AMC Lags Behind in Surprisingly Competitive Saudi Cinema Market

The Saudi kingdom’s market is proving tricky for the world’s biggest cinema chain, which was expected to dominate a field with no other major global players.

AMC’s experience illustrates how Saudi Arabia remains a difficult place for Western companies to do business, even with the country’s efforts to woo international business with legal and social changes.

AMC said it would open up to 20 cinemas by the end of last year but currently runs 10, with about 65 screens. Its two biggest competitors, Saudi brand Muvi and Dubai-based Vox Cinemas, run roughly 150 screens each, despite winning licenses to operate after AMC and without the direct government support that AMC has. Three other firms are building cinemas, and three more have obtained licenses, according to investment bank Saudi Fransi Capital, making Saudi Arabia a competitive market.

Earlier this year, AMC’s Saudi operation replaced its chief executive, John Iozzi, and installed a former executive at Vox’s parent company as interim CEO, according to people familiar with the changes.

Now, the Saudi government is taking greater control of its joint venture with AMC, and the two sides plan to renegotiate the terms of their contract, according to people familiar with the partnership. AMC currently owns 10% of the joint venture with Saudi Entertainment Ventures, a subsidiary of the country’s sovereign-wealth fund, and the American firm receives fees for licensing its brand and for managing the partnership, these people said.

A new-look partnership is likely to involve a simpler relationship whereby Saudi Entertainment Ventures, also known as Seven, pays a fee to license AMC’s brand but runs the operation, according to a person familiar with the discussions.

In a statement, AMC Chief Executive Adam Aron said the pandemic slowed the pace of its theater openings.

“AMC is perfectly happy and content with our expansion into the Kingdom of Saudi Arabia,” Mr. Aron said, adding that he had “the highest praise, deepest respect and genuine affection” for his Saudi government partners.

AMC has invested at least $10 million, or roughly $1 million per theater, in its partnership with Seven, according to a person familiar with the details and public statements. A spokesman for Seven didn’t respond to requests for comment.

Seven partnered with AMC thinking the world’s biggest operator would bring expertise developing cinemas, said John Sullivan, director of the Big Picture, a cinema-development consulting firm that advised on Muvi’s establishment. But the American firm’s size has largely come via acquisitions of competitors, rather than experience in new emerging markets, he said. That size didn’t guarantee as much success as first appeared, he added.

AMC entered the kingdom thinking its brand was internationally recognized, and therefore landlords would want AMC screens in commercial centers, people familiar with the rollout said. But the U.S. firm didn’t have local connections like Muvi and Vox, which are subsidiaries of established retail and shopping-mall conglomerates in the Gulf, the people added.

“The average Saudi national, they knew AMC only when [AMC] came to the market,” said Haitham al-Shammari, CEO of Gulf Hub, an executive-search consulting firm based in Riyadh, and a former adviser to Seven. “Vox is very well known to the Saudis.”

Kansas-based AMC lauded the opportunity in the kingdom when Crown Prince Mohammed bin Salman in 2017 announced the reopening of theaters. Saudi Arabia banned cinemas in the 1980s as its rulers, facing growing Islamic sentiment across the Middle East, allowed conservative clerics greater influence.

AMC first began talking to Saudi officials about a presence in the kingdom in November 2017 when Mr. Aron attended a conference in the capital Riyadh, according to a person involved. That December, the two sides unveiled a memorandum of understanding to build cinemas, the same day the kingdom announced it was ending the theater ban.

The move was part of a broader shake-up of Saudi Arabia. Prince Mohammed also allowed women to drive for the first time, barred religious police, and encouraged sexes to mingle in public—previously taboo.

Like many competitors, AMC had raced to build multiplexes in the U.S. in recent decades and expanded into international markets. Saudi Arabia was one of the few developed nations where exhibitors had yet to expand. AMC vowed to open up to 50 theaters within five years, and as many as 100 by 2030.

“We expect this to be a very lucrative opportunity for AMC,” Mr. Aron said in an earnings call in April 2018.

That month, AMC and the Saudi government opened an unused Riyadh symphony hall as a makeshift cinema, even before ironing out the details of a joint venture, according to people involved. That month, AMC hosted the first movie shown in Saudi Arabia since the 1980s, Walt Disney Co. ’s blockbuster “Black Panther,” a debut seen as symbolic because it told the story of a young prince trying to modernize his country.

But after the killing in October 2018 of journalist Jamal Khashoggi—an operation the Central Intelligence Agency concluded Prince Mohammed likely ordered—foreign-investment interest in the country cooled. The kingdom denied any involvement of the crown prince.

Even as other executives pulled deals after Mr. Khashoggi’s death, Mr. Aron said publicly that AMC would continue to work in the kingdom, citing the best interests of Saudi Arabia’s 35 million people.

AMC opened its second theater in December 2019, nearly 18 months after the first. AMC worked with Seven on a market plan that outlined AMC opening 20 stand-alone cinemas and another 30 as part of entertainment venues to be constructed by Seven across the country, according to people involved. Seven hasn’t opened any entertainment clusters yet.

Mr. Aron said the company’s competitive position in Saudi Arabia “will ultimately be incredibly strong” once it rolls out more theaters and Seven’s entertainment clusters open. He said Saudi consumers “appear to be avidly interested in moviegoing.”

Globally, AMC’s share price has been on a tear in recent months, fueled by interest among individual investors who have piled into it and other meme stocks. Using liquidity raised by these thousands of shareholders, AMC has acquired more than half a dozen new locations in the U.S., a twist from more than a year ago, when Covid-19 put the company on the brink of bankruptcy.

The company has said that essentially all of its locations world-wide have reopened, but attendance levels remain below pre-pandemic levels.

—Stephen Kalin and Erich Schwartzel contributed to this article.

Write to Rory Jones at rory.jones@wsj.com