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

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

Netflix and Warner Bros. Discovery announced a deal for the streaming giant to acquire WBD’s film studio and streaming service, bringing an end to a months-long bidding process that saw Paramount Skydance and Comcast also vying for the assets.

With Netflix as the victor, exhibitors are in a panic.

Unlike traditional movie studios, the streamer has not adhered to conventional theatrical distribution, and there are fears that big changes could be coming to an industry that is still struggling post-pandemic.

“It’s no secret that this was probably the least desired outcome for many theater owners,” said Shawn Robbins, director of analytics at Fandango and founder of Box Office Theory. “There are no two ways around that. This may be one of the most meaningful days in the history of the business, but it could yet be a constructive one for cinema if Netflix honors early indications that it will maintain the theatrical business model of Warner Bros. properties and lean into those unique strengths which are not replicable on the streaming platform.”

Cinema United, the world’s largest exhibition trade association, came out strong Friday morning against the sale of WBD assets to Netflix.

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

A half dozen movie theater operators who spoke to CNBC shared concerns that Netflix’s acquisition of WBD would lead to a significant decline in the number of films made available to cinemas annually and, therefore, hit annual box office ticket sales.

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

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

“We are going to be pulling all of the levers we can because we think that a deal of this magnitude and the potential impact that it will have is something that everyone with regulatory and oversight authority needs to look closely at,” O’Leary said on CNBC’s “Squawk on the Street” Friday. “So, we’ve already been talking to people at the federal level, at the state level and internationally because this is a significant, significant threat, we believe, to the long-term viability of the theatrical exhibition.”

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

A collective of top industry players sent an open letter to Congress detailing the potential economic and institutional blowback that could play out if the merger goes through.

The letter, reported by Variety, stated that Netflix would “effectively hold a noose around the theatrical marketplace” and could alter the footprint of theatrical movies and decrease licensing fees paid in post-theatrical windows.

Several exhibitors told CNBC that they fear a deal between WBD and Netflix will result in fewer theatrical releases and even shorter theatrical windows for would-be major releases.

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

The theatrical business has struggled in recent years from pandemic related production shutdowns as well as dual labor strikes that halted film shoots and delayed movie releases. The industry still has not returned to pre-pandemic release numbers or box office ticket sales, and there are worries that 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 movies produced for theatrical distribution goes down,” O’Leary told CNBC Friday.

Netflix co-CEO Ted Sarandos said during an investor call Friday morning following the deal announcement that planned Warner Bros. releases “will continue to go to the theaters through Warner Bros.”

Sarandos doesn’t plan to alter WBD’s current business practices, a person familiar with the matter told CNBC, speaking on the condition of anonymity to discuss private conversations. Still, he does plan to meet with theater owners in an effort to assuage any concerns and to explain his vision that movies should have shorter exclusive theatrical windows, the person said.

For exhibitors, shrinking theatrical windows pose a major threat.

Prior to the pandemic, movies typically played in theaters for between 70 and 90 days before entering the home market. Following Covid shutdowns, studios and cinemas renegotiated these terms, and the average window fell to 30 to 45 days.

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

If Netflix does release a film in cinemas, it’s usually only for the minimum requirement to be eligible for awards contention or for weekend stints as one-off events.

When Netflix does go to theaters, it doesn’t report box office figures publicly. That’s left industry analysts wondering if the company will continue WBD’s transparency when it comes to ticket sales once the deal is finalized.

“We’ve released about 30 films into theaters this year, so it’s not like we have this opposition to movies in the theaters,” Sarandos said during Friday’s investor call. “My pushback has been mostly in the fact of the long exclusive windows, which we don’t really think are that consumer friendly.”

“Netflix movies will take the same strides they have, which is some of them do have a short run in the theater beforehand, but our primary goal is to bring first-run movies to our members, because that’s what they’re looking for,” he said.

Of course, that strategy could shift in the coming years.

Alicia Reese, an analyst at Wedbush, highlighted in a research note Friday that the theatrical slate has already been negotiated through 2029.

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

One theater chain operator, speaking on the condition of anonymity to share candid thoughts, told CNBC, “All exhibition can do is take Netflix at their word.”

“In the deal they have pledged to continue to release legacy WB titles to theatres,” the operator said. “Now does that mean with a one-week window, a four-week window or no window? Netflix will have to diametrically alter their corporate philosophy of streaming first. We just have to wait to see. It’s not great for exhibition.”

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

Disclosure: Comcast is the parent company of Fandango and NBCUniversal, which owns CNBC. Versant would become the new parent company of Fandango and CNBC upon Comcast’s planned spinoff of Versant.