The great American Movie scam is over. And it’s at such an advanced stage that the New York Times is even commenting on it, as it did this week, remarking that Movie Theaters are not just for movies any more.
That should come as no surprise. The reason that they are called Movie ‘Theaters’ is because 90% of began life as buildings which were once theaters, which then replaced the stage with a big screen. To be fair that was once true. Today Cinemas are built from scratch as multiplexes, a single building with multiple viewing rooms of different sizes, all sharing one set of concession stands and ticketing.
The economics of a multiplex are different from the 250 to 350 seat single screen theaters that used to make up the bulk of US and European screens a decade ago, but they are still basically buildings that have to generate revenue. It’s all very well assuming that the three largest US exhibitors Regal, AMC, and Cinemark have 38% of the screens and 50% of the box office take, are mostly large multiplexes, and therefore somehow they are more efficient.
The economics are still similar and perhaps go something like this. Displaying movies brings in $7.50 per ticket, half or moreo fo which goes to the studio or distributor, and which uses more than 80% of the entire building. Selling concessions, such as food and drink takes up under 20% of the building and brings in perhaps an average of $3 per person, selling goods that are worth around $0.50.
Initially this looks good for the movies, they pay $3.75 on average to the film owner, and make $3.75 on the film, and perhaps only make $2.5 on the concessions. That seems to make sense. Of course if you did an overhead allocation and allocated 80% of overhead, power, lightings and rent to the film side of the business you’d find it makes a small loss, while the concessions make around a $1 profit per person.
It is these economics that explain why a theater spends so much effort on making the most out of high priced fizzy drinks and popcorn, which almost put the modern family off going to the cinema.
Of course the two businesses are intertwined and it is the profit on the visit that is most important for the proprietor, the concession profit, less the movie viewing loss. One single fact drives this down. The fact that the total number of seats per viewing, on average has been falling in the US (and Western Europe) for years. In fact this has been happening in every cinema market where the number of seats is more or less flat.
There are, as in many entertainment business battles, two wars going on. One is the war for the best entertainment, so that any given Cinema chain is NOT suffering from too few bums on seats, and instead is giving the problem to the smaller chain that cannot attract the best content.
A side show to this battle is the fact that movie distributors will try to gain a sliding percentage of box office revenues say 70:30 the first week, 60:40 the second week, and so on. The bigger the cinema chain, the more buying power it offers, the less the distributor can apply this logic, and the less profit the theater owner has taken away .
And the second war is the fact that the entire market place is slowly faltering, due to less and less frequent visits to the movie theater.
Naturally for years the cinema industry has focused on the wrong problem, the one about winning the battle for having the largest market share out of all the cinemas in one town ‘ and selling their customers the most popcorn.
But eventually, once all the theaters are held by fewer and fewer businesses, they have to do something about the shrinking total numbers of visits to those buildings which are mostly used for watching blockbuster movies, but where the sole profit derives from consumers eating expensive rubbish while they are there.
This is something that is fundamentally wrong with the may the movie industry works, because it leads to a poor experience ‘per se’ for movie goers.
One of the reasons that people go less and less to the cinema, along with improved home screens, Hollywood’s obsession with remakes and youth’s obsession with video games, is that they can watch the same movie, often only a few months later, on DVD.
This has been one of the reasons for rising prices at the cinema. DVD revenue makes up more and more of Hollywood film revenue. It is concern for this increasingly large chunk of revenue this has made studios bring forward DVD availability sooner, preferring to get as much revenue out of a film prior to it being widely available in a pirated form. In turn that has led to advertising the theatrical release and the DVD release with the same chunk of promotional revenue, and in turn bringing the DVD release earlier and earlier.
The less people have to wait for their movies, the more likely they are to watch them on home video screens with full control over their surroundings (pause, play, better food, alcoholic drinks etc’).
But this trend has now halted, because DVD revenues, if anything are falling slightly, due in part to competition from non-film DVDs and other entertainment sources such as online. So DVDs make up the bulk of movie revenue, and this is substantially more than the box office, but that trend has now frozen.
But it has opened the door on ‘other’ activities, other ways of making money out of owning a large building with multiple screens in it, and four years ago we suggested this would lead to smaller viewing rooms, where children’s parties, executive lunches, specialist genre film clubs could all be catered for, and where the surroundings could be made more comfortable, with control being given over to the viewers. A sort of Cinema 2.0.
The industry itself felt that the arrival of digital screens is what would save it, and although this is having some effect, it is the shift to a wider view of the functions of a cinema that is changing that economic equation, not purely at the smaller theaters, but now at many of the major chains.
