Business Insider

When MoviePass released its $10 a month subscription service for almost unlimited visits to movie theaters, fans went rabid.

The massive demand unlocked by MoviePass could end up giving the movie subscription startup a lot of leverage over the theater industry according to Credit Suisse, which could end up being a problem for the theaters' bottom lines.

In a note shared with clients Thursday, Credit Suisse lowered its price target for Regal Entertainment, Cinemark Holdings and AMC Entertainment. Credit Suisse said it expects a decline in earnings due to the impact of MoviePass on the industry.

"The key question for gauging the potential impact of MoviePass on the industry is how much leverage the service may eventually have over theaters to share ticket and concession revenues," Credit Suisse wrote.

Credit Suisse said that MoviePass's business model is based on building up a subscriber base large enough that the startup can eventually go to the movie theaters and ask for a cut of their business.

Credit Suisse thinks that up to about two-thirds of the current movie-goer population in the US could eventually buy a MoviePass subscription, which would equal about 20 million people. If MoviePass can achieve those levels, it would have significant leverage over the theaters, and would likely ask for some cut of the ticket and concession sales.

If the theaters say no, MoviePass could steer its subscribers away from certain theaters by offering discount packages with local businesses, Credit Suisse said. Credit Suisse said MoviePass could offer a discount to a local restaurant if a user goes to an AMC theater instead of a Regal Cinemas theater, for example.

Credit Suisse estimates that 20 million MoviePass subscribers would purchase up to 180 million tickets annually, which would be about 27% of the theaters' total ticket sales. If MoviePass is able to control a third of a theater's business, Credit Suisse thinks that it would have sufficient leverage to ask for a 10% or 20% cut of the theater's ticket and concession sales. A 10% cut could dilute the theaters' earnings before interest, taxes and amortization by up to 6%, according to Credit Suisse's calculations.

The bank rates all three theaters a sell. It lowered its Regal price target to $13 from $17, its Cinemark price target to $30 from $34, and its AMC price target to $12 from $14.

The 2017 box office results haven't been great for theaters so far, further eating into theaters' earnings.

This story previously stated the incorrect bank as a source of the notes. The error has been corrected to reflect the most accurate information.

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