Can Movie Theaters Survive?

Interesting box office statistics from AMC’s 10K report

A slight decline in revenues and admissions from 2016 to 2017.

North American box office numbers

Here is another way to look at the yearly box office numbers.

A worrisome trend showing less movie admissions

North America box office attendance trend

The number of theaters have dropped, but the number of screens has grown. The higher ticket prices have masked the overall trend line showing less attendance over time. It is a reasonable assumption to attribute some of the lower attendance on the higher cost of going to a movie.

Netflix and streaming content providers combined with the affordability of higher definition and larger flat screens are clearly another threat to the movie going experience. What is a movie theater operator to do?

AMC’s answer is to invest in a higher end experience to differentiate from sitting at home on the couch and watching “Justice League” on a 75" LCD screen.

From AMC’s 10K report. Current revenue per patron and a push to increase revenues in the form of higher ticket prices and concession revenues.

AMC is pouring $600 million to renovate 1800 of their 5000 movie auditoriums.

Today, over 25% of AMC screens feature reclining seats

The seats are large, plush and recline. Along with these seat upgrades, now these theaters employ an assigned seating system. Another idea that is being tested is a full bar at select cinemas.

Pricing strategy

You need to sell a lot of buttery popcorn and licorice sticks to offset the $600 million theater upgrades. Interestingly, movie theaters are treading cautiously on spiking prices on their recliner-seat, assigned-seating tickets.

The above Fandango screens show that Century Cinemas is currently charging less ($13.00 per ticket) for a reclined-seat, assigned seating experience, than AMC’s regular seat theater.

This pricing strategy is curious. The big theater operators are running full tilt ahead with their upgrades with the expectation that once their customer acclimate to the conveniences of assigned seating and the comfort of their luxury recliner-seats, that they can charge a premium for these seats.

An extreme analogy is if an airline expanded their first class cabins and offered these seats at the same price as a coach fare.

If movie theaters create a new pricing tier for deluxe and assigned seats over regular seats, it will be interesting to see how patrons respond.

Remember when 3D movies were all the rage and were going to save Hollywood and movie theaters like Cinemark?

Source: https://www.hollywoodreporter.com/behind-screen/is-golden-age-3d-officially-1025843

This chart, though volatile, is definitely trending downward. What is more telling is the percentage of percentage of tickets for 3D movies. 2010 was the high water mark and an outlier thanks to Avatar.

Regardless, the drop from 21% of 2010 box office revenues to 14% of 2016 revenues is significant. The verdict is that 3D is no longer a must have. The novelty has worn thin. The 3D ticket premium is getting less and less takers. With the success of 3D revenues in 2010, AMC and Cinemark converted many theaters to a 3D experience. Fast forward to 2018, the number of 3D screens is dropping and being converted back to standard format.

Take away: Humans, and especially American humans, are hard to please, more specially, hard to keep pleased. A feature becomes an expectation or a novelty fast.

WARNING: BEGIN PRICING STRATEGY DIGRESSION

iPhone pricing case study, high to low

The genius of the iPhone pricing strategy can be attributed to its smashing debut. The first generation rolled out with relatively low unit volume, a few million. The purchase cost of the first iPhone was $600. On top of that, an iPhone customer could only use the AT&T network and was required to subscribe to a substantial data plan. This price point was far higher than any other phone on the market. In comparison, a top flip phone cost a customer $200 out of pocket.

The critics thought Steve Jobs was nuts attempting to pull off this massive price premium. The iPhone turned out to a massive hit product from day 1. A few month after the release date, Apple dropped the price of the iPhone from $600 to $400, it was considered a ridiculously great value at this new price point.

Why? Besides being a great and unparalleled product, the boldness of Job’s initially premium price point created a lasting association with the $600 price point.

Netflix pricing backlash, low to high

Let’s take another famous pricing case study.

The 2011 Netflix Pricing Fiasco

Netflix saw the writing on the wall. Their mail-order DVD business was fading as streaming gained in popularity. In 2010, a Netflix customer paid a $8 monthly subscription price for the DVD mail order rentals and the streaming service.

