Actual Case Study
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A Horror Show at the Cinemaplex? Steve Gove, Virginia Tech Brett Matherne, Loyola University of New Orleans If the motion picture industry s performance in 2007 were a feature presentation, the marquee would read Massive Box Office: Smashing Records the Sequel! At $9.63 billion, box office revenue set another record in 2007, a full 5 percent above the record set in 2006 s.1 An astonishing 1.4 billion tickets were sold in 2007. But beyond the headlines, the industry is a study in contradictions: the number of theaters is declining, but the number of screens is at an all-time high (Exhibit 5) revenues are up, but attendance is largely flat that 1.4 billion tickets is little improved from 1997 when 1.35 billion tickets were sold and a fraction of the 4 billion sold in 1946. Then the average person attended 28 films a year, today it is 6.2 (Exhibits 1 & 2) the U.S. population is increasing, but the size of the market in the core demographic group is growing more slowly (Exhibit 3) Americans spend more time than ever on entertainment 3,500 hours annually but only 12 are spent at the movies.3 The average person spends as much time watching TV every 3 days. Movies remain as popular as ever, but opportunities for viewing outside the theater have greatly increased. While motion picture studios increased revenues through product licensing, DVD sales, and international expansion, the exhibitors movie theaters have seen their business decline. Movies are more available than ever, but fewer are venturing to the theater to see them. Many theaters have ceased operation, driven from the market by consolidation and as patrons stayed away. Will the marquee at the local theater exhibitor soon change to: A Horror Show at the Cinemaplex? How has this come to be? What can exhibitors do to respond? The Motion Picture Industry Value Chain The motion picture industry value chain consists of three stages: studio production, distribution, and exhibition the theaters that show the films. All stages of the value chain are undergoing consolidation. Studio Production the studios produce the lifeblood of the industry, they create content. Films from the top ten studios produce over 90 percent of domestic box office receipts (Exhibit 4). Studios are increasingly part of larger corporations, managed as any other profit center. Management is a challenge as investments are large and a success formula elusive. Profitability swings wildly. The cost of bringing a typical feature to market exceeds $100 million, up 25 percent in 5 years. 4 Typically a third of costs are marketing expenses. Studios know their core audience: 12-24 yearolds. This group purchases nearly 40 percent of theater tickets. Half are frequent moviegoers attending at least one movie per month. Profits are driven by the studios ability to satisfy this fickly
audience. In 2008, films based on two successful comic book characters meet with widely different fates.5 Paramount s successful Iron Man was produced for $140 and grossed $318 million at the domestic box office. Warner Bros. Speed Racer, produced for $20 million less and released the following weekend was flop, grossing just $44 million. Demographic trends are unfavorable. The U.S. population will increase 17 percent in 2025, an increase of 54 million people. But the number of 12-24 year olds is expected to increase only 9 percent, just 4 million more potential viewers. Based on current theaters and screens, this is an increase of under 700 additional viewers per theater, roughly 100 per screen. Distribution Distributors are the broker intermediaries between the studios and exhibitors. Distribution entails all steps following a film s artistic completion including marketing, logistics, and administration. Distributors select and market films to exhibitors, and seek to maximize potential attendees. Distributors coordinate the manufacture and distribution of the film to exhibitors. They also handle collections, audits of attendees, and other administrative tasks. There are over 300 active distributors, but a few major firms, including studios, also distribute films. Pixar, for example, coproduced Finding Nemo with Disney and distribution was done by Disney s Buena Vista. Exhibition Studios have historically sought full vertical integration through theater ownership, allowing greater control over audiences and capturing exhibition profits. A common practice was for the studio use their ownership to reduce competition by not showing pictures produced by rivals. This ended in 1948 with the Supreme Court s ruling against the studios in United States v. Paramount Pictures. Theaters were soon divested, leaving the two to negotiate film access and rental. Theaters are classified according to the number of screens at one location (Exhibit 5). Single screen theaters were the standard from the introduction of film through the 1980s. They have since rapidly declined in number, replaced by theater complexes. These include miniplexes (2-7 screens), multiplexes (8-15 screens), and megaplexes, (16 or more screens). The number of theaters decreased more than 15 percent between 2000 and 2007, but the number of screens increased due to growth in megaplexes. Nearly 10 percent of the theaters are now megaplexes and the number of screens is at a historical high of 40,077.6 Many analysts argue the industry has overbuilt and too many theaters and screens exist to make the business profitable. The economy effects attendance, historically increasing as the economy declines. 2008 saw rapid increases in gas prices, the stock market decline, and significant layoffs. One summer movie patron commented, There's not a whole lot you can do for $10 anymore. 7
