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Friday, August 08, 2003 |
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Industry brief: Movies 3 Part I 2 4 5 6 In the last three decades, there has been an explosion in shelf place in the motion picture industry. Long gone were the days of the standalone movie palace. In the seventies, chains started to build duplex or even fourplex theaters, so movies could share common facilities, including concession stands, parking, and rest rooms. The process accelerated in the '80s, and increasingly bigger theater chains started building multiplexes with 8, 10, even 12 screens, with luxurious stadium seating and a big concession bar (often the only profitable part of the operation), even cafes, along with full parking facilities. The AMC theater chain built the first 24-screen megaplex near Dallas in 1994. That set off a building boom, with 14-plexes and 30-plexes popping up across the country like mushrooms after a spring shower. Small theater complexes with fewer screens and old seats were out of luck. The leading companies in the business were growing fast, both through acquisitions and adding new properties. Regional chains were being bought out by fast-moving national chains, and all were adding screens in the suburbs. In 1990 there were around 23,000 screens in the U.S. By 2000 there were around 39,000. And most of these were owned by a handful of companies (see chart). And though most chains hiked prices to help service their debt (by over 25% over the last decade), there were limits to price hikes, in that there were plenty of other entertainment choices, especially home video. Many people asked themselves why go to see a so-so film when it will be available on video in a few months or on TV in half a year. A period of unusually poor (from the box office point of view) movies in the 1999 -2000 season didn't help. So that in 2000 and 2001 a number of chains started declaring bankruptcy. These includes Carmike, Loews, United Artists, General Cinema, and Edwards Cinemas, along with several smaller chains. The other chains were nearly all teetering on the brink. Theatre revenue actually increased in the last two years, thanks to a number of blockbusters and major ticket price increases. But this may be a short-term fix. While the popularity of movies goes up and down, the oversupply of theaters is still a major problem. One analyst (Dan Ackman writing for Forbes) has done the math and concluded that, on the whole, the movie theaters are working at 12% of capacity or less. In other words over 80% of seats, on average, are empty. That's no surprise when we learn that 80% of the revenue comes in the three weekend days, meaning four days a week most theaters are nearly empty, hardly earning enough to pay the electricity to operate the popcorn machine and pay the (minimum) wages of the ticket-takers. Like restaurants, movie theaters make their big money on Friday, Saturday, and Sunday. Those evening are the premium shelf positions. The oversupply of screens hurt the industry badly. More than 350 theaters, comprising 1,888 screens, were closed during the year 2000 alone. The closures represented 5%of America's theaters and 5% of its approximately 39,000 screens. A number of others have closed since, and the rate of building new ones has slowed considerably. There are now 34,000 to 37,000 thscreens, but some industry analysts think there are still perhaps 5,000 too many screens for a profitable industry. As we've pointed out, at some point shelf space becomes a zero sum game. New theaters simply reshuffle the audience; they don't attract new ones. Over the past year, Edwards Theaters, General Cinema, and Universal Studios Theaters were sold to the survivors. Hoyts Cinema, an Australian chain, left the U.S. market and sold out to Regal. As you can see, the top five chains now own around 50% of the screens. An oligopsony is developing to define the movie theater business against the oligopoly of the studios.
Around 40 chains have between 50 and 500 screens But that's not the only problem the theater chain owners face. They can add in the twisted economics of the business. Some sixty to seventy percent of the first two weeks' box office collections go directly to the studio. In the third week, normally the share is 50/50. The theatre owner's percentage goes higher as the movie stays longer, up to 70% at week six. However, few films last that long. And, after all, 70% of a $2,000 take is not even close to 70% of $20,000, which is what the studio can get per screen in the first week of most films. These agreements make the studio all the more eager to bring in another film to drive in a fresh set of profitable viewers, and is already plotting the video release of the current movie in the first two or three weeks. Theatre owners have to make their income from the snacks and soft drinks concessions - that's why the prices are so high, and the portions so jumbo, at the snack bar. It's also why attracting teens has become particularly important to the chains; parents don't spend as much on concesions. Chains are also making money from selling major amounts of advertising in front of their captive audiencesbefore the film begins as well. (New York Times, August 2,2003. "A Movie Theater Revival, Aided by Teenagers".) We'll see what kind of a reaction that gets from the moviegoers over the long term. In fact, thanks to reorganization and getting rid of older theaters, some chains are starting to do well. That's especially true of Regal Cinema, which managed to capture 20% of the market at firesale prices. It will be interesting to see if the increasingly concentrated oligopsony of theater chains will be able to negotiate a bigger cut of the take from the studios. So far, that hasn't happened. 7:23:52 PM 
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Last update: 9/4/2007; 8:54:15 PM .
