MGMT 490

20 February 2017

The Movie Exhibition Industry

Introduction
The Movie Exhibition Industry has been on a recent steady decline. Revenues peaked in 2013,
however have decreased in the previous five years. Admissions are down 19.5% from the most
recent high in 2002. The average number of films seen per capita in 2014 was 3.9. This doesn’t
seem so low until you compare it to the number of films the average American viewed in 1946:
28. The movie theater industry has done what they can to improve the experience overall.
Whether it’s elevating the look and feel of the theater itself, providing more appetizing
concessions, or altering the way movies are views with 3-D and 4-D capabilities. But the
question is… is it enough? What will the movie exhibition industry look like ten years from now?

The Value Chain:

The movie industry value chain has three stages: studio production, distribution, and exhibition.
Studios are managed as profit centers because risks and costs are significant. It is said that
these costs increase faster than inflation. Distributors are also known as the intermediaries
between the studios and exhibitors. Distributors market films to prospective studios and handle
all of the administrative tasks that go along with the sell. Finally, the chain ends with exhibition.
A self explanatory process, theaters use the films they are screening to bring in audiences and
therefore revenue.

Market Summary:
Although box office sales have increased over the years, the number of tickets sold has been
steadily decreasing. The graph pictured does not count for inflation. On both lines of the graph,
you see spikes of popularity but they do not remain constant over time.

Themes
Studios are facing increasingly large costs:
Fewer movies are being produced because of a growing trend to have large budgets in order to
appeal to a global audience. Costs are increasing due to features such as special effects. The
studios are struggling to make significant returns on investments because people are not
attending the movies like they use to.

Distribution and exhibition changes have caused big problems:

In 2006 the change to digital projection technology was becoming more and more popular. This
caused concern for piracy issues since movies were now being shipped on reusable disks. This
also required new equipment such as projectors and specialized screens. Because of this
multiplexes were the ideal location to view a movie. With the transformation to larger viewing
centers, smaller businesses that could not make the switch began to struggle.

Differentiation amongst competing theaters:

Many theaters are international. Surprisingly, the theaters don’t vary their movie experience by
country. The theater shows the same movies at the same time and offers the same options in
concessions worldwide. The biggest differentiation theaters have amongst one another is the
 MGMT 490
20 February 2017

convenience to the customer. The time of the show and location to the customer are the factors
that attribute to a theater’s success over another.

What digital investments really bring:

Distribution costs are one of the biggest perks of digital distribution compared to physical films.
With the new trends, like 3-D movies, exhibitors have increased the cost of ticket prices.

Movie experience is evolving:

The costs, at home movie options and viewer experience, such as not dealing with other movie
patrons, has moved movie go-ers from driving to their local theater to just staying at home.
Instant downloading has become a real convenience to the viewer. You can now watch movies
on your smart T.V. or pick up a DVD from a vendor like RedBox on your way out of the grocery
store. People are upgrading their at home entertainment systems in efforts to have the at home
movie experience so they no longer have to get from going to the theater.

How theaters are competing:

Theaters are trying to compete with the at home movie experience alternative by offering a
better viewing experience. Theaters have begun to improve their image quality, sound effects
and offer viewings in IMAX. They have also began to integrate the 4-D movie experience with
additions like moving seats that sequence with an actions scene of a movie or equipment to
enhance what is being played on the screen. Theaters have also turned to opening their
screenings to more than movies. When a certain art comes to town like an Opera, the theater
may hold an exclusive viewing on one of their screens. Or the space can be used as an
alternative space, like a game of laser tag. Concessions have also made large improvements.
Now when you go to certain theaters you may see a full service bar or even have a wait staff in
the theater to bring you food and drinks during the movie. Advertisements are being enhanced
with the introduction of viewer participating ads. People in the theater react to cues during the
ad and it is then reflected in the ad, like an Angry Birds game that is determined by how loud the
audience is. People are also able to reserve their seats ahead of time. This encourages buyers
to feel more comfortable knowing that they’ll have the seat they want ahead of entering the
theater.

