Silver Screen vs home cinema: which is an investment blockbuster?, July 2018

When Mamma Mia! opened at cinemas around the world 10 years ago, it fast became a box office hit, taking more in ticket sales than both Titanic and Harry Potter in its first week and contributing to the best summer for cinema attendance in 40 years. It went on to become the most popular film of the year in 15 different countries and the fastest-selling DVD ever, with 1.7 million copies being bought on the first day of its release.

With the much anticipated and talked about Mamma Mia 2 opening this coming weekend, Gavin Launder, senior fund manager at Legal & General, discusses the future of the silver screen as it contends with on-demand providers such as Amazon and Netflix.

Demise of the cinema?

“Despite the rise of original content from Netflix and Amazon, alongside a migration of the talent pool, there is little evidence to suggest this will inevitably lead to the demise of cinema,” Gavin said. “Global box office revenues have largely proved resilient, and recent successes such as the new Avengers films demonstrates cinema’s enduring appeal. Subscription video on demand services (SVOD) have matured into a viable distribution model that complements, not replaces the cinema experience.”

While Netflix has been able to raise prices and gain subscribers at the same time, investor expectations are high and lower-than-expected new subscribers in the second quarter of this year resulted in the share price falling some 14%*.

“There are a number of positive industry dynamics in play for the traditional cinema industry,” Gavin added. “Encouragingly, we are seeing positive trends in ticket price growth, alongside incremental revenue from ancillary services such as online pre-booking. Talk of the threats posed by SVOD seems overplayed, given the use of reward programmes liked ‘Unlimited’ from Cineworld, which helps provide revenue visibility on the back of high loyalty levels.”

Merging the boundaries between performer and audience

“Cinemas need to invest to ensure that they provide a more enjoyable experience than consumers can get at home,” continued Gavin. “Arguably, the biggest challenge for them comes from investment in the technology itself.

“Innovation will be heralded by new ways to watch film and greater focus on improving the overall cinema experience. For example, IMAX and 4D screens are growing in popularity, while the use of virtual and augmented reality can help deliver a premium offering. More bespoke cinema experiences will likely soon become the norm, potentially using the Secret Cinema template. Immersive experiences have taken the market by storm in recent years, creating large-scale productions that merge the boundaries between performer and audience.

Cineworld: a Marvel-ous example

“Cineworld’s acquisition of Regal Entertainment last year - the second-largest cinema chain in the US – is an interesting example. Initial market reaction to the announcement was categorically negative. Investors were concerned by the sheer scale of the deal, alongside structural fears of declining US box office admissions. However, fast forward six months, and the market has a greater degree of confidence in the investment rationale.

“Helped by the recent Marvel film franchise success, investors are now more optimistic. Operational synergy targets look both credible and deliverable, while the potential revenue uplift from refurbishing the Regal estate represents an attractive growth opportunity. Management have made their ambition clear and expressed confidence that site refurbishment can drive desirability of the experience, which should help arrest the trend of modestly declining US admissions.

“Admittedly, the success of this investment is uncertain, with returns on extensive refurbishments unproven in the US market. However, Cineworld have already successfully demonstrated the merits of this model in the mature UK market, where it has achieved returns on invested capital in excess of 20%. Although there is execution risk, we see logic in the strategy to upgrade food and beverage areas (to drive improved retail spend per admission) and roll-out tech innovation (screen size, sound and seats). Combined, these factors should help generate improved premium screen mix and help ensure that the silver screen remains the home of film.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Gavin's views are his own and do not constitute financial advice.

*16-17 July 2018.

Published on 17/07/2018