Movies do remain a bargain in the entertainment business. Four tickets to a movie costs under $27 compared to $141 for an amusement park or $261for a pro football game.8 For many, the air conditioned comfort of a dark theater and the latest Hollywood release offers a break not just from the summer heat but from reality. It's escapism, absolutely. It's probably a subconscious thing, and people don't realize it. But there's just so much going on, with people trying to pay their mortgages and get by. It's an escape for a couple of hours. 9 Declining ticket sales and the increased costs associated with developing megaplexes began a wave of consolidation among exhibitors. Four companies now dominate: Regal, AMC, Cinemark, and Carmike. Operating 1,405 theaters in the country (just 19 percent), these companies control 42 percent of screens. This market share provides these exhibitors with negotiating power for access to films, prices for films and concessions, and greater access to revenues from national advertisers. There is little differentiation in the offerings of the major theater exhibitors prices within markets differ little, the same movies are shown at the same times, and the food and services are nearly identical. Competition between theaters often comes down to distance from home, convenience of parking, and proximity to restaurants. Innovations by one theater chain are quickly adopted by others. The chains do serve different geographic markets and do so in different ways.10 Regal focuses on mid-size markets using multiplex and megaplexes. Regal s average ticket price of $7.43 is the highest among the leaders. AMC concentrates on urban areas with megaplexes and concentrates n the large population centers such as those in California, Florida, and Texas. Cinemark serves smaller markets, operating as the sole theater chain in over 80 percent of its markets. Cinemark s average ticket price last year of $5.11 was the lowest of the majors. Carmike concentrates on small to midsized markets, targeting populations of less than 100,000 that have few other entertainment options. Carmike s average ticket price in 2007 was $5.89 but at $3.05, their average concession revenue per patron is the highest among the majors. The different approaches of the companies is reflected in the cost of fixed assets per screens. These costs result from decisions made on how to serve customer, such as the level of technology and finish of the theater digital projection and marble floors cost more than traditional projectors and a carpeted.11 Despite multi- and megaplex facilities, Regal s cost per screen is the highest $430,000. Carmike s, the rural operator, is the lower at just $206,000. Cinemark is in the middle at $367,000. Data is not available for AMC, but costs are expected to be near or exceed that of Regal.
The Business of Exhibition There are three primary sources of revenue for exhibitors: box office receipts, concessions, and advertising. Managers have low discretion; their ability to influence revenues and expenses is limited. Operating margins among exhibitors average a slim 10 percent. This is before significant expenses such as facility and labor costs. The result is marginal or negative net income. Overall, the business of exhibitors is best described as loss leadership on movies: the firms make money selling concessions and showing ads to patrons who are drawn by the movie. Box Office Revenues Ticket sales constitute two thirds of exhibition business revenues. The return on these receipts, however, is quite small. A power imbalance results in contracts that return the vast majority of box office receipts to the studios. The record setting revenues at the box office have been the result of increases in ticket prices and have flowed back to the studios. Concessions Movie goers frequently lament the high prices for concessions. Concessions average 25 to 30 percent of revenues. Direct costs are less than 15 percent of selling price making concessions the largest source of exhibitor profit. These are influenced by the three factors: attendance, pricing, and material costs. The most important is attendance: more attendees = more concession sales. Per patron sales are influenced by prices a common moviegoer complaint is high concession prices. The $3.75 price point for the large soda is not by accident, but the result of market research and profit maximization calculation. Costs are influenced by purchase volume with larger chains able to negotiate better prices on everything from popcorn and soda pop to cups and napkins. Advertising Exhibitors also generate revenue through pre-show advertising. Though this constitutes just 5 percent of revenues, it is highly profitable. Mintel reports that advertising revenues among exhibitors is expected to increase at a rate of approximately 10 percent over the coming decade.12 Audiences signal consistent dislike for advertising at the theater. Balancing the revenues from ads with audience tolerance is an ongoing struggle for exhibitors. Overall, the exhibitor has limited control over both revenues and profits. Box office receipts are the bulk of revenues, but yields few profits. Attendance allows for profitable sales of concessions and advertisements, but there are significant caps on the volume of concession sales per person and selling prices seem to have reached maximum. Advertising remains an attractive avenue for revenues and profits, but audiences loathe it. The Process of Exhibition The fundamentals of film exhibition have changed little since the early 1940s. To show a picture, each theater receives a shipment of physical canisters containing a release print from the distributor. Making these prints requires $20,000 - $30,000 in up-front costs and $1,000 - $1,500 for each print. Thus a modern major motion picture opening on 2,500 screens simultaneously requires $2.50 - $3.75 million in print costs. This is borne by the studios, but paid for by movie attendees. Each release print is actually several reels of 35 mm film which are manually loaded onto projector reels, sequenced, and queued for display by a projector operator.