So with all of these themes in mind, we can understand what lead to why this case is being
discussed. With rapid change to industries, it can be hard for companies to bring to market
exactly what is trending with consumers. A consumer’s need greatly affects the market and a
once steady industry, like movie theaters, can take a big hit with such a fast changing world.

Strategic Issues
While attendance is going down, prices are going up:
Highest peak was in 2002 with a close to $10,500 million dollars in 2D tickets sold. In 2014 the
admissions were close to $9 million in the 2D tickets, while the 3D tickets only reached $2
million, making the fourth worst admission revenue since theater began projecting it in 2007.

On the other hand, the ticket prices have increased 27% since 2005, from $6.44 to $8.17 in
2014. This prices have not kept up with inflation, which makes us ask the value proposition of
the movie exhibition industry. The prices with a 1980 base year inflation should be close to $9.

Target Market:
 MGMT 490
20 February 2017

In 2014, the domestic box office shows that the first eleven movies with the highest gross
income have a rating of PG and PG-13, and are mostly animated and science fiction movies
with special effects. This indicates that the target market for the movie exhibition industry range
is people aged from 12 to 24 years old, which combine a percentage of 30% of the market. This
segments whoever, have a potential growth of 28% combined, while the segment of 60 years
and older have a potential growth of 36% but only have 13% of the market. 60 years and older
have a new annual admission per screen of 2,013. This makes us rethink the market segment
the movie industry is targeting. While most grossing films are cartoons and action movies with
lots of special effects, the potential market lies on the 60+ year old segment.

The Issue of Convenience:

Theater experience is diminishing over the years, now you can have most of the theater
experience without going out of your house, with a TV screen and a surround system, which are
now more accessible than before thanks to the improvements in the home entertainment
technology, the average TV has increased in size while the price for it has gone down; more
comfortable couches and no distractions of ads prior the movie, other people’s voices or
phones. Getting there early to get the best seats and not seeing the movie without lifting your
head all the way up or watching it from the corner adds up to the overall cost of going to the
movies: driving to the theater, tickets, popcorn, soda, other type of food, driving back, etc. which
makes the experience substitutable.

Streaming services like Netflix and Apple TV, which were introduced in the market in 1997 and
2007, respectively, make movies much more accessible and even cheaper than before, which
leaves the theater with less audience than previous years.

Innovations in the Industry:

The 3D movies launches in 2007 and while their peak was in 2010 with the movie Avatar, which
was released in late December 2009, the 3D experience has dropped, with only over $2 million
in tickets sold in 2014, 3D shows that an innovation in the movie exhibition industry is not easy
to captivate the audience. 4D experiences with moving seats and splashes came to very
selected theaters in United States, but elevated the price of the tickets up to three times its
normal prices, which makes the experience more substitutable.

Connecting Concepts
General Environment:
1. Economic segment -- The movie exhibition industry is facing a decrease in its demand
since 2002 the most recent high, although the revenues peaked in 2013 at 10.9 billion.
The ticket prices had risen 27% since 2005, but the prices lag inflation, distribution and
production cost influence the cost of the ticket. In the 90´s the production budget
increase 827% over $100 million for a major production.
 MGMT 490
20 February 2017

