Legendary filmmakers Steven Spielberg and George Lucas made headlines this week after they warned that Hollywood could be on the verge of imploding. Specifically, Spielberg and Lucas believe that studios have made too many aggressive bets on too few films, and that a string of box office failures (something that they feel is inevitable) could bring the industry to its knees.
It’s an interesting premise, and given that it comes from the minds behind countless blockbusters, one that can’t be so easily discounted. But if they’re right, how can investors prepare for that future world?
The slow death of the movie industry
Arguably, the movie industry has been dying for over a decade now. The widespread adoption of high-definition TVs and home theater audio equipment, combined with short release windows (most movies are available on DVD within only a few months) may have led many Americans to stay home.
To compensate, movie theaters have been upping the ante — installing bars, 3D projectors, and offering restaurant-quality food. Some (like AMC) have aggressively pushed loyalty programs with discounted tickets.
But Lucas and Spielberg think that’s just the beginning. In the future, they expect theater-goers to shell out $25 for a ticket, minimum, and perhaps as much as $150. Going to the movies will resemble Broadway — an expensive, but unique experience. Only the biggest movies will make it into the theatres, where they’ll stay for a year, and perhaps never make it to video.
Where will the movies go?
Will all that creative talent remain idle? No. Instead, it will shift to cable TV, and cable TV alternatives like Netflix, Inc. (NASDAQ:NFLX).
Spielberg revealed that his Oscar-winning film Lincoln was “this close” to becoming an HBO made-for-TV movie. The cable channel’s recent film, Behind the Candelabra, only appeared on HBO after its maker failed to get a theatrical release.
Netflix, Inc. (NASDAQ:NFLX) has expanded aggressively into original content in recent months, in attempt to compete directly with HBO. House of Cards, starring Oscar-winner Kevin Spacey and produced by David Fincher (Seven, Fight Club, Social Network), was positively received, but cost Netflix over $100 million to make.
Netflix, Inc. (NASDAQ:NFLX)’s competitors (like Amazon.com, Inc. (NASDAQ:AMZN), RedBox and now Microsoft Corporation (NASDAQ:MSFT)) have all explored, or committed to creating original content of their own. In theory, this should increase the cost for this content, as more bidders in the market drive up the price for original shows.
But if Hollywood’s crumbling, a service like Netflix, Inc. (NASDAQ:NFLX) should actually benefit. In fact, Spielberg is working with Microsoft on a Halo TV series for its Xbox Live subscription service, and more filmmakers could come to see these services as superior outlets for their creative talents.
On the consumer side, fewer trips to the movies might lead to an expanded budget for competing forms of entertainment. With the average movie ticket costing around $10, not going to the movies every month would cover the cost of a Netflix, Inc. (NASDAQ:NFLX) subscription.
Theater businesses could suffer
If Spielberg and Lucas are right, having money invested in big-name movie chains might not be the wisest decision. While movie theaters aren’t going to go extinct overnight, higher ticket prices and fewer movies means that less theaters would be needed. Rather than have a movie theater every five miles, a handful of theaters could likely service an entire city.
Cinemark Holdings, Inc. (NYSE:CNK) and Regal Entertainment Group (NYSE:RGC) are two of the bigger movie theater stocks investors should be aware of.
As of its last annual filing, Cinemark Holdings, Inc. (NYSE:CNK) had 298 theaters spread throughout the US, and 167 in various Latin American countries. It pays a decent dividend of 3% and trades with a price-to-earnings ratio of about 20, just slightly above the broader market.
For its part, Regal Entertainment Group (NYSE:RGC) has 540 theaters in the US and no International exposure. It pays a higher dividend than Cinemark, 4.80%, but trades with a higher PE of 23.
Of the two, Cinemark Holdings, Inc. (NYSE:CNK)’s international exposure seems to give it superior staying power. Latin Americans, with lesser digital distribution infrastructure and household wealth, could continue to flock to the movies for quite some time.
But if Spielberg and Lucas are right, both stocks will inevitably become value traps. There simply won’t be much need for their theaters in the long-run.
The death of the movie industry?
Is the movie business on its last legs? It would be easy to dismiss the idea as futuristic nonsense if it wasn’t being advocated by such film stalwarts as George Lucas and Steven Spielberg.
If they’re right, Hollywood’s creative talents could be re-directed to Internet streaming services such as Netflix, Inc. (NASDAQ:NFLX). At the same time, movie theaters could find their businesses challenged, as fewer theaters would be needed in the world that Spielberg and Lucas envision.
The article The Next Industry to Die: Hollywood? originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
