Efforts to redevelop dying Stonestown Galleria in San Francisco turn into mess. The beating of landlords will continue until mood improves.

By Wolf Richter for WOLF STREET.

It was another stab in the back of the already bleeding brick-and-mortar movie theater business and its landlords and their lenders. But for Disney, it was the next big step in selling direct to consumers, rather than through movie theaters, cutting out the middleman. Ecommerce is doing the same to brick-and-mortar retail. And the Pandemic has compressed what would have taken years into a few months.

Disney has a slew of problems on its hands. It had to close some of its theme parks. When it reopened parks, it was with diminished capacity. It announced last week that it would lay off 28,000 workers, as its Disneyland parks in California would not reopen soon. It had to suspend operations at its Disney Cruise Line. It halted some movie productions. For a while, it ran out of live sports events to stream. It halted and delayed distribution of movies to cinemas because cinemas were closed, and when they reopened, people didn’t come.

But Disney+, a subscription video on-demand streaming service launched in November 2019, is one of the stars of the Pandemic, like most everything related to doing or watching at home, as consumption has massively shifted in all kinds of ways, powered by spending more time at home, working at home, learning at home, riding bicycles at home, or even cutting hair at home. Oh, and buying entertainment at home.

So today, Disney announced a reorganization of its media and entertainment businesses. It said its “creative engines will focus on developing and producing original content for the Company’s streaming services….”

The writing was on the wall. After the fiasco in the movie theaters of Disney’s Warner Bros. production “Tenet” in early September, when movie goers didn’t go, Disney released “Mulan” directly on Disney+, for $29.99, and the entire family could watch it for that price, and watch it several times too.

Then on October 8, Disney announced that its Pixar animated movie, “Soul,” will not debut in theaters but on Disney+ on December 25.

Disney reported in August that the number of paying subscribers for Disney+ had already grown to 57.5 million by the end of June, up from zero in November. It also reported 35.5 million subscribers to Hulu (up from 27.9 million a year earlier), and 8.5 million subscribers to ESPN+, up from 2.4 million a year earlier. In total, over 101 million paying subscribers on its streaming platforms.

For brick-and-mortar movie theaters, this is toxic.

Cineworld Group announced on October 5 that it would close all its 536 Regal Theaters, the second largest theater chain in the US, behind AMC and ahead of Cinemark.

Cineworld blamed precisely the fact that, with theaters still closed in some areas and movie goers not going to movies where theaters are open, “studios have been reluctant to release their pipeline of new films.”

Without big new movies, cinemas cannot survive – assuming that they could survive with big new movies in this environment.

What Cineworld didn’t spell out, but what’s now clearer than daylight is that studios are and will be releasing big new movies, but the action is now shifting to their own streaming services and away from theaters.

Universal Pictures, which is owned by Comcast, has started down that route as well, selling “Trolls World Tour” directly on Comcast’s platforms rather than debuting it in theaters.

All this is part of the broader brick-and-mortar meltdown that started years ago, when ecommerce in the retail business and streaming in the movie and music businesses became ever more powerful forces. Netflix, Amazon, and others not only distribute movies via streaming but also create their own movies and sell them directly to consumers. All of them have been relentlessly growing competition for movie theaters and legacy studios for years.

Movie theater ticket sales peaked in 2002 at 1.58 billion tickets, and by 2019, were down 22% to 1.24 billion tickets. On a per-capita basis, ticket sales plunged 31%. At the same time, Americans watched more movies than ever, but at home. And that was before the collapse of ticket sales in 2020. The Pandemic just compressed the developments of years into a few months. And Disney confirmed it.

Concerning this shift to streaming,  Disney CEO Bob Chapek told CNBC’s Closing Bell on Monday, “I would not characterize it as a response to Covid. I would say Covid accelerated the rate at which we made this transition, but this transition was going to happen anyway.”

Like ecommerce, this is not a blip, but a structural change in how Americans consume entertainment.

The beating of mall landlords will continue until the mood improves.

That shift to streaming and its consequences among movie theaters form the latest challenge for mall landlords. Many landlords have tried revitalizing malls by replacing the shuttered department stores with services and entertainment options that offer an “experience,” and movie theaters are high on the list.

For example, the Stonestown Galleria in San Francisco. It had been anchored by a Macy’s and a Nordstrom, both of which closed. In August 2018, an entity of Brookfield, a giant private equity firm in Canada, with publicly traded subsidiaries, bought the two-thirds of GGP it didn’t already own for $15 billion, and thereby ended up with the Stonestown Galleria.

So it decided to plow a lot of money into redeveloping the mall. Much of the 40 acres are parking, and some of it will eventually be turned into apartments. The rest of the mall will be redeveloped as mall, with a different flair.

In 2019 construction started on the first projects on the property: One, a Whole Foods, with grocery stores at the time still having mostly been spared the beating by ecommerce; and two, you guessed it, an 11-screen Regal movie theater inside the mall.

OK, back to the drawing board. Maybe more housing instead. Oh wait, rents have plunged by over 20% year-over-year in San Francisco and now there’s a historic glut of condos on the market. For mall landlords trying to redevelop a mall by building movie theaters to replace zombie department stores, Disney’s – and other studios’ – shift to streaming is another nightmare in the long-running Brick-and-Mortar Meltdown series.

The out-of-money-date for Cineworld is in November or December, but it’s hoping for a US taxpayer bailout. Read... Cinema Chains Near Collapse: The Problem Beyond the Pandemic

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