The film passes through the projector which shines intense light through the film, projecting the image through a lens which focuses the image on the screen. A typical projection systems costs $50,000 with one needed for each screen. Digital cinema is becoming economically viable. Digital cinema involves a high resolution (4096×2160) digitized image projected onto the screen. Basic digital systems cost $150,000 to $250,000 per screen. Conversion of an existing 8 screen theater to digital thus involves an investment of $1.2 to $2.0 million. The costs for digital release prints are far lower than traditional film, but these costs savings most directly benefit the studio whereas costs to convert theaters are the exhibitors . The number of digital theaters is expanding rapidly. In 2004, there were under 100. There are now approximately 4,600, 12 percent of screens. Due to the costs, most theaters use a mixture of technologies, with a minority of screens in any one facility digital projection. The Theater Experience For a significant number of movie goers, the draw of the theater is far more than what film is showing. Moviegoers describe attending the theater as an experience, with the appeal based on: 13 the giant theater screen the opportunity to be out of the house not having to wait to see a particular movie on home video the experience of watching the movies with a theatrical sound system the theater as a location option for a date The ability of theaters to provide these above what audiences can achieve at home appears to be diminishing. Of the reasons why people go to the movies, only the place aspects, the theater as a place to be out of house and as a place for dating seem immune from substitution. Few teenagers want movie and popcorn with their date at home with mom and dad. The overall experience currently offered by theaters falls short for many. Marketing research firm Mintel reports the reasons for not attending the theater more frequently are largely the result of the declining experience. Specific factors include: the overall cost, at home viewing options, interruptions such as cell phones in the theater, rude patrons, the overall hassle, and ads prior to the show.14 Patrons report general dismay with the theater experience. A recent Wall Street Journal article reported on interruptions ranging from the intrusion of soundtracks in adjacent theaters to cell phones. The interruptions capped a night of movie going already marred by out-of-order ticketing kiosks and a parade of preshow ads so long that, upon seeing the Coca-Cola polar bears on screen, one customer grumbled: This is obscene. 15 Recounting bad experiences is a lively topic for bloggers. A typical comment: I say it has gotten worse. I hate paying $9.00 for a ticket and the movie is 90-100 minutes long, people talking on the cell phone, the people who work at the theaters look like they are bored, and when you ask them a question, the answer is very rude. I worked as a usher in the late 60's and we had to wear uniforms and white gloves on Friday and Saturday nights, those days are long gone.16 A trip to the local cinemaplex can be eye opening even for industry insiders. In 2005, Toby Emmerich, New Line Cinema s head of production faced a not-so-common choice: attending War of the Worlds in a theater or in a screening room at actor Jim Carrey s house. Said Emmerich in an LA Times article I love seeing a movie with a big crowd, but I had no idea how many obnoxious ads I d have to
endure it really drove me crazy. After sitting through about 15 minutes of ads, I turned to my wife and said, Maybe we should ve gone to Jim Carrey s house after all. 17 The unique value proposition offered by movie theaters large screens, the long wait for DVD release, and advantages of theatrical sound systems also appear increasingly to be fading. Increasingly larger television sets, DVD content, and the adoption of high definition technology are all eroding this. One blogger posts, Whereas the electronics industry has been innovating to create immersive experiences from the comfort of our own home, the US theater industry has been dragging their feet. 18 Home Viewing Technology Home television sets are increasingly large, high definition sets coupled with inexpensive yet impressive audio systems. In 1997, the screen size of the average television was just 23 inches. Currently almost have of LCD televisions sold have screens 36 inches or larger19. Because set size is measured as the diagonal screen size, increases in viewable area are greater than the measurement suggests. The viewing area of sets doubled from 250 inches2 to 550 inches2. The FCC requirement that all broadcasters convert to digital broadcasts by February of 2009 is widely credited with starting a consumer movement to upgrade televisions. Since the 1950 s, television transmissions were formatted as 480 interlaced vertical lines (480i) of resolution. The new digital format is high definition (HD), providing up to 1080 vertical lines of resolution (1080p).20 Three quarters of all televisions sold since 2006 are HD capable. As LCD technology became the standard for both computer and television screens, manufacturing costs declined. Wholesale prices for televisions fell 65 percent from the late 1990 s to 2007. 21 In 2006, the average television retailed for $29 per diagonal inch of set size. This is expected to decrease to $22 within 5 years.22 Consumers, however, are actually spending more on every television, consistently electing to purchase larger sets to achieve a better viewing experience. Sharp, a leading manufacturer of televisions, predicts that by 2015 the average screen will reach 60 inches.23 Large screen televisions, DVD players, and audio and speaker components are commonly packaged as low cost home theaters. The average DVD player now costs just $7224 and high definition DVD players are beginning to penetrate the market. Retail price wars during the 2008 Christmas season led to HD Blu-Ray players dropping below $200. These home theater systems offer a movie experience that rivals many theaters, all for $1,000 $2,000. Says Mike Gabriel, Sharp s head of marketing and communications, People can now expect a home cinema experience from their TV. Technology that was once associated with the rich and famous is now accessible to homes across the country. 25 Content Availability & Timing Even the best hardware offers little value without content for display. Rental firm Netflix advertises a selection of 100,000+ titles extending well beyond new and classic films to include television shows, sports, and music performances. HD content is increasingly available to maximize the experience offered by those HD televisions. Satellite and cable television
providers have engaged in a game of one-upmanship to provide the greatest percentage of HD content available to subscribers. By the end of this year 2,000 movies will be available on Blu-Ray DVD.26 Movie fans no longer have to wait long for the summer s blockbuster to appear on DVD. The time period between theatrical and DVD release has declined 40 percent since 2000. The top 5 films in 2000 were released on DVD an average of 37 weeks after their box office opening. In 2007, the lag was just 23 weeks. Studios have experimented with simultaneous release to theaters, pay-per-view, and DVD. Overall, the visual and audio experience available in the home is rapidly converging with that available at the movie theater. As blogger on the movie fan site Big Picture posted: I used to go to the movies all the time -Even my blog is called the Big Picture. Then I started going less -- and then less still and now -- hardly at all. My screen at home is better, the sound system is better, the picture is in focus, the floors aren't sticky and the movies start on time. My seat is clean. And there's no idiot chattering away 2 rows behind me, and (this is my favorite) THERE'S NO CELL PHONES RINGING. EVER.27 Is this a horror show at the cinemaplex?
