Solomon Connects
Listen as Solomon investment bankers and key partners share their latest thinking and insights across a broad range of sectors, with a focus on M&A, financing, and dealmaking.
Solomon Connects
EP 06: The Resiliency of Experiential Entertainment and its Post-COVID Return
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
PJ SOLOMON's Head of Media & Entertainment, Rich Brail, speaks with CEO Marc Cooper on the state of experiential entertainment and the outlook for its reemergence in the post-COVID world.
Sneak Peek
Rich BrailThe key to the movie exhibition industry successfully reopening is threefold. First, the customer has to feel safe and secure to come out and play. Second, venues need to be open for business and COVID-compliant. And third, Hollywood needs to release the type of quality content worth watching. With these three elements in place.,we will see a successful relaunch of the movie industry heading into the third quarter.
Marc CooperHi everybody. I'm Mark Cooper, CEO, PJ SOLOMON, and I'm delighted to be here today with one of my dear partners, Rich Brail, who runs our Media & Entertainment practice.
Rich BrailThanks Mark. It's Rich Brail here. We focus on a broad range of sub-sectors in content creation and distribution ranging from books, toysand games, which are sold in retail. The music industry, which is enjoying a significant uplift from streaming TV and filmed entertainment, whether it be through streaming services, traditional broadcast, or theatrical exhibition, as well as digital content online,.
Human Nature is to be Social
Rich BrailRich you seem to be at the center of the storm, tell us what's going on. People want to be entertained. And of course human nature is to be social. We remain optimistic about the experiential entertainment sector, whether seeing a movie at the cinema, visiting a theme park or a family entertainment center, or frequenting a venue with a social competitive activity, such as bowling, axethrowing, go-karting... all while surrounded by expanded food and beverage. For example, seeing a movie at the cinema theater is fundamentally a social activity. It's immersive entertainment consumed as a shared human experience. Seeing a movie at a theater or any activity in a venue is very distinct from staying at home. If this pandemic has taught us anything, it's that people crave social interaction and there's a lot of pent up demand to get out. And with the right health precautions in place, seeing a movie in a theater can be a safe experience in the current environment.
Marc CooperAnd I hope that it is in fact true because I know that personally, I'm dying to get out and see a movie.
With Zero Revenues, How Will Theaters Survive?
Marc CooperBut how are they going to get through this time? And we're talking about not being down 50% or 80% or 70% down, but 100% of the revenue. How do you withstand a zero revenue environment for an extended period of time?
Rich BrailSo everyone went into hibernation. People had to close their doors. So, they found ways through their landlords, either for rent or some form of relief. They had to furlough their employees. So they reduced expenses any way they could. They spoke with their creditors and pushed off any kind of obligations. Everyone's in this together. Landlords who are overly harsh with their tenants will end up not having any tenants and that's not good in the l ong t erm. So the folks who've sort of recognized that we're all in this together, seemingly have made it through the hibernation phase, despite not having any revenues by minimizing costs. Theatres will be successful if three conditions are satisfied. First, the customer has to feel safe and secure. Exhibitors are going to great lengths right now to ensure social distancing, capacity restrictions, contactless purchases, masks, and other precautions and protocols are in place. Second, the venues have to be open with the business arrangements in place with vendors and financial resources to rehire their employees. And third, the film studios need to release quality content, which consumers are excited to go see. So consumers have to feel safe and secure in a venue which is open and COVID-compliant, which is showing quality product worth watching. If the consumer and venue content conditions are all met, then the industry is poised for robust reopening. The studio film release schedule is very strong for the end of 2020 and all of 2021 and more broadly in experiential entertainment. The content is the social competitive activity, safe customers , compliant venues and worthwhile activity means that the revenues will return. The only challenge will be if health conditions deteriorate and further outbreaks dictate reclosing venues.
Marc CooperSo understanding that our country is opening, we in New York a little later than most, but some communities are back to some semblance of normality. But recognizing
Necessary Capacity for Profitability
Marc Cooperit is a highly leveraged model, at what point from a profitability perspective, what point in capacity can theater chains prosper?
Rich BrailSo I think we're seeing an evolution in the business model. Movie theater going historically was very concentrated on Friday and Saturday nights. I think you're going to see a spread of the week, especially if people are working remotely, you know, what's to say people don't go out more often on a Monday night, if they don't have to get up early in the morning to catch a hour and a half long train on a Tuesday morning. So you may see a spreading out of the capacity of the occupancy across the full week. You also may see theaters operate much more efficiently where their labor model and their resource allocation is better suited to the business opportunity. If there are capacity restrictions because of social distancing, there are ways to show popular films and more auditoriums the way the release schedule is shaping up. At least in the first few months, a couple of films are going to have a very clear runway without a lot of competition and without getting out of the theaters after the first handful of weeks. So I think we're going to see longer runs of bigger feature films in more auditoriums where the cinemas can make a lot of money and get a lot of patrons to come through safely using reserved seating that keeps the social distancing. And people are also modifying their food and beverage offerings , having fewer personnel in the kitchen to save on labor costs, putting forward concessions that the patron really enjoys. And in an environment where people are still have health concerns, we're going to see a lot of innovation in how theaters operate to try to make the most profit they can from what may be slightly reduced attendance. So as we've seen in most crises, necessity is the mother of invention.
