Will the Multiplex Go the Way of the Drive-In?

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In December 2020, an announcement by Warner Bros. Entertainment that appeared in both industry press and mainstream news outlets sent shockwaves through the motion picture industry. The studio's entire 2021 slate of films would be released simultaneously on its streaming platform, HBO Max, in addition to theaters. The decision signified a fundamental change to the ways Hollywood does business that The New York Times described as "a strikingly grim comment on the future of movie theaters." This shift from tradition, in which films are released theatrically first, prior to streaming, relates only to 2021 releases and was prompted – in part – by widespread theater closures resulting from the COVID-19 pandemic. In another sense, however, it reflects an industry shift that may have broader implications on retail real estate, especially for owners of shopping centers with significant space dedicated to motion picture theaters.

The concept and the mechanics of streaming media on platforms like HBO Max, Netflix, Amazon Prime, Hulu, Disney+ and others is familiar to most consumers. Beyond allowing audiences to consume new content where and how they choose, the release of a film on a streaming platform leads to an entirely different revenue stream for studios and production companies than a theatrical release. In most cases, streamers generate revenue from subscriptions to an entire platform rather than ticket sales for a specific film. It therefore becomes challenging to quantify the success of a specific film that is released on streamers, and nearly impossible to monetize the contributions of a film's talent and producers in the same ways that traditional film finance looked to percentages of theatrical sales. An immediate streaming release, even when concurrent with a theatrical release, eliminates the customary " exclusive play period," in which the first 75-90 days of a film's initial release are limited to theaters.

The COVID-19 crisis inarguably upset a great many traditions globally, and many 2020 releases moved to streaming platforms when stay-at-home orders and shutdowns made many theaters unavailable. According to an article in the Dec. 9, 2020, issue of Variety, the pandemic generated significant economic activity in an industry-wide shift to streaming while theaters were closed. Warner Bros.' announcement about its entire 2021 film slate, however, affirmed the impact of streaming services on a long-term basis and could alter the financial model for film distribution and finance, transforming the foundational economics of a system that had always based significant portions of compensation and profit upon theatrical ticket sales. Most industry predictors expect that theatrical releases will return at some level in 2021, but the Warner Bros. announcement challenges the forecast of an en masse return of audiences to theaters and an industry-wide return to old-school economics.

This business shift threatens potential changes to the leasing and operation of retail centers because streaming will likely remain a viable alternative to theatrical release, at least for some films. Audiences will routinely have viewing options that avoid a visit to a physical theater for a new release. To be sure, many studios remain committed to "theatrical experiences," and some new releases will continue to look to the local multiplex for a big opening. Actors and creative professionals will continue to prefer more lucrative theatrical releases, and in some cases their agents will push for them. But the prospect for some films to first appear on streamers will continue, and could significantly impact theater demand. The share prices of publicly traded theater chains following the Warner Bros. announcement confirmed a market-borne concern for such a possibility.

In 2021 and beyond, the amount of real estate demanded by movie theaters, and the revenue stream of theaters subject to percentage rent leases, may become irregular and more difficult to predict. Theater operators may not need as many screens within their leased premises, and may need theaters of differing sizes or more flexible configurations.

The expansion of streaming and the potential end to exclusive play periods may signal a shift in audience demand for theatrical film releases. In response, real estate operators may look to new revenue-sharing lease structures or management-style agreements that leave to operators the strategic decisions regarding film distribution and exhibition, but seek to allow real estate owners to retain economic ownership of their investments in theater construction and outfitting. The coming years may witness restructures of leases for theater operators and of operating chains themselves, with a focus upon flexibility and identifiable revenue potential. This may in turn open up the potential for retail operators to identify opportunities for repositioning and value-creation in those portions of large multiplexes that were once the focus of major theatrical releases on a weekly basis.

The experience of 2020 has shown that the media industry is undeniably changing. Real estate operators and attorneys may need to recognize that impermanence and attempt to interpose flexibility and adaptability into their contractual relationships in order to mirror the resilience of media businesses.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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