At Cineplex there are re-runs of recent Opera, Wrestling matches and Hockey games. At the AMC owned Loews Cinemas in the US, its website offers to host business meetings for presentations with catering, as well as private screenings, teambuilding exercises, customer thank you events. The formula is almost the same, you still get the expensive food, but it’s not such basic potato chips and coke style food, so it has an even better margin, and the entertainment can be carefully selected long tail, entertainment which is far cheaper to hire than modern first run movies.
At Cinemark which has just under 3,000 locations in the US and South America, it advertises, company meetings, employee recognition and reward meetings, lead generation events, product launches and even contemporary worship services and school field trips to the cinema, as well as children’s birthday parties.
And at the Landmark art house cinema chain, bought in 2004 by Mark Cuban and Todd Wagner, the Broadcast.com entrepreneurs, there is no exception and they even add the innovative opportunity of allowing hirers to play huge Xbox/PlayStation style video games for all their friends to view in glorious Technicolor.
And all of these cinemas, where they have access to Digital Screens and can tap into an online HD network stream, can drop movies in favor of showing a live music event right across America, because then they can charge $25 to $50 a ticket, and once again, help the audience fill up on food and drink.
And soon multiplex cinema design will be more and more like the modern car. Not just one with seats, but one where the seats for away so the car can become a truck, the cinema a dance floor.
The advent of the digital screen is one of the major drivers for this type of opportunity. Not only is the image so much better, but the economics for delivering films are far better for the distributors.
So far there are abut 5,000 screens set up with digital projectors mostly due to initiatives by two or three financially based consortia, including one driven by Technicolor owner Thomson, to arrange bulk finance for a partially impoverished industry.
But it is the advanced copy protection, combined with the digital projection systems, that make country wide musical HD simulcasts feasible, which in turn leads to better and better utilization of the building. Every cinema can become part of Madison Square Gardens or the Carnegie Hall. Film openings become ‘events’ and favorite live band events can be sold through social networks.
Now all of this has been thrust on the humble cinema operator and they have had to move with the times. So these high priced movie alternatives change that basic economic formula very simply at first.
Displaying movies brings in $7.50 per ticket and now uses only 60% of the entire building’s productive time and space. Concessions now average more like $8 per person due to the improved catering opportunities, selling goods that are worth around $4.50. So concessions get a little more profitable. But the other activities yield tickets up at $20, take up 20% of the available building’s productive time and space so pick up 20% of the overhead from movies. This now makes movies profitable, the concession profitable and the new activities are vastly more profitable. It’s a win, win. Except it isn’t.
What has happened is that the stable number of hours that a movie screen can be used for, with new movies, will go down, if it hasn’t yet. By picking the best movies, less movies may be needed to keep the same number of movie viewers turning up. But as cinema chains get better at other activities, and as they find a natural level for how profitable each seat they own can be, there are a whole class of films that will get less and less viewing space, and these will eventually die.
That means that less movies will be made. Which in turns puts more onus on those few that are supposed to be the season’s big draws, and it makes the effect of a failure all the more keenly felt.
The arrival of private equity groups into this sector during 2004 and 2005, showed that already massive debt was required to rethink the American Cinema, and that professional management was required to preside over this type of transition.
For instance Leows was bought out of Chapter XI by Bain Capital, and then merged with Grupo Cinemex, and by June 2005 it was merged with AMC and JP Morgan, Apollo Management, Bain, The Carlyle Group and Spectrum Equity Investors ended up all involved in AMC Loews, which went straight to the markets for $875 million, to pay for this type of transition.
But this company still has flat revenue, and on its balance sheet holds goodwill of some $2 billion, without which it would have negative net worth. The company claims that movie attendance went up 1% during 2007 after four years of flat or down years.
So even with this strategy of stimulating other revenues, it may still not be enough go counter the falls in cinema going, and the journey from Theater to Movie Theater to general entertainment complex is well under way.
The Hollywood studios don’t seem to care. After all they have their DVD revenue, and a growing number of cinemas in the Far East, which just about takes up any slack they lose in the US and Western Europe. But already in order to create an artificial ‘record’ opening weekend, films are having to be distributed to over 4,000 cinemas around the world on their first weekend. While there are many times more than that, we were given 165,000 as a number by one researcher for global cinema screens, the great movie film is perhaps past its best.
The great American movie scam we referred to is the way the big 5 cinemas had the power to insist that each cinema takes the ‘bad’ films if they wanted to be entitled to the ‘good’ ones that make all the money, but those days are clearly passing.
And with them as Hollywood loses control of and interest in, its once loved distribution channel, the business imperatives for those people who are, in essence, in charge of running a building, move towards more profitable pastimes.