John Hopewell contributed to this report.

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