Netflix-Warner Bros. film deal throws theater industry into upheaval

Movie theater operators woke up Friday to the prospect of a new world order.

Netflix and Warner Bros. Discovery It announced a deal for the streaming giant Get the movie studio and streaming service from WBDbringing an end to the months-long bidding process that witnessed Paramount Skydance and Comcast They also compete for assets.

With Netflix winning, showrunners are panicking.

Unlike traditional movie studios, the streamer has not committed to traditional theatrical distribution, and there are concerns it could bring major changes to an industry that is still struggling after the pandemic.

“It’s no secret that this was probably the least desired outcome for many theater owners,” said Sean Robbins, director of analytics at Fandango and founder of Box Office Theory. “There’s no two ways about it. This may be one of the most momentous days in the history of the business, but it could be a constructive day for cinema if Netflix lives up to the early indications that it will maintain the theatrical business model of Warner Bros. properties and rely on those unique strengths that can’t be replicated on the streaming platform.”

Cinema United, the world’s largest exhibition trade association, announced its strong opposition Friday morning to the sale of WBD’s assets to Netflix.

“The proposed acquisition of Warner Bros. by Netflix poses an unprecedented threat to the global exhibition business,” Netflix CEO Michael O’Leary said in a statement. “The negative impact of this acquisition will impact theaters from the largest circuits to single-screen independents in small towns in the U.S. and around the world.”

Six movie theater operators who spoke to CNBC expressed concerns that Netflix’s acquisition of WBD would lead to a significant reduction in the number of films available to theaters annually, and thus their annual box office ticket sales.

“Netflix’s stated business model does not support theatrical release. In fact, the opposite is true,” O’Leary said.

Cinema United said the deal “would risk removing 25% from the annual domestic box office,” putting small theater chains and independent cinemas, in particular, at risk.

“We’re going to use everything we can because we believe that a deal of this size and the potential impact that it’s going to have is something that everyone with regulatory and supervisory authority should look at closely,” O’Leary said on CNBC’s “Squawk on the Street” on Friday. “So, we’ve already talked to people at the federal level, state level and international level because this represents a significant threat, we believe, to the long-term viability of the theater show.”

And Cinema United isn’t the only group concerned about the future of the industry if the Netflix deal is approved.

A group of major industry players sent a message Open letter to Congress detailing the potential economic and institutional setback that could occur if the merger were implemented.

The letter, reported by Variety, said Netflix would “effectively tighten a noose around the theatrical market” and could change the footprint of theatrical films and reduce licensing fees paid in post-theatrical windows.

Consolidation in studio space has been a growing issue for the theatrical industry in recent years. When studios merge, they typically reduce the number of films they produce, something the industry saw firsthand when Disney It bought 20th Century Fox back in 2019.

The theatrical business has suffered in recent years from pandemic-related production shutdowns as well as dual labor strikes that halted film shoots and delayed movie releases. The industry has yet to return to pre-pandemic release numbers or box office ticket sales, and there are fears it never will.

“If you look historically, when legacy studios are absorbed by other entities, even in the case where those other entities are also legacy studios, the amount of films produced for theatrical distribution goes down,” O’Leary told CNBC on Friday.

Netflix co-CEO Ted Sarandos said during a call with investors Friday morning after the deal was announced that Warner Bros. The planned “will continue to go to theaters through Warner Bros.”

Sarandos does not plan to change WBD’s current business practices, a person familiar with the matter told CNBC, who spoke on the condition of anonymity to discuss private conversations. However, he plans to meet with theater owners to try to allay any concerns and explain his view that films should have shorter exclusive theatrical windows, the person said.

For exhibitors, shrinking theatrical windows pose a major threat.

Before the pandemic, films typically ran in theaters for 70 to 90 days before entering the domestic market. After coronavirus shutdowns, studios and movie theaters renegotiated these terms, and the average window dropped to 30 to 45 days.

However, Netflix has never followed these guidelines. The company has long maintained that its content is intended for streaming subscribers, and therefore should be delivered to them at home, via the service as soon as possible.

If Netflix releases a film theatrically, the minimum requirements are usually for it to be eligible to compete for awards or to spend the weekend as one-off events.

When Netflix goes to theaters, it doesn’t publicly announce box office numbers. This has industry analysts wondering whether the company will continue WBD’s transparency when it comes to ticket sales once the deal is finalized.

“We’ve released about 30 films in theaters this year, so we don’t have this opposition to films in theaters,” Sarandos said during an investor call on Friday. “My opposition was mostly on the fact of long exclusivity windows, which we don’t think is consumer friendly.”

“Netflix films will take the same steps I did, as some have a short run in the cinema beforehand, but our primary goal is to bring first-run films to our members, because that’s what they’re looking for,” he said.

Of course, this strategy could change in the coming years.

The theatrical slate through 2029 has already been negotiated, Wedbush analyst Alicia Reese highlighted in a research note on Friday.

“So any buyer will have to honor those contracts by showing scheduled WBD films in theaters for at least the next four years,” Reiss wrote.

“All the show can do is take Netflix at its word,” one theater chain operator, who spoke on the condition of anonymity to share his candid thoughts, told CNBC.

“In the deal, they pledged to continue releasing legacy WB titles to theaters,” the operator said. “Now, does that mean a one-week window, a four-week window, or no window? Netflix is ​​going to have to fundamentally change the company’s streaming philosophy first. We’ll just have to wait and see. That’s not great for viewing.”

— CNBC’s Alex Sherman and Stephen DeSaulnier contributed to this report.

Disclosure: Comcast is the parent company of Fandango and NBCUniversal, which owns CNBC. Versant will become the new parent company of Fandango and CNBC based on Comcast’s planned spin-off of Versant.