Does the rise of Netflix spell the fall of cinema chains?

With the Oscars looming and Netflix receiving multiple nominations, we look at how streaming is affecting cinema.

Article updated: 22 February 2019 9:00am Author: Ian Forrest

As movie-streaming giant Netflix celebrates the success of its Best Film BAFTA award for “Roma”, more and more investors are asking whether traditional cinema chains can survive if consumers continue to sign up to Netflix and other video on demand providers.

Those of us who can still remember how big the Blockbuster video rental shop chain became will be only too aware of how trends in movie-watching can change dramatically in a short space of time and have a major impact on those companies that cater to consumer demands. Having opened its first shop in 1985, Blockbuster grew to over 9,000 locations before going bust just a few years later. Part of its downfall was caused by the emergence of Netflix, especially when it moved from renting out DVDs to offering video-on-demand services. Since then, it has gone from strength to strength, pouring increasing sums into producing its own content and expanding into overseas markets.

Streaming vs Cinema: Not the battle everyone thinks it is

There is some evidence that it may be denting the growth of cinema chains, but there is also a credible argument that the relationship between the two is about a lot more than just the method of delivering the film. People going to cinemas are often looking for a complete experience that involves a big screen, great sound quality, a restaurant meal and making a night of it with family and friends. There’s also the nature of modern films to be considered. The most popular are action adventure style films which benefit significantly from a larger screen.

Despite the rise of Netflix and Amazon Prime, cinema admissions in the US have held steady since 2011 and in the UK they’ve actually risen over the past 20 years. There is some evidence that the customer base is older now than it used to be and the industry clearly faces the challenge of dragging younger people away from social media apps on their phones.

One company faced with this challenge is Cineworld, one of the largest cinema groups in the world with operations across the US, UK and Eastern Europe. The company was transformed by the acquisition of the large US cinema chain Regal Entertainment in 2017 for $5.8bn. Despite the daunting size of that deal for a company with no previous operations in the US, the appeal for Cineworld was the opportunity to apply its well-worn strategy of acquiring cinemas, refurbishing them and then improving both the customer experience and efficiency of the operation.

Their excellent track record in the UK and then Eastern Europe speaks for itself with sales more than doubling over the past five years along with a trebling of earnings. In the latest trading update in January, ahead of full year figures in March, the company said revenues rose 7.2% overall with more new sites opened and the integration of Regal progressing well.

The future of the movie-going experience

Cineworld’s shares have risen 70% over the past five years but there’s no evidence that the annual awards season has a decisive impact on them one way or another. What really drives performance, and this is true across the sector, is the strength of the schedule of film releases and the ability of cinema-operators to generate sales both in terms of tickets and also from retail sales as people buy food and drink.

Cineworld has historically been good in both areas and the valuation of its shares remains attractive, with a healthy 5.2% prospective dividend yield on top. Prospects look good as there are a number of major movies pencilled in for 2019, with Disney already set to dominate the box office thanks to its latest Marvel and Star Wars entries, live-action remakes such as Aladdin and The Lion King, plus the highly anticipated Frozen sequel.

The contrast with the largest US cinema chain, AMC, is marked as it has much smaller profit margins and fell into a loss in 2017, while Cineworld recorded a 22% rise in pre-tax profits. However, it has taken on a sizeable amount of debt to fund the Regal deal and there’s no guarantee of success there so the shares are for investors willing to accept a higher level of risk.

Cineworld’s success demonstrates that with the right strategy, it is perfectly possible to make good returns from cinemas, even in a world where services like Netflix are an option for many.

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Ian Forrest portrait photo
Ian Forrest

Investment Research Analyst

Ian’s background in investments, financial journalism and research has seen him advising private investors on equities and helping to manage portfolios. His qualifications include the Certificate in Financial Planning and the Chartered Institute for Securities & Investment’s Investment Advice Diploma.