The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
This biweekly newsletter lists key events in the movie rental and exhibition industries for the period between April 8 and April 21, including notable rental releases, box office figures, and recent company-specific news.
Movie Rental Industry
Key Redbox (NASDAQ:CSTR) releases this year, with domestic box office total in millions from www.boxofficemojo.com:
o 4/9: Life of Pi ($124), Hitchcock ($6).
o 4/16: The Hobbit: An Unexpected Journey ($303), Django Unchained ($163), Les Miserables ($149), This is 40 ($68).
Key Redbox releases last year, with domestic box office total in millions from www.boxofficemojo.com:
o 4/10: The Iron Lady ($30), The Darkest Hour ($21).
o 4/17: Mission Impossible: Ghost Protocol ($209), Hop ($108).
Over the next two weeks, there are two notable rental releases compared to three last year (notable releases are those that grossed over $50 million in domestic box office). DVD rentals for the upcoming two-week period should underperform the same period last year, as this year’s DVD releases grossed approximately $30 million less than last year at the box office.
Redbox Instant by Verizon (NYSE:VZ) has launched to the public. Redbox Instant by Verizon was recently offered on Microsoft (NASDAQ:MSFT) Xbox Live to its Gold members (an estimated 10 million addressable market in the U.S.), as well as on all Samsung (SSNLF.PK) smart TVs and blue-ray players, on Apple (NASDAQ:AAPL) iPhones and iPads, and on Google (NASDAQ:GOOG) Android phones and tablets. We expect the service to become increasingly ubiquitous over the next few months.
It is unclear whether the service will gain much traction, as the streaming portion of the offering is limited to movies, with only films from EPIX and a handful of studios, although we think that the DVD side of the offering presents a reasonable value. New Ventures have negatively impacted 2012 profitability and free cash flow; we believe investors would prefer continued viability of the company’s Redbox and Coinstar (NASDAQ:CSTR) businesses before embarking on a chase for untested and potentially expensive growth opportunities.
In our view, the initial impact of Redbox Instant will be to depress rental demand from the core Redbox kiosk offering, as early adopters of Redbox Instant are likely to be current Redbox kiosk customers. Over time, we think that overall frequency of visits to Redbox will increase due to the rollout of Redbox Instant, given the offer of four one-night rentals per month…
Netflix’s (NASDAQ:NFLX) original series, while initially successful, do not place it at competitive parity with HBO (NYSE:TWX), in our view. We believe that in recent months, a large part of Netflix’s share price appreciation was driven by the perceived potential from House of Cards’ success. In our view, many investors believe that Netflix’s original series have the potential to place the company at competitive parity with HBO, which has 39 original series (not including miniseries) currently listed on its website.
We believe that the difference between HBO’s and Netflix’s ownership of original content is meaningful, insofar as HBO can choose when other windows of distribution are exploited, and Netflix apparently cannot. In our view, Netflix’s ability to monetize House of Cards is limited to its own platform, negatively impacting the bull thesis that it may one day be able to compete with premium cable outlets such as HBO.
Q1:13 box office ended down 12.4 percent year-over-year due to a quiet release slate and a difficult comparison. For Regal (NYSE:RGC), whose quarter ended on March 28, Q1 box office ended down ≈ 10 percent. Q1 was up against a strong +24 percent comp that became progressively more difficult throughout the quarter. January ended down 0.6 percent, led by late-December Oscar-nominated releases. February ended down 24.6 percent due to a particularly quiet release slate. March ended down only 12.3 percent despite a difficult comparison of up 38.1 percent from last year’s release of The Hunger Games. Both March and Q1 were led by Oz: The Great and Powerful.
Looking forward, we expect a stronger release slate through Q2 and Q3 to offset the weak first quarter. We expect a strong release slate in Q2, led by Iron Man 3 and Man of Steel, to drive a positive 5 percent comp during the quarter. Q2 is trending down 6.1 percent quarter-to-date as the majority of the blockbusters will be released in May and June. We also expect a strong Q3 release slate…
We estimate that Cinemark’s (NYSE:CNK) international admissions revenue was up 7 percent in Q1. According to our estimates, Cinemark’s international circuit was up 10 percent in U.S. dollars year-over-year, while in local currency the circuit was up 3 percent year-over-year. We expect foreign currency translation headwinds in Q1 similar to Q4:12, impacting the international growth rate during the quarter. Additionally, we note that Cinemark is slated to sell its entire Mexican theater base, and, while a sale date has not yet been announced, our model accounts for this sale as of the beginning of Q3:13.
We calculate the concentration of total box office within the top 10 films in Q1 to be roughly flat year-over-year, suggesting stable film rental margins. With that said, the concentration of total box office within the top three films in Q1 is ≈ 200bps lower y-o-y, so we expect film rental costs to be down slightly y-o-y for the exhibitors.
Michael Pachter is an analyst at Wedbush Securities.
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