2. Physical segment -- Movie theaters are exposed to natural disasters (floods,

earthquakes, etc.).
3. Technological segment -- Technology plays both sides, on one hand the movie
exhibitors changed to digital projection technology improving the image quality and
reduced the distribution cost up to 90%, movies exhibitors also offers theatrical sound
system, 3D movies, 4D and IMAX, unfortunately for the movie exhibitors the technology
created direct substitute: Home viewing. Netflix, YouTube, Amazon Prime, Instant Video,
Hulu Plus, allow view movies at home.
4. Sociocultural segment -- Understanding that over 71% of the US studio’s revenues are
international, this has led studios to internationalize, films must be cross-cultural, in order
to increase the ticket sales volume.
5. Political/Legal segment -- As any other company established in the USA, a movie
exhibitor should follow the laws and regulations, including tax payment. Obtain the
required permits. Some of the commonly agreements are: leasing, revenue sharing,
agreement in the nature of sale of goods.
6. Demographic segment -- By 2035 the core audience will increase 9.9 million, nowadays
films are focus for 12-24 years old but this will change because the largest growth of the
population will be 60+, remember that the 60+ has the lowest admission per capita 2.4
so the demographic conditions are not favorable.

Industry Environment Analysis: Porter’s Five Forces

1. Threat of new entrants -- Capital requirement is high a digital projection system (serves
a single screen) cost between $50,000 to $75,000 including a specialized creed,
projector, hardware and computer equipment, plus the construction or leasing of the
complex, lobby, theater, restrooms, etc.
2. Bargaining power of suppliers -- 6 Studios are responsible of the 81% of the box office
receipts as a consequence film rental fees average 54% of box office receipts, as
studios focus to the international market they are less dependent on domestic exhibitors.
3. Bargaining power of buyers -- Low switching cost between 1-2 dollars, 4 major exhibitors
but 6300 different locations, although exhibitors try to standardize their service the
preference of the customer will change depending on location or previous experiences.
4. Threat of substitute products -- Categorizing a “movie theater” as the traditional service
for entertainment there are several substitutes such as: bowling, reading, hiking, practice
a sport, etc. even though cheaper. Home viewing is the direct substitute, many
companies offer streaming video, with exclusive content, it convenience and cheaper.
5. Intensity of rivalry among competitors -- 4 major exhibitors (AMC, Regal, Cinemark,
Carmike) with 45.5% of the total Screens in the USA, 2300 screens from other firms, a
decrease in box office tickets demand in concerning the movie industry. Because of their
specialized assets (digital projection system) and strategic interrelationships between
distributors (movie´s rental contract) this industry is a high exit barrier.

Alternative Approaches & Recommendations

In order for the movie exhibition industry to improve, revenues and admissions must increase.
Theaters can start changing and upgrading their operations. Cost reduction coupled with some
 MGMT 490
20 February 2017

innovative additions could well enhance the movie experience and therefore create a better
incentive for the audience members to go to the movies. Other ways to keep seats filled are
subscription memberships and delivering content on new mediums. Also theater companies
should consider closing some locations, focusing on international opportunities, and starting an
independent movie studio.

Reduce Prices:
Many consumers would agree that cost is a major factor in their decisions. Attendance would
surely increase if customers would have to spend less money on admission and food. This also
helps the problem of video piracy because consumers might feel less compelled to buy pirated
videos. Although reducing the costs of ticket sales would mean less revenue for movie theaters.
Since fixed costs are so high, this might hurt the industry more. It could result in less available
movie times, decrease in employees, or decrease in the quality of the theater.

Enhanced Moviegoer Experience:

There are a lot of opportunities when it comes to an elevated viewing experience in movie
theaters. Many movie theaters have already incorporated 4D, in-theater dining, and upscale
renovations. They can take it to the next level by enforcing a strict noise policy, providing private
screening rooms, and possibly partnering with popular restaurant chains. In 2012, Fox France
held a premiere screening of Life of Pie inside the Piscine Pailleron swimming pool. The
audience wore life jackets in lifeboats to watch the 3D movie. If customer experience is
prioritized, then growth will follow. Investment in these changes will be high, but it would
differentiate it from the typical movie experience. However ticket prices would certainly increase,
which might turn off some consumers.

Subscription Membership:
Movies theaters can compete with subscription streaming services like Netflix and Hulu by
implementing a monthly or annual subscription. Theaters pay the same overheads whether a
screen is empty or full, so as long as uses keep paying, it does not really matter if they use the
facility or not. The problem with this method is it does not take in account price differences for
opening weekend or evenings. It might also be difficult to create a system to ensure subscription
members always have a seat in the theater.