A Horror Show at the Cinemaplex? / 6 EXHIBIT 1: DOMESTIC TICKETS SOLD & BOX OFFICE GROSS 10 9 8 7 6 5 4 3 2 1 0 1983 1988 1993 1998 Tickets Sold (billions) Box Office Gross ($ billions) 2003 2008 Source: Boxofficemojo.com & U.S. Census
EXHIBIT 2: AVERAGE MOVIE TICKET PRICE $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1983 1988 1993 1998 2003 2008 Source: Boxofficemojo.com EXHIBIT 3: POPULATION TREND AMONG 14-17 AND 18-24 AGE GROUPS (millions) 60 50 40 30 20 10 0 2008 2010 2015 2020 2025 2030 2035 2040 2045 2050 18 to 24 years 14 to 17 years Source: U.S. Census. EXHIBIT 4: MARKET SHARE OF FILM PRODUCTION (2007) 2007 Combined Share (%) 19.8 16.7 15.5 15.4 11.4 10.5 3.6 0.0 92.9 Studio Parent & Label Time Warner (Warner Brothers & New Line) Sony (Sony & MGM) Viacom (Viacom & Paramount) Disney (Disney, Buena Vista Pictures & Miramax) Universal Studios News Corp (20th Century Fox) Lion's Gate DreamWorks SKG* Note: *Dreamworks share in 2005 was 5.7% Source: Adapted from Mintel Report: Movie Theaters - US February 2008 EXHIBIT 5: NUMBER OF THEATERS BY COMPLEX SIZE 2000 2,368 3,170 1,478 405 7,421 2007 1,748 2,296 1,617 616 6,277 % Change -26.18% -27.57% 9.40% 52.10% -15.42% Single Screens Miniplexes (2-7 Screens) Multiplexes (8-15 Screens) Megaplexes (16+ Screens) Total Sources: Developed by author from: Entertainment Industry, 2007 Report Motion Picture Association of America and Mintel Report "Movie Theaters - US - February 2008"
EXHIBIT 6: EXHIBITION MARKET LEADERS
# U.S Theater Locations 526 315 284 280 1,405 7,421 Avg. Screens per Theater 12 14 12 8
Company Regal AMC Cinemark Carmike
Theater Brands Regal, United Artists, Edwards AMC, Loews Cinemark, Century Carmike Total for leading four Industry total
# U.S. Screens 6,355 4,585 3,606 2,412 16,958 40,077
Source: Mintel Report "Movie Theaters - US - February 2008", SEC Filings & Author estimates A Horror Show at the Cinemaplex? / 8
Works Referenced 1 Motion Picture Association of America (MPAA) 2007 Entertainment Industry Market Statistics. 2 Serwer A. 2006. Extreme makeover: With big screens and high-def in more and more living rooms, movie theaters are taking radical new measures to woo filmgoers, Fortune, Vol. 153: 108-116 3 Mintel Report, Movie Theaters - US - February 2008 4 MPAA 2007 Entertainment Industry Market Statistics 5 All data on these two films from www.BoxOfficeMojo.com 6 Developed by author from: Entertainment Industry, 2007 Report Motion Picture Association of America 7 John Woestendiek and Chris Kaltenbach, July 8, 2008, $10 is small price for a big escape: Movie box office figures are flourishing despite, or because of, economic worries, The Baltimore Sun; accessed on Factival, December 5, 2008 8 MPAA 2007 Entertainment Industry Market Statistics 9 John Woestendiek and Chris Kaltenbach, July 8, 2008, $10 is small price for a big escape: Movie box office figures are flourishing despite, or because of, economic worries, The Baltimore Sun; accessed on Factiva, December 5, 2008 10 Data on the firms, screen sizes, location, from web sites and SEC filings.
