Cinemark deal with Universal and WW1984 – more arrows in movie bull quiver ($CNK, $IMAX, $NCMI)

Two pieces of news have dropped in the last week that overall improves the bull thesis for Cinemark, National CineMedia and IMAX. Both news items confirm that studios remain invested in theatrical releases and continue to believe they represent good economics even in the worst environment for theaters since the dawn of movies. Let’s review both:

Wonder Woman 1984 (WW1984) doing hybrid release in theaters and HBO Max

Yesterday (11/18), Warner Media CEO Jason Kilar announced WW1984 will be released in theaters and on HBO Max on Christmas. Per the blog post the company published, this is “unprecedented” in the history of film. The company breaks down why it did this in the post and offers some key considerations I want to reprint here:

Later in the post:

We are, of course, in an extraordinary moment. This entails a patchwork of regulations, geographic considerations and, most importantly, fan preferences. With that in mind, we see an opportunity to do something firmly focused on the fans: give them the power to choose between going to their local cinema or opening on HBO Max.

Calling out “the power to choose” I think shows Warner wants to discover consumer preferences in what amounts to a big A/B test. There even seems to be a hint of how they might evaluate this A/B test later:

I find it fascinating that we will be measuring the performance of this movie in an entirely new way. To use a line from The Wizard of Oz, we’re not in Kansas anymore. While we will pay attention to theatrical revenues, our expectations are clearly adjusted due to COVID-19. In parallel, we will be paying close attention to the numbers of families and fans diving into HBO Max, as we certainly anticipate that a portion of fans will choose to enjoy Wonder Woman 1984 that way on opening day and beyond. To provide a comparable, a little over four million fans in the U.S. enjoyed the first Wonder Woman movie on its opening day in 2017. Is it possible for that to happen again this Christmas with Wonder Woman 1984 between theaters and HBO Max? We are so excited to find out, doing everything in our power to provide the power of choice to fans.

So the non-COVID comp is 4 million fans in 2017 – what would be an acceptable number for this Christmas? 1 million? 500K?

I’ve been going to movies on Christmas for years now and I think people might be surprised by the strength of demand to escape boredom even during COVID. If this experience goes well for moviegoers (and there’s no reason to think it won’t – $CNK reported not a single case of COVID has been linked to theaters and that those who have attended a movie during COVID are 96% satisfied), many are likely to return to theaters. If Warner deems this A/B experiment a success, we’re likely in my opinion to see more theaters commit to putting big titles on the silver screen.

A word on expectations – as a $CNK, $NCMI and $IMAX shareholder, I had written WW1984 off. On recent calls for these companies, management all said they were uncertain how this would play out and expressed great caution on Q4. This is definitely a win for theaters. That said, I think there remains some headline risk if 1) a COVID outbreak occurs because of WW1984 or 2) attendance is extremely poor and HBO Max streams in contrast are excellent. I think the likelihood of (1) and (2) is low. Even if I am wrong, I don’t think either happening is thesis breaking. The one thing that matters for the movie theater thesis is a return to relative normalcy one year from now.Cinemark agrees to deal with Universal allowing for dynamic release windows for films and gets portion of PVOD revenue

CNK announced on Monday (Nov. 16) that it had agreed with Universal on a deal that gives it 17 days (three weekends) of exclusivity for new films. Titles that make $50 million or more will get a 31 day exclusive (5 weekends). For comparison, the previous window was 75 days, and is obviously being shortened as studios want to de-risk from COVID by getting PVOD (Premium Video on Demand – note Universal is a division of the cable provider we all are not big fans of, Comcast) revenue earlier. AMC made a similar deal with Universal in July of this year.

Importantly, it seems CNK does get PVOD revenue from this deal:

Sources with knowledge of the deal have told TheWrap that Cinemark will receive similar PVOD profit-sharing.

Additionally, this article on AMC’s deal with Universal confirms they are getting revenue share on PVOD.This news on the surface could be interpreted negatively as theater exclusivity decreasing from 75 to 17 days makes theaters worse off than before COVID. 17 days, however, is above zero and gives consumers a chance to state their preferences with their feet. The $50 million hurdle to get to 31 days also is pretty low. I looked at this list of domestic 2019 opening weekends and movies like Downton Abbey (I used to watch the PBS Show – very limited audience), Glass (more mainstream but still not a blockbuster) and the Secret Life of Pets 2 (as far as I know, not in the same class as some other kid favorites)  did well over $100 million in a single week. As another comp, a top film like Frozen II did well over $200 million for the long Thanksgiving weekend.

Here’s the question I think should be asked as a $CNK shareholder – can any film in the next two quarters clear $50 million in 17 days? If movie theaters operate at 50% capacity and a film does $25 million, $15 million and $10 million in its first three weeks, you’re there. This ask seems pretty do-able and I have strong conviction at least one movie gets to the finish line.

The revenue share on PVOD also is a bonus I wasn’t expecting and can only help the theaters.

I’m continuing to increase exposure to $CNK, $IMAX and $NCMI via dollar-cost averaging over time. I’m a strong believer that as you reach more certainty on your conviction for names you own, you need to add to positions. Will Danoff has a poker analogy here I really like – if the flop improves your hand in Texas Hold Em, you should be betting. I feel my hand just improved on movie theaters / movie advertising – studios are giving theaters a chance during the height of COVID and even extending a nice olive branch through PVOD revenue share.

Happy trading,