Movie theaters are in trouble in both the UK and U.S., with reports that Cineworld, the second-largest cinema chain in the world, is looking into a company voluntary arrangement as an insolvency mechanism that would shutter some of its locations permanently. Meanwhile, the UK entered another lockdown on November 5 that ordered theaters closed. To get a sense of the damage done to the industry, as well as the role streaming video has played, GLG spoke with Mel Alcock, chairman of the British Board of Film Classification and former COO at Curzon World. Below are a few select excerpts from our broader discussion.

Can you take us through the current state of the UK cinema industry, especially Cineworld’s decision to close its theaters?

It’s extremely fragile, but it’s not totally attributable to the impact of COVID. The cinema sector had a good year in 2019, but we’ve seen the disruption created by the phenomenal growth of subscription video on demand. Those SVOD players are increasingly producing their own content. For example, Netflix’s annual budget is more than all the West Coast studios put together. Mix the growth of SVOD with COVID-19, which has dramatically escalated the exhibition sector’s operating costs while their admissions have fallen off a cliff, and the sector is very precarious. I think the industry is currently looking at somewhere in the region of only 10% occupancy. Probably most operators are drawing on their reserves just to survive.

How do you see the news about Cineworld closing for the winter?

It would appear that the best way to control losses and manage its debt is to close. I believe that a syndicate of lenders and FTI Consulting is now in talks with the company on how to manage its $8 billion of debt. There may be the prospect of a CVA. Trying to find a positive out of this is exceptionally difficult.

Odeon announced that it’ll open only on weekends. How does that strategy compare versus totally shutting down?

Well, the weekday business for the exhibition sector is absolutely dead. I suppose the company is pulling back to see if it can maintain some level of customers on the weekend, but I would probably say it’s a path toward some form of full closure.

What sort of level of operating capacity would cinemas need to reach to breakeven?

Generally it’s got to be in excess of 50%. Their key costs are essentially three: do they own venues or lease, staffing, and the cost of film rental. They run on fairly slim margins, so they need admissions in excess of 50% to start to cover costs and actually make some money.

How do you expect the major players to incentivize customers to come back?

I don’t think it’s a matter of price. There is that overall concern about going back to a closed box with recirculated air. The operators effectively don’t have that many tools at their disposal. Their key lever is content. That’s what will bring audiences back. It’s as simple as that. Chopping a ticket or providing promotions and incentives won’t turn customer perception about coming back to the cinema.

Is there any possibility for cinemas perhaps broadening their offerings to make up for the shortfall of movies? For example, live opera broadcasts.

That strategy would have happened without COVID. Those businesses need to look at their core offering and diversify and reduce that dependency. There are so many ways beyond just content. It could be gaming, for example. They could take advantage of sports, as large venues will take some time to bring audiences back. It could be, for example, launching their own SVOD service and running that in parallel with their bricks and mortar. These companies really need to look at their venues in a more rounded capacity.

Given all these developments, are there just too many cinemas in the UK right now?

Anne Sweeney at Disney said something like, at the end of the day, people want to view content anywhere, anytime, anyplace. The advent of digital has fueled this rise of SVOD. We’ve seen a whole raft of key titles move to SVOD as a form of distribution. So increasing the real estate of exhibition of cinemas is certainly questionable.

The government announced a 30 million pounds recovery fund for independent cinemas. Is that sufficient to help them through this difficult period?

It’s a Band-Aid. Entering COVID, the exhibition sector was challenged. The pandemic has accelerated that risk. While I imagine they are welcoming the funds, their core business is actually creaking, and to a certain extent, is flawed. While the funds may give operators some room to breathe, what does it mean? Whether those operators will still be in existence in 18 months to two years is the question.

How do you view the other major operators in the UK, Vue and Odeon? How well are they positioned and how resilient can they be to this situation?

Wanda Group, the parent company of Odeon owner AMC, publicly stated that it has six months worth of reserves to fund the business. AMC in the U.S. has closed theaters. Odeon, I would say, is precarious. Vue is a very well-run business. Out of the whole multiplex landscape, it’s probably the one that will survive. As for the independents, it’s difficult to judge. They were affected before the multiplexes because a lot of their venues are old, so it’s difficult to socially distance. They don’t have the reserves. Now, as the result of these tentpole titles moving, the independents are incredibly precarious at this moment in time.

If we do see a vaccine, how quickly do you think numbers will return? With more people signing up for VOD platforms, will we get back to 2019 numbers of attendance?

I don’t think so. The CEO of Cineworld recently went on Sky and said he expected to get back to normal business by 2023. That’s optimistic. I don’t think the company will ever get back to where it was. As people experience these services, as content producers work with these services, the rise of SVODs will continue. There’ll be one victim, and that’ll be the exhibition business.

How likely is it that studios will start to cut out cinemas and go directly with VOD?

There’s every possibility that we might find that. It’s happened in the television industry, effectively, as budgets have soared as a result of the investment these SVOD players have put into content. So it’s extremely attractive to produce content for SVOD distribution budget-wise. Logistics is pretty much the same. One of the key fundamental challenges two or three years ago was the talent, who didn’t effectively want their content to be shown on SVOD — they wanted it in cinemas. But now that Netflix and Amazon have demonstrated they can win awards, talent is flowing to this form of production and distribution. There are now very few barriers for studios with regards to producing content and distributing in some form of SVOD.

Are there any data or numbers proving the success of big movies to platforms? Mulan was released on Disney+ last month.

The short answer is no. Netflix keeps its performance data close to its chest, as does Disney+. Mulan was interesting because Disney launched it as a £30 buy in addition to a subscription. The only level of proof is the fact that the talent still comes back to those kinds of productions. That implies there has been some form of success.

That said, everybody is waiting to hear from Disney as to how Mulan operated as a TVOD entity. Whether it’ll release that data, I don’t know. Disney probably will if the numbers are good. If it doesn’t, it’s likely bad. Trying to understand how content has worked on SVOD is the big question mark. Tenet has been the only tentpole film that came out and did $300 million worldwide. It was a $200 million production and the previous film from Nolan was Interstellar, which did $700 million worldwide and cost $150 million. We can see the math at the moment with regards to releasing these titles in the exhibition world just isn’t working.

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About Mel Alcock

Mel Alcock is the Chairman of the British Board of Film Classification and serves as Vice Chairman of Cement Fields, The Whitstable Biennale. Mel holds the title of Advisor at Ascension Ventures and is the owner of the Complete Circle Consultancy. He is also a Member of the Board at Turner Schools and a Network Member at Saint Gregory’s Society. Previously, he served as Chairman of The Rio Cinema. Prior to this, Mel served as Chief Operating Officer at Curzon World.

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This theater and cinema industry article is adapted from the December 3, 2020, GLG teleconference “UK Cinemas: High Yield Credit Update.” If you would like access to this teleconference or would like to speak with cinema industry expert Mel Alcock, or any of our more than 700,000 industry experts, contact us.