11 All data is from SEC filings, based on net property, plant and equipment reported in 2007 balance sheet and the number of screens. 12 Mintel, Movie Theaters - US - February 2008 - Segment Performance - Cinema Advertising 13 Mintel Report, Movie Theaters - US - February 2008 - Reasons to go to Movies over Watching a DVD 14 Mintel Report, Movie Theaters - US - February 2008 - Reasons why Attendance is not Higher 15 Kate Kelly, Bruce Orwall and Peter Sanders, 2005, The Multiplex Under Siege, Wall Street Journal, December 24, 2005; Page P1 16 blog comment on Cinema Treasures | Over the past ten years, the movie theater experience has ... ; URL: http://cinematreasures.org/polls/22/, accessed:12/11/2008 17 Incident reported in Patrick Goldstein, 2005, Now playing: A glut of ads, Los Angeles Times, July 12, 2005 in print edition E-1; URL: http://articles.latimes.com/2005/jul/12/entertainment/et-goldstein12; accessed December 5, 2008 18 Designs of the Week: The Movie Theater Experience, Sunday, November 23, 2008, URL: http://www.sramanamitra.com/2008/11/23/designs-of-the-week-the-movie-theater-experience/ , Accessed: 20081211 19 DuBravac, 2007 20 DuBravac, 2007 21 DuBravac, 2007 22 Bob Keefe, "Prices on flat-screen TVs expected to keep falling" (2008), The Atlanta JournalConstitution, published on 03/15/08. 23 23 Source: Average TV size up to 60-inch by 2015 says Sharp, TechDigest, URL: Http://www.techdigest.tv/2008/01/average_tv_size.html ; Accessed: 2008/12/11 24 MPAA 2007 Entertainment Industry Market Statistics 25 Source: Average TV size up to 60-inch by 2015 says Sharp, TechDigest, URL: http://www.techdigest.tv/2008/01/average_tv_size.html ; Accessed: 2008/12/11 26 Source: http://www.movieweb.com 27 The Big Picture | Why is Movie Theatre Revenue Attendance Declining? URL: http://bigpicture.typepad.com/comments/2005/07/declining_movie.htm. Accessed: 12/11/2008
audience. In 2008, films based on two successful comic book characters meet with widely different fates.5 Paramount s successful Iron Man was produced for $140 and grossed $318 million at the domestic box office. Warner Bros. Speed Racer, produced for $20 million less and released the following weekend was flop, grossing just $44 million. Demographic trends are unfavorable. The U.S. population will increase 17 percent in 2025, an increase of 54 million people. But the number of 12-24 year olds is expected to increase only 9 percent, just 4 million more potential viewers. Based on current theaters and screens, this is an increase of under 700 additional viewers per theater, roughly 100 per screen. Distribution Distributors are the broker intermediaries between the studios and exhibitors. Distribution entails all steps following a film s artistic completion including marketing, logistics, and administration. Distributors select and market films to exhibitors, and seek to maximize potential attendees. Distributors coordinate the manufacture and distribution of the film to exhibitors. They also handle collections, audits of attendees, and other administrative tasks. There are over 300 active distributors, but a few major firms, including studios, also distribute films. Pixar, for example, coproduced Finding Nemo with Disney and distribution was done by Disney s Buena Vista. Exhibition Studios have historically sought full vertical integration through theater ownership, allowing greater control over audiences and capturing exhibition profits. A common practice was for the studio use their ownership to reduce competition by not showing pictures produced by rivals. This ended in 1948 with the Supreme Court s ruling against the studios in United States v. Paramount Pictures. Theaters were soon divested, leaving the two to negotiate film access and rental. Theaters are classified according to the number of screens at one location (Exhibit 5). Single screen theaters were the standard from the introduction of film through the 1980s. They have since rapidly declined in number, replaced by theater complexes. These include miniplexes (2-7 screens), multiplexes (8-15 screens), and megaplexes, (16 or more screens). The number of theaters decreased more than 15 percent between 2000 and 2007, but the number of screens increased due to growth in megaplexes. Nearly 10 percent of the theaters are now megaplexes and the number of screens is at a historical high of 40,077.6 Many analysts argue the industry has overbuilt and too many theaters and screens exist to make the business profitable. The economy effects attendance, historically increasing as the economy declines. 2008 saw rapid increases in gas prices, the stock market decline, and significant layoffs. One summer movie patron commented, There's not a whole lot you can do for $10 anymore. 7
Movies do remain a bargain in the entertainment business. Four tickets to a movie costs under $27 compared to $141 for an amusement park or $261for a pro football game.8 For many, the air conditioned comfort of a dark theater and the latest Hollywood release offers a break not just from the summer heat but from reality. It's escapism, absolutely. It's probably a subconscious thing, and people don't realize it. But there's just so much going on, with people trying to pay their mortgages and get by. It's an escape for a couple of hours. 9 Declining ticket sales and the increased costs associated with developing megaplexes began a wave of consolidation among exhibitors. Four companies now dominate: Regal, AMC, Cinemark, and Carmike. Operating 1,405 theaters in the country (just 19 percent), these companies control 42 percent of screens. This market share provides these exhibitors with negotiating power for access to films, prices for films and concessions, and greater access to revenues from national advertisers. There is little differentiation in the offerings of the major theater exhibitors prices within markets differ little, the same movies are shown at the same times, and the food and services are nearly identical. Competition between theaters often comes down to distance from home, convenience of parking, and proximity to restaurants. Innovations by one theater chain are quickly adopted by others. The chains do serve different geographic markets and do so in different ways.10 Regal focuses on mid-size markets using multiplex and megaplexes. Regal s average ticket price of $7.43 is the highest among the leaders. AMC concentrates on urban areas with megaplexes and concentrates n the large population centers such as those in California, Florida, and Texas. Cinemark serves smaller markets, operating as the sole theater chain in over 80 percent of its markets. Cinemark s average ticket price last year of $5.11 was the lowest of the majors. Carmike concentrates on small to midsized markets, targeting populations of less than 100,000 that have few other entertainment options. Carmike s average ticket price in 2007 was $5.89 but at $3.05, their average concession revenue per patron is the highest among the majors. The different approaches of the companies is reflected in the cost of fixed assets per screens. These costs result from decisions made on how to serve customer, such as the level of technology and finish of the theater digital projection and marble floors cost more than traditional projectors and a carpeted.11 Despite multi- and megaplex facilities, Regal s cost per screen is the highest $430,000. Carmike s, the rural operator, is the lower at just $206,000. Cinemark is in the middle at $367,000. Data is not available for AMC, but costs are expected to be near or exceed that of Regal.