Deliver Content on New Mediums:

If content could be delivered on new mediums, this could add revenue streams or create an
industry shift. Movie studios could take a queue from the video game industry and start
transforming movies into a virtual reality experience. Although this idea is exciting and new, it
might take away some of the reasons people go to see movies such as the social aspect. Either
way thinking of new mediums that would attract audiences is challenging and expensive.

Close Small and Underperforming Theaters:

To improve overall cash flow, theater chains should close underperforming domestic theater
locations in states where they have a wide range of cinemas. AMC, Regal, and Cinemark are
spread thin in large states such as Alaska, Arkansas, Missouri, Minnesota, and Kentucky. In
 MGMT 490
20 February 2017

these areas, where their level of brand awareness is probably scare, that they should focus on
disposing a majority of their operations unless they consider them to be highly profitable. The
downside of this would be that sparsely populated areas might turn to other substitutes for
media entertainment and employees would lose their jobs.

International Focus and Expansion:

Over 71% of US studio revenues are now international. This makes the importance of pleasing
international audiences vital. By focusing more on movies that perform well internationally, could
be an opportunity for increasing revenue. For example in 2014, Transformers: Age Extinction
ranked 7th domestically, but 2nd internationally. When translating movies for the global market,
cultural and language barriers might become a problem. A way to combat this is for studios to
use anthropological studies to guide their film making. This tactic would ensure that films would
not disrespect or turn off other cultures. On the other hand it would helpful to analyze why some
movies perform better internationally. Studios could also hire employees with international
backgrounds. AMC, Regal, and Cinemark should also consider expanding theaters in the
Asia/Pacific and Latin America market.

Independent Movie Studio:

Production studios have the upperhand in the movie industry, whereas movie theaters have
limited control over profits. So if theaters take out the middleman, this could benefit them
profitably. It could provide a company with an opportunity to partially evolve into an independent
and foreign film production company. It is unclear how successful a new movie studio would do
compared to an established, well known one.

Final Recommendations
Urgent:
It is imperative that the movie industry sees more attendance in the coming years. To make this
happen, they will need to make necessary changes to the viewing experience that will make
viewers more inclined to pay to see a movie. These changes could include cheaper tickets, but
as mention before this could affect profit margins as well as the bottom-line. On the other hand
they could give viewers more for their money. This can be done by reducing the number of
movies the theater shows, as well as how often they are shown. By reducing these cost you will
be able to add extra amenities to make the movie goers experience more pleasurable.

Short-Term:
Movie theaters need to compete with newer mediums. While our recommendation to re-vamp
the moviegoer experience by creating a luxury trip to the theater is a viable option for competing
with other mediums such as Netflix, Hulu, Pay-Per-View TV, there are other options to stay up-
to-date and relevant.
New Mediums:
● Movie Subscription: much like the netflix experience, movie theaters could create
monthly subscriptions for viewers were there would be no ticket cost when you
get to the theater; it would be more like a membership with a monthly fee. This
 MGMT 490
20 February 2017

could make viewers more inclined to attend the theaters since they will be
paying.
● Movie App: Netflix and Hulu bring their subscribers the gift of convenience, or
perceived convenience. The idea of an app where movie theaters can charge
users a monthly fee and they would be able to view “New to Theaters” movies.
The app could be highly competitive since Netflix/Hulu have yet to create a way
to view new streaming content -- often known for their streaming of old
episodes/movies. Movie Theaters could control how many movies an individual
was allowed to watch a month based off of their monthly fee (different packages).

Long-Term:
International expansion seems to be the best idea for long-term benefits in the movie industry.
While attending the movies may not be the most popular action in the United States today, that
does not mean other areas around the world are observing the same trend. By movie theaters
expanding internationally they will increase their potential for growth and profit. They open their
doors to entirely new market with different needs.