As an AMC "bear", here's why I'm concerned about the regulatory environment
Before the pandemic, Trump's DOJ started the process of removing a piece of antitrust legislation that protected movie theaters from movie producers.
In 1948, in the United States vs Paramount Pictures Inc. Supre Court case, the Supreme Court justices voted heavily in favor against Paramount Pictures. In other words, the Supreme Court voted against the idea of allowing film studios to own all the movie theaters that it intends to show their films at.
This created the Paramount Decree, a law that makes it illegal for movie producers to monopolize the distribution of their content.
This piece of antitrust legislation has affected our lives massively. We were able to go to one movie theater to see all the movie theaters. Many jobs were created as movie theaters showed more movies. Movie theater culture became a big part of America.
In the process, it prevented film studios from vertically integrating and from monopolizing the distribution of their content. While the free markets see this as a bad piece of legislation, even they got to enjoy the convenience and the prosperity that came with that piece of legislation.
Then in November of 2019 (remember, this happened before the pandemic), President Trump's Department of Justice (DOJ) started looking into removing the Paramount Decree.
The DOJ saw the removal of the Paramount Decree as a way to encourage more innovation in the entertainment space while changing the laws to keep up with modern times. Since Netflix came into the scene, essentially, the film producers have been monopolizing the distribution of content by only showcasing it onto its platform. Consumers had to pay a cheap monthly payment to gain access to it.
Removing the Paramount Decree would leave many streaming providers off the hook for any antitrust violations for only showing their movies on their own streaming platforms. At the same time, it will allow them to buy out movie theaters and take control over the movie theater experience that their customers have.
In the past, Netflix had major movie theater chains had growing tensions in their relationships because Netflix wasn't a great film studio to do business with. While Netflix and movie theater chains have different perspectives on "windowing" requirements, at the end of the day, movie theaters didn't gain much benefit from showing Netflix films because nearly all of Netflix's users would just watch it on the platform rather than in the theater.
Many of the AMC bulls believe that once the pandemic is over, people will be flooding towards the movie theaters for a long time because they missed out on that experience. However, it's important to note that even before the pandemic, movie theaters were struggling. With people preferring to watch movies on their streaming devices at home rather than go to the theater to watch that same movie, movie theaters were closing their doors.
Allowing companies like Disney to start their own theater chain and refuse to show their movies in other movie theaters would hurt companies like AMC severely since Disney makes up a significant portion of ticket sales.
But for all Disney investors out there, having Disney start their own movie theater business would mean bigger profits from producing films.
While seeing Netflix buying out two movie theaters might make AMC bulls hopeful for a potential M&A deal to occur, at the end of the day, film studios are more focused on streaming.
I will say that it's possible that this pandemic has revived people's excitement for movie theaters and will make them more grateful for having access to one and for going to one for seeing new movies. This newfound gratitude that consumers gained during the pandemic could boost business for movie theater chains for a very long time.
And if newfound gratitude isn't enough to boost recurring sales for AMC, then AMC's subscription service could encourage more people to go to the movie theater since their subscription already covers 3 movie tickets each week. Plus, it adds a recurring revenue aspect to the business, which is quite attractive since it adds safety to a business.
*Subscription businesses usually come with a premium
Finally, with AMC taking advantage of the high stock price to raise more equity and use the proceeds to wipe out more of its debt, AMC will be on better footing for the long run as it will have little to no debt dragging it down as it capitalizes on the post-pandemic world.
The removal of the Paramount Decree will threaten the position that movie theaters have on the entertainment industry. Rather than having to solely worry about the declining ticket sales due to the rise in streaming, movie theaters will soon have to worry about Disney or other film studios starting their own chain of movie theaters. The removal of the Paramount Decree will make it harder for AMC and other movie theater chains to thrive in a post-pandemic world.
But, because the stock market mania has given AMC a chance to raise more capital at better prices and consumers are excited to go back to movie theaters, AMC does have a chance of justifying an investment in the company's shares at a massive premium.
While the threat of film studios starting their own chain of movie theaters looks slim as streaming is the new way of distributing content to consumers, I do see movie theaters continuing to struggle in the post-pandemic world since consumers were starting to have a lower preference for them during pre-pandemic times.
In the meantime, while I have bearish views on AMC, I do wish the AMC bulls good luck.
About the author
My views on markets, investment strategies, perspectives on events, etc. usually differ from the mainstream consensus.
*All views expressed in my articles are my own and should be considered opinionated