The Business of Exhibition There are three primary sources of revenue for exhibitors: box office receipts, concessions, and advertising. Managers have low discretion; their ability to influence revenues and expenses is limited. Operating margins among exhibitors average a slim 10 percent. This is before significant expenses such as facility and labor costs. The result is marginal or negative net income. Overall, the business of exhibitors is best described as loss leadership on movies: the firms make money selling concessions and showing ads to patrons who are drawn by the movie. Box Office Revenues Ticket sales constitute two thirds of exhibition business revenues. The return on these receipts, however, is quite small. A power imbalance results in contracts that return the vast majority of box office receipts to the studios. The record setting revenues at the box office have been the result of increases in ticket prices and have flowed back to the studios. Concessions Movie goers frequently lament the high prices for concessions. Concessions average 25 to 30 percent of revenues. Direct costs are less than 15 percent of selling price making concessions the largest source of exhibitor profit. These are influenced by the three factors: attendance, pricing, and material costs. The most important is attendance: more attendees = more concession sales. Per patron sales are influenced by prices a common moviegoer complaint is high concession prices. The $3.75 price point for the large soda is not by accident, but the result of market research and profit maximization calculation. Costs are influenced by purchase volume with larger chains able to negotiate better prices on everything from popcorn and soda pop to cups and napkins. Advertising Exhibitors also generate revenue through pre-show advertising. Though this constitutes just 5 percent of revenues, it is highly profitable. Mintel reports that advertising revenues among exhibitors is expected to increase at a rate of approximately 10 percent over the coming decade.12 Audiences signal consistent dislike for advertising at the theater. Balancing the revenues from ads with audience tolerance is an ongoing struggle for exhibitors. Overall, the exhibitor has limited control over both revenues and profits. Box office receipts are the bulk of revenues, but yields few profits. Attendance allows for profitable sales of concessions and advertisements, but there are significant caps on the volume of concession sales per person and selling prices seem to have reached maximum. Advertising remains an attractive avenue for revenues and profits, but audiences loathe it. The Process of Exhibition The fundamentals of film exhibition have changed little since the early 1940s. To show a picture, each theater receives a shipment of physical canisters containing a release print from the distributor. Making these prints requires $20,000 - $30,000 in up-front costs and $1,000 - $1,500 for each print. Thus a modern major motion picture opening on 2,500 screens simultaneously requires $2.50 - $3.75 million in print costs. This is borne by the studios, but paid for by movie attendees. Each release print is actually several reels of 35 mm film which are manually loaded onto projector reels, sequenced, and queued for display by a projector operator.
The film passes through the projector which shines intense light through the film, projecting the image through a lens which focuses the image on the screen. A typical projection systems costs $50,000 with one needed for each screen. Digital cinema is becoming economically viable. Digital cinema involves a high resolution (4096×2160) digitized image projected onto the screen. Basic digital systems cost $150,000 to $250,000 per screen. Conversion of an existing 8 screen theater to digital thus involves an investment of $1.2 to $2.0 million. The costs for digital release prints are far lower than traditional film, but these costs savings most directly benefit the studio whereas costs to convert theaters are the exhibitors . The number of digital theaters is expanding rapidly. In 2004, there were under 100. There are now approximately 4,600, 12 percent of screens. Due to the costs, most theaters use a mixture of technologies, with a minority of screens in any one facility digital projection. The Theater Experience For a significant number of movie goers, the draw of the theater is far more than what film is showing. Moviegoers describe attending the theater as an experience, with the appeal based on: 13 the giant theater screen the opportunity to be out of the house not having to wait to see a particular movie on home video the experience of watching the movies with a theatrical sound system the theater as a location option for a date The ability of theaters to provide these above what audiences can achieve at home appears to be diminishing. Of the reasons why people go to the movies, only the place aspects, the theater as a place to be out of house and as a place for dating seem immune from substitution. Few teenagers want movie and popcorn with their date at home with mom and dad. The overall experience currently offered by theaters falls short for many. Marketing research firm Mintel reports the reasons for not attending the theater more frequently are largely the result of the declining experience. Specific factors include: the overall cost, at home viewing options, interruptions such as cell phones in the theater, rude patrons, the overall hassle, and ads prior to the show.14 Patrons report general dismay with the theater experience. A recent Wall Street Journal article reported on interruptions ranging from the intrusion of soundtracks in adjacent theaters to cell phones. The interruptions capped a night of movie going already marred by out-of-order ticketing kiosks and a parade of preshow ads so long that, upon seeing the Coca-Cola polar bears on screen, one customer grumbled: This is obscene. 