Adam Aron sounded exhausted.
The AMC Entertainment CEO had suffered a bruising week, watching the exhibition company he leads lose 27% of its value in a matter of hours after alerting analysts that its upcoming quarterly earnings would be worse than anticipated. On Aug. 4, having unveiled a calamitous report that saw the country’s largest theater chain drown in losses amid an industry-wide box office plunge, he was blunt.
“To say we were disappointed would be an understatement,” Aron said. “The quarter was simply a bust.”
AMC isn’t the only company hurting. All along the movie business food chain — from the studios that make the films to the companies that bring them to consumers — it’s been a summer of hell. Flops such as “King Arthur: Legend of the Sword” and “Baywatch” are dragging down the box office. Ticket sales are down 10.8% so far this summer and are off nearly 3% year to date. Theatrical revenues are expected to fall through the next two months. Over the weekend, the top-grossing new release, “The Dark Tower,” opened to less than $20 million. During the same weekend a year ago, “Suicide Squad” kicked off to $134 million. Summer’s supposed to be the most profitable time of the year for studios — in 2017, they can’t wait to put their swim trunks in mothballs.
Analyst Jeff Bock attributes the poor box office performance to one factor — “and that’s the over-reliance on sequels catching up to Hollywood,” he said. “Every one save for ‘Guardians of the Galaxy Vol. 2’ disappointed.”
The threat of digital streaming has also grown, catching up to studios, Bock argues. In the battle for viewership in a fragmented media landscape, studios are losing.
“The talk of last summer was [Netflix’s] ‘Stranger Things,’ and the talk this summer is [HBO’s] ‘Game of Thrones,’” said Bock. “It used to be ‘What’s playing this summer in theaters?’”
Nicole Rifkin for Variety
That, in turn, is triggering an intense selloff of exhibition stocks. Since the beginning of August, the top four theater chains in North America lost $1.3 billion in value. The bleeding may continue as the box office slide accelerates. If the second quarter was bad, just wait until the next one — estimates are that ticket sales could fall 15% year over year.
The major studios may be the ones being punished for raiding the franchise larder too many times, but it’s been a downright brutal few weeks for independent players. EuropaCorp stands to lose tens of millions on “Valerian and the City of a Thousand Planets,” a $180 million passion project from founder and director Luc Besson that will be lucky to hit $60 million at the domestic box office. Broad Green, the independent studio behind “A Walk in the Woods,” announced it was shuttering its production division and laying off 20% of its staff after years of flops.
The uncertainty is also inspiring consolidation in the indie space. Open Road, which backed 2016’s Oscar winner “Spotlight,” sold to Tang Media on Aug. 7 for an undisclosed sum, while Hasbro nearly snagged Lionsgate last week before talks broke down.
New independent distributor Annapurna scored a critical hit with its first release, Kathryn Bigelow’s “Detroit,” but the $30 million-budgeted drama about the 1967 riots will struggle to break even despite a major marketing push.
It would be easy to pin the blame for Hollywood’s hard times purely on the movies. But the issues go beyond mere quality control. One thing that the industry has been particularly skilled at in recent years has been unearthing new sources of funding; from Germany to China to Texas, studio suits have scoured the globe using the soft power of red carpet invites and selfies with movie stars to separate wealthy investors from their cash. But the dumb money has smartened up. Tired of losing its shirt on would-be winners like the “Ghostbusters” reboot and “The Brothers Grimsby,” Lone Star Capital pulled the plug on its slate financing deal with Sony in July. The studio spin is that the deal wasn’t a good one and that it doesn’t need the funding. That’s good, because according to one executive who met with Sony about taking over the Lone Star pact, financiers aren’t interested and weren’t impressed with the studio’s upcoming releases.
Then there are the China headaches, a series of countrywide contractions that are endangering the movie business’s most promising source of growth. This week, Viacom executives will travel to the Middle Kingdom to try to rescue $500 million in financing from Huahua after the media company missed a June payment to Paramount. Their trip comes as Dalian Wanda, the conglomerate that helped kick off the Sino spending splurge in Hollywood with its purchase of Legendary and AMC, is selling off some $9 billion in tourism assets to service its debt.
Stan Rosen, a longtime Chinese politics and society expert at USC, said that the country’s newly enacted restrictions on foreign investments abroad will usher in more selective investment in industries beneficial to China. “They’re going to look very carefully at any investment,” he said. “The message is clear that just because you can sign a deal with some foreign company doesn’t mean it’s going to be approved.”
Aynne Kokas, a University of Virginia professor and author of “Hollywood Made in China,” said the pullback in foreign investment is contributing to the film industry’s anxiety about China. The country is in the midst of a political transition, choosing new leadership for the Chinese Communist Party. Studios are also negotiating a new yearly film quota with Chinese officials, with the added tension of an audit that could show fraudulent box office reporting by Chinese distributors.
Because China’s film industry hasn’t grown as quickly as expected, American studios may have leverage. Kokas predicts the quota will be raised but warns that until that happens, there will be “continued uncertainty.”
Both Kokas and Rosen believe that the restrictions on foreign investment will be lifted, but the slowdown is leading to panic across studio lots. It’s also true that things could improve by next summer, when studios will try to lure moviegoers back to theaters with “The Incredibles 2,” “Jurassic World: Fallen Kingdom” and the Han Solo “Star Wars” spinoff. The theory seems to be that audiences still like sequels … to the right franchises.
Eric Wold, senior analyst at B. Riley & Co., is not convinced that 2017’s poor summer box office is cause for alarm. “People tend to overreact a little bit when you get a short-term period of box office weakness,” Wold said. “The first reaction is some kind of systemic problem with the industry.”
Barring some tectonic shake-up in consumer tastes, the box office will likely rebound. But in a world of digital giants and communications titans, movie companies are looking downright diminished. Take AT&T’s $85 billion purchase of Time Warner (a deal that is still waiting for a government rubber stamp). The telephone conglomerate is shelling out big money for the company behind HBO and Warner Bros. Yet even with all that cinematic and small-screen firepower, Time Warner will contribute less than 20% of its revenues. Are we moving toward a time when blockbuster movies and watercooler shows are something that gets thrown in with a more expensive phone plan?
Someday, and that day may be fast approaching, content won’t be king. It will be additive.