CEO Reed Hastings announced they were changing the plan. Customers would have to either choose the DVD mail order rental or the streaming service plan. Some loyal Netflix customers revolted. Customers would have to pay $16/per month if they wanted to both service options. Never mind that customers were neglecting their DVD mail-order rental option for the more convenient streaming option. Netflix customers believed that it was his or her right to either pathway for one low rate. The negative attention, bad press and precipitous plunge in share prices followed the controversial pricing action.

Don’t worry. Things worked out for Reed and Co in the end.

Side Hustle: Baggage Fee

The airlines came up with an insidious but successful revenue stream without radically increasing the fragile airfare rates. Airlines’ published fares are artificially low, which is critically important as more consumers use comparison travel engines like Priceline and Kayak to research fares. The baggage fee has been a boon to this historically profit-challenged industry. Customers grumble about these sneaky hidden costs, but the revenues generated by baggage fees are substantial and are often the margin between profit and losses.

Freemium, 0 to $

Freemium for services is more complex. A service like Spotify uses a dual revenue strategy. They have a premium offer and an ad-supported revenue stream.

Profits? Not yet.

For a service like Dropbox, the freemium model is the primary revenue source. The service has a huge client base, giving them economies of scale, yet they are still have not been able to cross over to the black. 2018 figures put Dropbox at 11.9 paying customers against a 500 million customer base, or 2.4%. Dropbox is attempting to move up stream to more price resilient business customers as the competition from Google and Microsoft intensifies. The challenge in getting customers to go premium is proving more difficult than anticipated.

Pricing Conclusion

Baseline expectations are as much an art as a science. When introducing a new product or service, an ambitious price point can be a great strategic tool. The danger is that it can hurt initial sales and cause a “too expensive” label for the product or service. A sudden and rapid price drop can send a “nobody wants this lame product and service” air of desperation which can be fatal.

A business may instead under-price or give away a product or service at first and then up-sell. This can create a bump in initial customer acquisitions, but are these bargain hunters the true target customers? As Groupon proved, the customer most attracted to low prices are deal hawks. Not surprisingly these thrifty customers rarely return to pay at full retail. Attempting to retain value conscientious customers after right-sizing prices is often a losing proposition.

— END PRICING STRATEGY DIGRESSION

Privacy or Isolation?

Wrigley Field is the major leagues oldest ball park. It still maintains its position as one of the best stadiums to watch a baseball game. It is not just the joy of watching the previously lovable losers on the field, it is the spirit of the crowd. In particular, the sun-baked, uncomfortable bleacher section is world famous. It is best not to dress too elegantly in that section. Hot dog mustard, peanut shells, sweat, and especially beer may coat your favorite button-up shirt, especially if a home-run ball is hit your way. A micro-community is formed in the chaos and close quarters of the friendly confines of Wrigley Field.

Movies, especially horror films, are more enjoyable in a theater. The screams and jolts from frightened patrons greatly enhances the suspense and experience. Moving from a coach to a first-class movie experience, we are becoming physically isolated from our neighbors. Nice for the red-eye from New York to Paris, but less fun when watching Halloween Part 18.

Are these buffer spaces enhancing our experience or removing our connection to other audience members, in turn dampening the spirit of the crowd?

Too comfortable?

A dark room, a long work week is over, and a nice comfy reclineable chair. You are getting very, very sleeeepppppyyyyyyy.

The end of spontaneous movie going

We iCal our kid’s play dates. We auto repeat date night on our Google calendars. We Facebook Messenger outings with over 4 participants.

One of the more pleasurable and easy last minute excursions we have is the movie going experience. This too is being to disappear. Now, like our more advance-planned plays, concerts and sports events, movies are transitioning from last minute opportunistic excursions to methodically planned events.

Refund fun

Advance tickets leads to a financial and future time commitments. Unexpected emergencies derail our best laid plans. This leads to cancellation issues, or worse, paid-for and unused tickets. Another to-do item that previous did not exist.

Potential for Awkward Confrontations

Unlike sporting events, plays and concerts, movie theaters are not interested or capable of adding a massive layer of employees to usher and assist in making sure assigned seating arrangements are followed.