15 Recounting bad experiences is a lively topic for bloggers. A typical comment: I say it has gotten worse. I hate paying $9.00 for a ticket and the movie is 90-100 minutes long, people talking on the cell phone, the people who work at the theaters look like they are bored, and when you ask them a question, the answer is very rude. I worked as a usher in the late 60's and we had to wear uniforms and white gloves on Friday and Saturday nights, those days are long gone.16 A trip to the local cinemaplex can be eye opening even for industry insiders. In 2005, Toby Emmerich, New Line Cinema s head of production faced a not-so-common choice: attending War of the Worlds in a theater or in a screening room at actor Jim Carrey s house. Said Emmerich in an LA Times article I love seeing a movie with a big crowd, but I had no idea how many obnoxious ads I d have to
endure it really drove me crazy. After sitting through about 15 minutes of ads, I turned to my wife and said, Maybe we should ve gone to Jim Carrey s house after all. 17 The unique value proposition offered by movie theaters large screens, the long wait for DVD release, and advantages of theatrical sound systems also appear increasingly to be fading. Increasingly larger television sets, DVD content, and the adoption of high definition technology are all eroding this. One blogger posts, Whereas the electronics industry has been innovating to create immersive experiences from the comfort of our own home, the US theater industry has been dragging their feet. 18 Home Viewing Technology Home television sets are increasingly large, high definition sets coupled with inexpensive yet impressive audio systems. In 1997, the screen size of the average television was just 23 inches. Currently almost have of LCD televisions sold have screens 36 inches or larger19. Because set size is measured as the diagonal screen size, increases in viewable area are greater than the measurement suggests. The viewing area of sets doubled from 250 inches2 to 550 inches2. The FCC requirement that all broadcasters convert to digital broadcasts by February of 2009 is widely credited with starting a consumer movement to upgrade televisions. Since the 1950 s, television transmissions were formatted as 480 interlaced vertical lines (480i) of resolution. The new digital format is high definition (HD), providing up to 1080 vertical lines of resolution (1080p).20 Three quarters of all televisions sold since 2006 are HD capable. As LCD technology became the standard for both computer and television screens, manufacturing costs declined. Wholesale prices for televisions fell 65 percent from the late 1990 s to 2007. 21 In 2006, the average television retailed for $29 per diagonal inch of set size. This is expected to decrease to $22 within 5 years.22 Consumers, however, are actually spending more on every television, consistently electing to purchase larger sets to achieve a better viewing experience. Sharp, a leading manufacturer of televisions, predicts that by 2015 the average screen will reach 60 inches.23 Large screen televisions, DVD players, and audio and speaker components are commonly packaged as low cost home theaters. The average DVD player now costs just $7224 and high definition DVD players are beginning to penetrate the market. Retail price wars during the 2008 Christmas season led to HD Blu-Ray players dropping below $200. These home theater systems offer a movie experience that rivals many theaters, all for $1,000 $2,000. Says Mike Gabriel, Sharp s head of marketing and communications, People can now expect a home cinema experience from their TV. Technology that was once associated with the rich and famous is now accessible to homes across the country. 25 Content Availability & Timing Even the best hardware offers little value without content for display. Rental firm Netflix advertises a selection of 100,000+ titles extending well beyond new and classic films to include television shows, sports, and music performances. HD content is increasingly available to maximize the experience offered by those HD televisions. Satellite and cable television
providers have engaged in a game of one-upmanship to provide the greatest percentage of HD content available to subscribers. By the end of this year 2,000 movies will be available on Blu-Ray DVD.26 Movie fans no longer have to wait long for the summer s blockbuster to appear on DVD. The time period between theatrical and DVD release has declined 40 percent since 2000. The top 5 films in 2000 were released on DVD an average of 37 weeks after their box office opening. In 2007, the lag was just 23 weeks. Studios have experimented with simultaneous release to theaters, pay-per-view, and DVD. Overall, the visual and audio experience available in the home is rapidly converging with that available at the movie theater. As blogger on the movie fan site Big Picture posted: I used to go to the movies all the time -Even my blog is called the Big Picture. Then I started going less -- and then less still and now -- hardly at all. My screen at home is better, the sound system is better, the picture is in focus, the floors aren't sticky and the movies start on time. My seat is clean. And there's no idiot chattering away 2 rows behind me, and (this is my favorite) THERE'S NO CELL PHONES RINGING. EVER.27 Is this a horror show at the cinemaplex?
