Cinema stocks: the cycle of disruptions: as the pandemic changes the habits of moviegoers, the profits of the multiplex suffer

Last week, the world’s second-largest movie theater chain, Cineworld, confirmed it was filing for Chapter 11 bankruptcy. According to its latest filing, net debt was $5 billion and lease liabilities totaled $4. billions of dollars. Its market capitalization at the time of this writing was just over $35 million!

The market capitalizations of the world’s two largest cinema chains, AMC and Cineworld, have fallen 83% and 99% respectively from their all-time highs. Indian multiplex channels fared much better by comparison, with PVR shares just below pre-Covid highs, and

just above. They have underperformed the broader indexes by a huge margin, but their stock performance is nowhere near that of their Western peers.

Yes, Covid has taken its toll on multiplexes. Yes, Cineworld’s acquisition of US movie chain Regal ($5.9 billion) in 2017 proved fatally ill-timed. And yes, unlike AMC’s own stock status that allowed it to raise half a billion dollars in equity in 2021, Cineworld was not so lucky. But there is a larger question at play here – that of how the disruption has always taken the incumbents by surprise. In today’s article, we’ll take a tour of the history of the disruptions and how they left many distraught ‘once great’ companies in their wake, and what we as investors can learn from them. assaults.

In the mid-1800s, Instagram wasn’t trendy yet, but people still loved taking pictures. Cameras were later constructed using photographic glass plates as supports for negatives and were considered superior to film because they were stable and unlikely to bend or warp. But there was a problem – the cameras were huge and not portable.

That was about to change in 1888. “You push the button; we do the rest” was the slogan with which Kodak’s first fully portable camera was launched. The guiding principles of George Eastman (founder of Kodak) were simple: low-cost mass production, international distribution, intensive advertising and customer orientation. Kodak single-handedly changed photography by transforming it from a complex activity into a social practice that has become part of everyone’s life.

Kodak had a good run until the 1970s when Japanese film companies (Sony and Fuji) began aggressively entering the US market. Kodak lost market share during the 1990s. Sales of analog cameras and film still accounted for 64% of photographic products in 2002, but the world was changing. In 2005, the mainstream film sector was shrinking by 25% per year. For 120 years, Kodak had done everything by itself (at one time it even raised its own cattle and used the bones to make photographic gelatin). In the new digital world, Kodak could no longer do that. In 2011, its stock price fell below $2 per share and it filed for bankruptcy on January 19, 2012.

The funny thing is that the first electronic camera was invented by Steve Sasson, an engineer at Eastman Kodak in 1975. But it was photography without film and Kodak generated the majority of its profits by selling films . Management’s reaction was “it’s cute, but don’t tell anyone”.

While the Japanese companies Fuji (films) and Nikon (digital cameras) disrupted Kodak, another American company, Apple, worked to dethrone a Japanese giant, this time in the field of music. Akio Morita, co-founder of Sony, had the vision to marry digital technology with multimedia content in the early 1980s. But the engineers (not the media division) were running Sony. The idea that consumers could download music and continue to listen to it without resulting in additional sales for Sony did not sit well with them. Even when they arrived they introduced proprietary files that were incompatible with the growing mp3 market. By the time they were forced to cooperate, Sony had lost its footing in two crucial product categories – televisions and portable music devices.

The company that owned the Walkman brand (synonymous with portable music devices) was nowhere to be found by the time Apple’s iTunes became the industry standard. Sony’s market valuation in 2012 was down 87% from its highs in 2003 (when iTunes was introduced) and down 97% from highs in 2000.

Nowadays, the cameras and the music are no longer disturbed; the film exhibition business is. Pay-per-view and OTT services are doing their best to change the way movies are watched around the world.

PVR and Inox settled in the late 1990s when Indians were busy watching movies in stand-alone movie theaters or buying shoddy compact discs at the roadside or downloading illegal bit torrents. They didn’t just exhibit a movie in high quality, they sold the whole “cinema experience”: spend time with your family, enjoy the movie in good seats and in air-conditioned rooms, shop in the center shopping after the movie and end the day with dinner at the restaurant next door. A whole ecosystem has emerged – shopping malls with show houses as anchor tenants, restaurants and shopping markets, which have become the mainstay of many families in India.

In the first quarter of this year, 43 million viewers came to see films on PVR and Inox combined (they are in the process of merging). This number is still slightly lower than what they admitted in the first quarter of fiscal 2020 (pre-Covid). An average visitor paid Rs 250 for a ticket and consumed popcorn worth Rs 134 and paid Rs 20 in convenience fees. For a family of four, this amounts to Rs 1,600 per film. That’s a significant amount considering India’s current average income, but nonetheless, it establishes the fact that in just over two decades, showrooms have succeeded in disrupting the way movies were traditionally watched in India.

The challenge is now at their doorstep. Since the beginning of Covid, during the approximately seventeen months of cinema closures, production houses and moviegoers have changed their habits. They found higher quality content on the OTTs, often in languages ​​they weren’t used to (but dubbed into familiar languages ​​or with subtitles).

Now, however, OTTs are reeling from their own challenges, which makes the problem quite unique. The traditional three-month exclusivity window for theaters (before movies are moved to OTT) will soon be making a comeback. Whether or not that would drive more moviegoers to the movies remains to be seen, but one thing is certain: the earnings multiples that the exhibitors used to command will certainly take a hit.

(The author is co-founder of Buoyant Capital)