Netflix and Warner Bros. movie deal throws theater industry into chaos

Movie theater owners woke up Friday to the possibility of a new world order.

Netflix and warner bros discovery The streaming giant announced a deal to acquire WBD’s movie studio and streaming service, ending a months-long bidding process in which Paramount Skydance and Comcast also competed for the asset.

Exhibitors are panicking now that Netflix has emerged as the winner.

Unlike traditional movie studios, the streamer is not wedded to traditional theatrical distribution, raising concerns about major changes to the still-struggling industry post-pandemic.

“It’s no secret that this was probably the least desirable outcome for many theater owners,” said Sean Robbins, director of analytics at Fandango and founder of Box Office Theory. “There is no way around this. Today may be one of the most meaningful days in the history of the business, but it could be a constructive day for film if Netflix honors early signs that it will maintain Warner Bros.’ theatrical business model and leverage its unique strengths that streaming platforms cannot replicate.”

Cinema United, the world’s largest exhibition trade association, strongly opposed the sale of WBD assets to Netflix on Friday morning.

“Netflix’s proposed acquisition of Warner Bros. poses an unprecedented threat to the global exhibition business,” CEO Michael O’Leary said in a statement. “The negative impact of this acquisition will impact theaters ranging from the largest theaters to single-screen independent theaters in small towns in the United States and around the world.”

Six movie theater owners who spoke to CNBC shared their concerns that Netflix’s acquisition of WBD could significantly reduce the number of movies shown at their theaters each year, hurting their annual box office ticket sales.

“Netflix’s business model does not support theatrical release; in fact, the opposite is true,” O’Leary said.

Cinema United said the deal “risks the loss of 25% of annual domestic box office revenue”, putting small theater chains and independent movie theaters in particular at risk.

“We’re going to pull all the stops we can because we believe a transaction of this size and its potential impact needs to be carefully considered by all regulatory and supervisory authorities,” O’Leary said on CNBC’s “Squawk on the Streets” on Friday. “So we’ve already been talking to people at the federal level, state level and internationally, because we believe this is a significant and significant threat to the long-term viability of theatrical exhibition.”

And Cinema United isn’t the only company concerned about the industry’s future if its deal with Netflix is ​​approved.

A group of the industry’s top companies sent an open letter to Congress detailing the potential economic and institutional fallout if the merger were to go through.

The letter, reported by Variety, said Netflix could “effectively put a noose on the theatrical market,” altering the footprint of theatrical films and reducing license fees paid after theatrical release.

Multiple exhibitors told CNBC they were concerned that WBD’s deal with Netflix would result in fewer theatrical releases and further shorten the theatrical window for major releases.

Consolidating studio space has become a major challenge for the theater industry in recent years. When studios merge, they typically produce fewer movies, something the industry saw firsthand when Disney acquired 20th Century Fox in 2019.

The theater industry has struggled in recent years, with pandemic-related production cancellations and double labor strikes halting film shoots and delaying movie releases. The industry still hasn’t returned to its pre-pandemic release numbers and box office ticket sales, and there are concerns it never will.

“Historically, when a legacy studio is absorbed by another entity, even if that other entity is a legacy studio, the amount of films produced for theatrical distribution decreases,” O’Leary told CNBC on Friday.

Netflix co-CEO Ted Sarandos said on an investor call Friday morning after announcing the partnership that Warner Bros.’ upcoming films “will continue to be released theatrically through Warner Bros.”

Mr. Sarandos has no intention of changing WBD’s current business practices, a person familiar with the matter told CNBC on condition of anonymity to discuss private conversations. Still, the person said he plans to meet with theater owners to allay their concerns and explain his vision that movies should be shown for a shorter period of time.

For exhibitors, the reduction in the theatrical release period poses a major threat.

Before the pandemic, movies typically played in theaters for 70 to 90 days before hitting the domestic market. In the wake of coronavirus shutdowns, studios and movie theaters have renegotiated these terms, reducing the average operating period to 30 to 45 days.

However, Netflix has never followed these guidelines. The company has long argued that its content is meant for streaming subscribers and therefore should be available on the home service as soon as possible.

When Netflix releases a movie in theaters, it’s usually only for the bare minimum requirements to qualify for awards competition or to be shown over a weekend as a one-time event.

Netflix doesn’t release box office revenue numbers even if it does open the movie in theaters. This has industry analysts questioning whether the company will maintain WBD’s transparency regarding ticket sales even after the deal is finalized.

“We’ve released about 30 movies theatrically this year, so we’re not that opposed to releasing movies in theaters,” Sarandos said on Friday’s investor call. “The main reason for my backlash is the fact that the exclusivity period is long, and we don’t think that is very consumer-friendly.”

“Netflix movies will continue to make the same progress as we have in the past. Some films will be shown briefly in theaters beforehand, but our main goal is to bring first-run movies to our members because that’s what they’re looking for,” he said.

Of course, that strategy may change in the coming years.

Wedbush analyst Alicia Reese stressed in a research note Friday that the theatrical timeline is already being negotiated through 2029.

“Accordingly, purchasers are required to comply with these agreements by showing scheduled WBD films in theaters for at least the next four years,” Reese wrote.

“All the exhibitors can do is take Netflix’s word for it,” one theater chain owner told CNBC, speaking on condition of anonymity.

“In the agreement, they committed to continue releasing legacy WB titles into theaters,” the operator said. “Does that mean there will be a one-week period, a four-week period, or no period? Netflix will have to completely change its streaming-first corporate philosophy. We’ll just have to wait and see. This is not good for the trade show.”

— CNBC’s Alex Sherman and Stephen Desaulniers contributed to this report.

Disclosure: Comcast is the parent company of NBCUniversal, which owns Fandango and CNBC. With Comcast’s planned spinoff of Versant, Versant will become the new parent company for Fandango and CNBC.