A Horror Show at the Cinemaplex? / 6 EXHIBIT 1: DOMESTIC TICKETS SOLD & BOX OFFICE GROSS 10 9 8 7 6 5 4 3 2 1 0 1983 1988 1993 1998 Tickets Sold (billions) Box Office Gross ($ billions) 2003 2008 Source: Boxofficemojo.com & U.S. Census
EXHIBIT 2: AVERAGE MOVIE TICKET PRICE $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 1983 1988 1993 1998 2003 2008 Source: Boxofficemojo.com EXHIBIT 3: POPULATION TREND AMONG 14-17 AND 18-24 AGE GROUPS (millions) 60 50 40 30 20 10 0 2008 2010 2015 2020 2025 2030 2035 2040 2045 2050 18 to 24 years 14 to 17 years Source: U.S. Census. EXHIBIT 4: MARKET SHARE OF FILM PRODUCTION (2007) 2007 Combined Share (%) 19.8 16.7 15.5 15.4 11.4 10.5 3.6 0.0 92.9 Studio Parent & Label Time Warner (Warner Brothers & New Line) Sony (Sony & MGM) Viacom (Viacom & Paramount) Disney (Disney, Buena Vista Pictures & Miramax) Universal Studios News Corp (20th Century Fox) Lion's Gate DreamWorks SKG* Note: *Dreamworks share in 2005 was 5.7% Source: Adapted from Mintel Report: Movie Theaters - US February 2008 EXHIBIT 5: NUMBER OF THEATERS BY COMPLEX SIZE 2000 2,368 3,170 1,478 405 7,421 2007 1,748 2,296 1,617 616 6,277 % Change -26.18% -27.57% 9.40% 52.10% -15.42% Single Screens Miniplexes (2-7 Screens) Multiplexes (8-15 Screens) Megaplexes (16+ Screens) Total Sources: Developed by author from: Entertainment Industry, 2007 Report Motion Picture Association of America and Mintel Report "Movie Theaters - US - February 2008"
EXHIBIT 6: EXHIBITION MARKET LEADERS
# U.S Theater Locations 526 315 284 280 1,405 7,421 Avg. Screens per Theater 12 14 12 8
Company Regal AMC Cinemark Carmike
Theater Brands Regal, United Artists, Edwards AMC, Loews Cinemark, Century Carmike Total for leading four Industry total
# U.S. Screens 6,355 4,585 3,606 2,412 16,958 40,077
Source: Mintel Report "Movie Theaters - US - February 2008", SEC Filings & Author estimates A Horror Show at the Cinemaplex? / 8
Works Referenced 1 Motion Picture Association of America (MPAA) 2007 Entertainment Industry Market Statistics. 2 Serwer A. 2006. Extreme makeover: With big screens and high-def in more and more living rooms, movie theaters are taking radical new measures to woo filmgoers, Fortune, Vol. 153: 108-116 3 Mintel Report, Movie Theaters - US - February 2008 4 MPAA 2007 Entertainment Industry Market Statistics 5 All data on these two films from www.BoxOfficeMojo.com 6 Developed by author from: Entertainment Industry, 2007 Report Motion Picture Association of America 7 John Woestendiek and Chris Kaltenbach, July 8, 2008, $10 is small price for a big escape: Movie box office figures are flourishing despite, or because of, economic worries, The Baltimore Sun; accessed on Factival, December 5, 2008 8 MPAA 2007 Entertainment Industry Market Statistics 9 John Woestendiek and Chris Kaltenbach, July 8, 2008, $10 is small price for a big escape: Movie box office figures are flourishing despite, or because of, economic worries, The Baltimore Sun; accessed on Factiva, December 5, 2008 10 Data on the firms, screen sizes, location, from web sites and SEC filings.
11 All data is from SEC filings, based on net property, plant and equipment reported in 2007 balance sheet and the number of screens. 12 Mintel, Movie Theaters - US - February 2008 - Segment Performance - Cinema Advertising 13 Mintel Report, Movie Theaters - US - February 2008 - Reasons to go to Movies over Watching a DVD 14 Mintel Report, Movie Theaters - US - February 2008 - Reasons why Attendance is not Higher 15 Kate Kelly, Bruce Orwall and Peter Sanders, 2005, The Multiplex Under Siege, Wall Street Journal, December 24, 2005; Page P1 16 blog comment on Cinema Treasures | Over the past ten years, the movie theater experience has ... ; URL: http://cinematreasures.org/polls/22/, accessed:12/11/2008 17 Incident reported in Patrick Goldstein, 2005, Now playing: A glut of ads, Los Angeles Times, July 12, 2005 in print edition E-1; URL: http://articles.latimes.com/2005/jul/12/entertainment/et-goldstein12; accessed December 5, 2008 18 Designs of the Week: The Movie Theater Experience, Sunday, November 23, 2008, URL: http://www.sramanamitra.com/2008/11/23/designs-of-the-week-the-movie-theater-experience/ , Accessed: 20081211 19 DuBravac, 2007 20 DuBravac, 2007 21 DuBravac, 2007 22 Bob Keefe, "Prices on flat-screen TVs expected to keep falling" (2008), The Atlanta JournalConstitution, published on 03/15/08. 23 23 Source: Average TV size up to 60-inch by 2015 says Sharp, TechDigest, URL: Http://www.techdigest.tv/2008/01/average_tv_size.html ; Accessed: 2008/12/11 24 MPAA 2007 Entertainment Industry Market Statistics 25 Source: Average TV size up to 60-inch by 2015 says Sharp, TechDigest, URL: http://www.techdigest.tv/2008/01/average_tv_size.html ; Accessed: 2008/12/11 26 Source: http://www.movieweb.com 27 The Big Picture | Why is Movie Theatre Revenue Attendance Declining? URL: http://bigpicture.typepad.com/comments/2005/07/declining_movie.htm. Accessed: 12/11/2008
