These are the first two sentences of a Variety Magazine piece entitled “Can Movie Theaters Survive the Coronavirus Crisis?” dated March 25, 2020.  We all read the article here at Flix on the day it was released.  We recall it well.  As the CEO (Chief Enthusiasm Officer) and CBE (Chief Brand Evangelist) of Flix Entertainment) we have both often stated the same thing to investors, developers, and others.  We still believe that movie theaters will not go the way of the horse drawn coach.  Streaming has co-existed successfully with in-cinema movies now for well over a decade.  Some might even argue it’s been closer to 15 years.  In fact, before mid-March 2020 most pundits would have argued that if streaming video had not killed off cinema by then, it was not going to.  In fact, most recently, it seemed as though cinema and streaming might learn how to play nice in the sandbox with Netflix releasing the Irishman direct to select movie theaters (including Flix Brewhouse) two weeks prior to streaming it.  Now that’s proper symbiosis! 

But that was then.  Roughly 120 days later, the world has become a much less certain place.  The eighth sentence of that same Variety article proclaims, “[i]f cinemas remain closed for a few months — which is seen as a real possibility — then the exhibition industry as we know it is ‘genuinely at risk,’ says Wedbush Securities analyst Michael Pachter.”  It is now the end of June 2020.  Movie theaters closed up shop in mid-March.  A few brave (some would call them misguided) souls have opened to show movie retreads from prior years in the hope that this might be a solid replacement business model.  To be blunt - it isn’t.  The available data to date would back this up.  We have unfortunately come to yet another inflection point in the timeline of the cinema industry and despite our penchant for choosing to view the world through rose colored lenses, the economic Mariana Trench that we’ve all settled in feels really cold and dark.  Will we emerge?  History would indicate that we will of course but it is not likely that our industry will be the same.  So the question then becomes quite obvious.  How will it change and how must cinema operators pivot to survive and even thrive?

The stats are rather damning and it is clear that the viability of the cinema industry is at great risk.  As of today, only 14% of potential movie patrons view going to the movie as a safe activity in the era of Covid-19.  Current negative consumer sentiment is reflected in future box office projections with 2020 expected to finish well over 50% off of 2019.  Expectations for 2021 were that the film exhibition industry would recover to roughly 80% of 2019 number and that 2022 would bring a relative return to historic performance levels.  But that was well before the most recent Covid-19 spike, which will invariably push out any cinema industry recovery for an undetermined period of time.  The larger movie studios seem to comprehend this harsh reality and have become far more comfortable with the concept of PVOD, or premium video on demand.  Warner Bros., Universal and Disney have already released films that were slated for movie theaters directly to PVOD and Fitch Ratings, in a recent FitchWire release, seems to acknowledge the very real specter of all but the biggest movies potentially moving to streaming services.  Movie theaters are dependent on all movies, big and small, to make cinema exhibition a viable business model.  Without these so called “filler” films, a major percentage of box office revenue potential will be taken off the table.  It is quite evident that Covid-19 has brought what will most likely be permanent, systemic change to movie going and along with it, a precipitous and persistent attendance decrease.

Consumer sentiment is only one of many salvos that have been fired directly at our industry.  To operate in this environment, we must do everything we can to make guests feel safe.  This requires that we spend money when we are not making any.  We will be required to thoroughly sanitize each auditorium between showings, which takes more time and of course costs us.  This in turn reduces the number of movies we can show in a given day.  We will also be installing cold plasma generators to ionize the air supply in each Flix auditorium in all locations, which will reduce the presence of pathogens (including those similar to SARS-CoV-2) in recirculated air by 85-99.4%.  This will require a reasonably significant investment but indoor air quality is a major concern of the public. Then we must create a two-seat buffer between ticketed groups who don’t know one another.  To achieve this automatically and consistently, we co-developed with our software vendor a novel seating algorithm, which while a huge plus for public safety, eliminates roughly 40% of all saleable seats.  So if you’re keeping score this means: 1) far fewer people interested in going to the movies, 2) fewer movies shown per day, and 3) fewer seats to sell, but 4) we still have to pay the same rent.  How might this new model work?  Well -- it doesn’t. 

There’s an additional fly in the ointment – and it’s a big one.  As of now, the two films we cinema operators were clinging to in the hopes of bringing some semblance of normalcy to our world (Tenet and Mulan) have been moved out of July entirely.  For now, Tenet at least is holding for an August 12, 2020 release.  But with major movie markets like Los Angeles putting a “hard pause” on movie theater openings last weekend, it is likely to move again, for the third time.  Mulan has tentatively slid now to August 21. It is not presently known when first run movies will be released by Hollywood in earnest as COVID-19 rates continue to spike dramatically and unabated in over 25 states. With no real end in sight, it is seeming more likely than not that all scheduled August openings will slide on a month-to-month basis, until this most recent spike is controlled.

One does not need to have an MBA to realize that this perfect storm is really an aggregate of multiple perfect storms.  A dose of a novel and pernicious virus with no known cure and no vaccine on the horizon, with a hint of decentralized and often lacking governmental response, blended with a dash of consumer malaise (as far as theaters are concerned) bordering on indignance (if not defiance), and you are left with what would have to be proclaimed one of the greatest natural and social disasters in the history of the United States.
   
Will cinema as we knew it survive?  Can Flix Brewhouse live to fight again another day as we face another minimum four weeks of zero revenue from the previous plan?  I’d like to think so, but we’ll need an awful lot of help – and the outcome is far from certain.  The Paycheck Protection Program was a step in the right direction, but without more assistance, it will only have served to delay what some would call the inevitable.  Our industry lobbyists are focused now on another round of Federal assistance for severely impacted industries, like lodging and movie theaters. In addition, there is Congressional movement to encourage Treasury and the Fed to create programs to help landlords who are CMBS borrowers. But none of this is likely to actualize in the next 30 days.

This has become an existential crisis that is far bigger than a single tenant and its landlords solving the problem via short-term rent deferrals. And we do acknowledge the enormous stress many landlords are under.  All investors in the cinema sector, whether operators or real estate owners must educate themselves as to the new reality.  The movie theater business is not traditional retail and is entirely reliant upon product controlled by others.  When movie theaters close, they drop to zero revenue and when they finally reopen with first-run product, resumption of positive cash flow will be highly uncertain and likely will permanently fall well short of historical attendance.  Investors who have theater properties in their portfolio must either adjust their cash flow and ROI models for the pending long-term sea changes in the cinema industry, or plan to transition out these occupancies in favor of a future higher and better use of invested capital.  In some cases, this will happen by parties working together on economic compromise once the future environment becomes clearer; in others, courts will deal with the residue.

Unfortunately, there is really no other way to consider the variables.  It is a veritable Hobson’s choice.

While we tend to conclude our newsletter articles with uplifting or otherwise positive endings here at Flix Entertainment, there is no good way to sugar coat the message being delivered.  A coat of varnish just won’t help.  It’s reality check time.  Period.