The massive demand unlocked by MoviePass could end up giving the movie subscription startup a lot of leverage over the theatre industry according to Morgan Stanley, which could end up being a problem for the theatres’ 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 theatres 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 theatres 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 theatres, and would likely ask for some cut of the ticket and concession sales.
If the theatres say no, MoviePass’s could steer its subscribers away from certain theatres 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 theatre instead of a Regal Cinemas theatre, 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 theatres’ total ticket sales. If MoviePass is able to control 30% of a theatre’s business, Morgan Stanley thinks that it would have sufficient leverage to ask for a 10% or 20% cut of the theatre’s ticket and concession sales. A 10% cut could reduce the theatres’ earnings before interest, taxes and amortization by up to 6%, according to Morgan Stanley’s calculations.
The bank rates all three theatres a sell. It lowered its Regal price target to $US13 from $US17, its Cinemark price target to $US30 from $US34, and its AMC price target to $US12 from $US14.
The 2017 box office results haven’t been great for theatres so far, further eating into theatres’ earnings.