Marc CooperThe other question that seems to be on everyone's mind is more at
In-Home vs. Experiential Entertainment
Marc Cooperhome viewing of prime movies. And I know that you answered it with the notion that people want more experiential activities and, you know, wanting to get out from their home, maybe now more than ever, but as the older generation, who were not as technologically inclined have gone through this process or this period where the only content they can get is in their own homes because they start changing behavior.
Rich BrailThere's always been options for in-home viewing whether television, starting in the 1950s to cable in the eighties to VCRs DVDs, PVOD, SVOD, and now streaming services of all shapes and sizes. These in home viewing alternatives, even those which are mobile, compete with each other for consumer attention at home. There is no substitute for a night out. Look at the restaurant industry. Everyone has a kitchen at home and look at how people go out to restaurants, which are social. And immersive cinematic experiences, with exceptional audio and visual, surrounded by other people, human beings, laughing, clapping, crying. It's a collective experience. It's immersive and social, very different than an at home viewing experience of a streaming service alone on a mobile phone, distracted by social media or all sorts of other interruptions.
Marc CooperWhen we think about all the negative forces against the theater business, to your point, necessity being the mother of invention and trying to bring down our costs become more efficient, does this mean
Outlook on Theater Consolidation
Marc Cooperthere's going to be more consolidation?
Rich BrailMany of the cinema operators layered in additional liquidity to their capital structures to ensure that they could make it through this challenging period to the other side. If it turns out that attendance is more robust in the third quarter and fourth quarter and the especially strong 2021 release schedule that the studios have planned, these operators are actually going to be flush with cash on the other side. So I think that'll be another catalyst to increased M&A activity and consolidation where people have this excess liquidity to do transactions. So I do think there will be consolidation in the theater space. It's still very fragmented. The three largest circuits in the US, AMC, Cinemark and Regal, are only approximately 50% of the screens in the US. So there's a huge opportunity for all of the other players, most of which have far fewer than 200 screens, to consolidate. And the reason that consolidation makes sense is it's an intergenerational business, still there's third, fourth generation families who still own their circuits. And as we've seen in other sectors, in particular retail, at some point, the kids of the kids of the founder don't want to be in the business. So they naturally find a buyer. I think we're going to see private equity come back into owning movie theaters. Remember 15 years ago, movie theaters were owned almost entirely by the private equity world, whether it be Apollo or Carlisle or Bain, they owned AMC and Loewe's. Cinemark was owned by Madison Dearborn. So you'll see, I think a lot of these middle market private equity firms recognize that the return on invested capital of these cinemas is quite attractive. And by the way, if the movie theaters come out the other side, after a global pandemic requiring social distancing and capacity restriction, you have all these streaming services that have now emerged offering content in the home. When the movie theater industry opens back up on the other side and succeeds, I think private equity will recognize that this is pretty much a bulletproof industry. It's recession resistant because it's a low cost form of entertainment. And if the sporting arenas are still fanless, there's no ball games to go to. There's no concerts to go to. And if restaurants are still somewhat capacity restricted, it really will be the most affordable way to get out of your house and engage with other people and have a social experience. In addition to movie theaters, I think other forms of family entertainment are also going to benefit from all this. You're going to see a real increase in activity in all these types of venues, whether they be bowling alleys or axe throwing, anything that's social competitive, top golf, putt putt, all these businesses where people meet up with friends and have a social activity. Because keep in mind, all these corporations have worked remotely for three months going on six months, if you want to get together with your workers, but everyone's not going back to the office. Corporate business is a huge part of these venue oriented spaces. I think there's going to be a huge amount of business coming from corporates, looking to create safe, fun environments for their employees to remain connected. So I think private equity early owned a lot of these family entertainment centers. I think we're going to see more activity. And then a lot of these are early stage. So we'll see consolidation and platforms form that have multiple activities underneath one corporate banner.
Marc CooperWe've talked about the recent trend
COVID's Impact to Onsite Upgrades
Marc Cooperis upgrading the experience at the movie theater with state of the art seating and nice dining and all that. It's a significant capital outlay. How has the current environment changed that? And how has that pushed back some of that spending and some of the retrofitting of the theaters?
Rich BrailSo most of the theaters have been luxury converted to have the comfortable luxury recliners. Many of the circuits offer expanded food and beverage dining . A few circuits have experimented with it and either have decided that it wasn't for them or that it was maybe cost prohibitive. But a lot of that capital has been spent. I mean, the cinema industry spends more than a billion dollars a year on all these different upgrades. Now, part of that's reflected in the capital structures of, for example, an AMC or a Cineworld. And part of the issues they're having is their capital structure right now. But for a lot of the smaller operators, either the landlord participated in some of those upgrades and it may be reflected in their rent as well, but people were seeing the returns of it. If it weren't for COVID-19, movie theater circuits were enjoying robust growth, increasing theater level cashflow per attendees. So the cashflow after all their expenses were actually going up. So it was capital well spent . Unfortunately COVID-19, you know, was a huge setback. And by the way, this is true of all these experiential businesses, theme parks, family entertainment centers, all these venue based entertainment assets were having the best year ever. They all had record quarters even heading into February of 2020 of this year. They were set to have a record year and then everything came to a grinding halt.
