MORGAN STANLEY: One company could hit movie theaters hard

source
Business Insider

When MoviePass released its $10 a month subscription service for almost unlimited visits to movie theaters, fans went rabid.

The massive demand unlocked by MoviePass could end up giving the movie subscription startup a lot of leverage over the theater industry according to Morgan Stanley, which could end up being a problem for the theaters’ bottom lines.

In a note to clients Thursday, Morgan Stanley lowered its price target for Regal Entertainment, Cinemark Holdings and AMC Entertainment. Morgan Stanley said it expects a decline in earnings due to the impact of MoviePass on the industry.

“The key question for gauging the potential impact of MoviePass on the industry is how much leverage the service may eventually have over theaters to share ticket and concession revenues,” Morgan Stanley wrote.

Morgan Stanley said that MoviePass’s business model is based on building up a subscriber base large enough that the startup can eventually go to the movie theaters and ask for a cut of their business.

Morgan Stanley thinks that about two-thirds of the current movie-goer population in the US could eventually buy a MoviePass subscription, which would equal about 20 million people. If Movie Pass can achieve those levels, it would have significant leverage over the theaters, and would likely ask for some cut of the ticket and concession sales.

If the theaters say no, MoviePass’s could steer its subscribers away from certain theaters by offering discount packages with local businesses. Morgan Stanley said MoviePass could offer a discount to a local restaurant if a user goes to an AMC theater instead of a Regal Cinemas theater, for example.

Morgan Stanley estimates that 20 million MoviePass subscribers would purchase up to 180 million tickets annually, which would be about 27% of the theaters’ total ticket sales. If MoviePass is able to control 30% of a theater’s business, Morgan Stanley thinks that it would have sufficient leverage to ask for a 10% or 20% cut of the theater’s ticket and concession sales. A 10% cut could reduce the theaters’ earnings before interest, taxes and amortization by up to 6%, according to Morgan Stanley’s calculations.

The bank rates all three theaters a sell. It lowered its Regal price target to $13 from $17, its Cinemark price target to $30 from $34, and its AMC price target to $12 from $14.

The 2017 box office results haven’t been great for theaters so far, further eating into theaters’ earnings.