MORGAN STANLEY: The 'desperation level in Hollywood' has reached new highs

home movie theater

Film studio profits have been suffering in recent years, and the "desperation level in Hollywood" has reached new highs, according to a new research note from Morgan Stanley.

Hard times and thin margins could result in a major push toward a service called "premium video on demand" — streaming newly released movies at home for a higher fee in lieu of visiting the cinema — that may boost profits at studios but would likely harm movie theater operators, according to the bank.

Just how bad is it for film studios right now? Despite the gaudy, billion-dollar global box office figures, most of Hollywood isn't earning huge profits, thanks in part to the onslaught of streamable, high-quality TV content.

Apart from Disney, which in 2016 pulled in $1.8 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization), the studio industry generated a combined EBITDA of just $1 billion. Paramount and Sony suffered losses.

Morgan Stanley film studio ebitda chart

One solution to juice those margins that Morgan Stanley says is "inevitable" is premium video on demand.

The idea is to make home viewing available when consumers are most aware of a movie — during the theatrical release when buzz and marketing are at a peak. Right now, people have to wait several months to rent or buy a new release.

Studios would charge $30 to $50 for the early access, compared with the $5 to $7 it currently costs to watch a movie on demand months after the theatrical release.

Premium video wouldn't necessarily attract hordes of new customers, since it would likely cannibalize sales from people who visit theaters.

Market research conducted by Morgan Stanley's suggests that 25% of consumers would be interested in the product, but those who expressed interest already go to the movies. If you pay extra to watch a new release at home, you probably won't also go see it at the local Regal theater.

"There is no evidence in our work that P-VOD is going to bring new consumers into the market," the bank's research note said.

But, given a higher price point, this service could still amount to a significant increase in sales. Morgan Stanley estimates Hollywood studios could reap $2 billion in additional annual revenue, assuming a price point of $35 per premium rental.

This scenario doesn't bode as well for movie theater owners, which could see attendance dip by 8% within a few years if consumers take to the service. Regal and Cinemark, two of the largest theater operators, could see EBITDA decline by 25% and 15%, according to the research note.

Morgan Stanley Hollywood premium video

That's a potentially dark future for theater owners, but it's still entirely hypothetical at this point, Morgan Stanley acknowledges.

Studios and theater operators have contractual agreements that would have to be sorted out, and the theater owners could end up negotiating a slice of the revenue generated from premium video. Disney, which is still generating massive profits from its theatrical releases, has a vested interest in the continued health of cinemas like Regal and Cinemark.

It's also possible that people find the notion of paying $35 to watch a movie at home objectionably high and the service sputters without leaving much of an impact.

But, given the current movie-studio malaise, Morgan Stanley thinks it's all but certain that Hollywood will give it a shot.

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