Marc CooperBut when you think about the growing number
The Effects of Abundant Content
Marc Cooperof companies that are creating content, how is the relationship between those who make content and the distribution or the theaters? How has that relationship between content creation and content distribution evolved?
Rich BrailThey've always had to have a symbiotic relationship and be in balance. If the studios exert too much power over distribution or exhibition, then exhibition can't survive. Studio economics require these blockbuster films to have massive revenues in the theaters. You don't know what to watch on a streaming service unless it had the marketing and buzz from being in the box office. Studios learned a difficult lesson when the DVD goose that was laying the golden egg disappeared. DVD economics was an enormous part of content creation economics for the studios. And when that was gone, they had to find something to replace it. Streaming services have not yet filled the void of what DVD was, and certainly premium video on demand, where you pay a high price to watch a movie early on your cable operator box, has never been proved out. Too many hands are out for a piece of the pie. And the studios just can't make enough money, you know, charging $50 to see a movie two weeks after it gets released in the theaters. So having a billion dollar Marvel movie is critical to Disney's economics. And if they just put that on Disney Plus they've destroyed so much of the value chain for themselves. And, you know, a lot's been made of these studios that went direct to streaming during the pandemic. Look, the reality is Universal made a big deal about how Trolls did a hundred million dollars of revenue in three weeks worldwide. It was during a pandemic with everyone at home and kids with nothing to do. Like that was some sort of massive accomplishment. In reality, there are two types of movies. The first type is where it's a blockbuster like Avengers Endgame. And you want to see it the first weekend, because it's what everyone's talking about. And you don't want to have any spoilers. The second type of movie is you say to your friends or your husband or wife, and you say, let's go out tonight. Hey, let's go see a movie. And then you see what's playing and you see what the movie theaters have curated for you based on what the studios have made available. And it's very different than being at home with nothing to do and flipping on your streaming service, whichever ones you may have for free that are ad supported or those that are you're paying for through the subscription service and deciding what you're going to watch. It's just a fundamentally different equation. That's why I think that they are complements and not substitutes.
Beneficiaries of the "COVID Bump"
Rich BrailI think the first studios that release films may very well be the beneficiary of the COVID bump and be rewarded for going first. There are no other major films out. Most of the theaters across the U S will be open by then. And even if the biggest cities are not fully open for cinema, or if there are capacity restrictions, these operators in exhibition will show these early films across all their auditoriums for an extended run. And when you think about it, even with spaced seating, using the additional auditoriums, the economics will end up the same, if not better for those studios. And I think having the longer run will certainly be the case because there won't be that many films to replace it. Certainly not in the beginning. And if people haven't seen a movie or been out to the theater in three or four months, they're going to be ready to go out and see pretty much anything that's showing.
Marc CooperWhen you
Five Years from Now
Marc Cooperthink about five years from now, how do you see the movie theater industry playing in the broader economy? How do you see site-based entertainment? Where do you think the opportunities are? You know, what's going to be the picture?
Rich BrailWe expect there to be a fair bit of vacancies in the retail landscape... malls, strip centers. Landlords are going to have to figure out what to do with all this space. Movie theaters historically have been single purpose operations. So I think the movie theaters are going to survive. I think that they're going to adapt. Maybe we'll see a slight de- screening of the country. We'll see a combination of movie theaters with family entertainment centers so that you go to see a movie, but then you can also go to the arcade or do bowling or laser tag or any number of other, axe throwing, activities that people have now combined with the cinematic experience as a way to more efficiently use some of these bigger theaters. I think we'll also see more concepts pop up that are adaptations of your traditional movie theater, whether they be smaller auditoriums with dine-in, which has been extremely popular, especially in Texas and across various parts of the country. I think we may see fewer and fewer of the theaters that have become obsolete, where it's nothing special, the audio visual isn't special, the seats aren't special and the food isn't special. I think that as long as there's a differentiation where you really feel like you're going out to someplace special, there will absolutely be an important place in culture for venues which show film in a cinematic experience. I also think that's true for all these activities, these social competitive venues and theme parks. I think the theme parks are going to do so well once people are comfortable and the consumer comes out to play. It's just a matter of getting through this next stage. So to answer your question, Marc, I think five years from now, we'll see a slightly different construct around cinemas . We'll see additional offerings in the venues, we'll see better food, healthier offerings, we'll see even better audio and visual to further differentiate from the home. And I fully expect it's going to be a thriving part of the industry where landlords are going to continue to have a cinema as an anchor tenant for whatever their lifestyle mall or strip center.
Marc CooperRich, as usual, most informative. And I look forward to speaking with you again on some of these interesting topic .
Rich BrailWell, hopefully we'll go out and do it in a venue someplace. Thank you for listening to PJ SOLOMON Presents. For more information, please visit our website, PJ solomon.com.