Instead, customers are left to self-police and enforce their seating assignments. This can be a formula for awkward and sometimes rude confrontations. Without an employee readily available to keep the peace and keep patrons from getting into yelling and pushing matches, ugly scenes originating from seating confusion or abuse are unavoidable. These incidents will lessen as assigned seating becomes more common. For now, there are still plenty of clueless or uncooperative people who need educating.

Similarities and Differences between plays, concerts and sporting events

Unlike live performance events, your version of Star Wars 8 and my version will be the same. We can even wait and watch that same movie at home.

Live performance benefit from audience participation. The audience must stay alert to witness an unexpectedly brilliant performance or euphoric moment. Sporting events and music concerts in particular are memorable when the action is intense or the performers have captured the full-attention and enthusiasm of the fans. Even during plays, where the audience is mostly asked to stay quiet during the performance, the crowd greatly influences the actors with their responses and ovations. No matter how excited and engaged a movie crowd is, the action on screen is fixed. No question that viewing a great movie with dozens of other people simultaneously is a more enthralling experience than watching a movie alone. How much is that enhanced experience worth?

Will the upgrades the theaters are introducing be enough to justify higher ticket prices? As the initial chart shows, there has been a subtle but measurable drop in movie attendance. As movies theaters continue to go upstream, theater operators are conceding that a continued drop in attendance is inevitable. Rather than fight that losing battle, they are focusing on increasing the yield per audience member.

Here’s how it may play out. The expensive cost of upgrading theaters increases the debt burden of the movie theater operators. In order to service this debt, theater operators need to increase total revenues and profits. The theaters gradually increase prices for assigned seating, deluxe seating theaters from the current $13 per ticket to the high teens. This higher ticket prices send audience attendance further downward.

Movie theaters in less affluent neighborhoods begin closing. Prices of tickets continue to rise to offset the lost revenues from the closed theaters. Movie attendance drops further. Movies become less of a regular outing and are relegated to rare special occasions.

Movie studios no longer view box office revenues as the most important business imperative. Studios like Sony Pictures are sold to Netflix, Amazon and Apple who rarely bother to bring their movies to the theaters and instead focus on driving streaming views for their content.

Movie theaters retool. The multiplex concept gives way to theaters with larger auditoriums and fewer screens where only a sure fire blockbusters are shown. As theaters continue to close, hit movies sustain longer runs, like a hit Broadway show. Popular movies are booked for weeks as patrons now have to drive further to see the now more novel experience of watching a movie in a theater.

The asterisk that is MoviePass

MoviePass had a crazy idea. Unfortunately for them, it is proving to be crazy bad. Their idea, provide customers a monthly subscription allowing them to attend one movie a day for the price of $12. Too good to be true, right? Right. MoviePass is currently experiencing its final death throes as it fades into movie history as a quirky and untenable business the likes we have not seen since the dot-com era.

MoviePass had no affiliation with the major theater operators like Cinemark and AMC. That means that every time a MoviePass customer attends a movie, MoviePass pays for a full-rate ticket price. This massive customer subsidy provided the theater operators with increased revenues as the 3.4 million MoviePass customers feasted on this inexpensive all-you-can-eat entertainment buffet.

WARNING: IF YOU HATE MATH, SKIP FORWARD

How much of the revenues of the 2018 North American box office came from MoviePass?

Let’s get out the calculator.

Assuming the average MoviePass customer attended 2 movies a month through October.

3,400,000 customer * 2 movies a month * 10 months * $10 ticket price = $680,000,000

AMC has followed MoviePass’ lead and now offers AMC Stubs-A, which cost $19.95 for up to 3 movies a week. This subscription service is much more logical for AMC as they own the theater and can realize $5.06 of concession revenues per attendee.

Movie studios receive around 60% of box office revenues from the theaters.

Based on AMC’s $9.67 average ticket sale, a 60% box office fee puts the cost at $5.80. The sale of concessions is extremely lucrative for a movie theater. It is likely that the raw costs of the food and drinks is only 20% of the sale price. Assuming a 20% cost of concessions, that equates to a $1.01 cost for the sale of $5.06 in concession, the average concession sale AMC realizes per attendee.

Now that we have established some assumptions, we can determine the revenue implications of AMC Stubs-A.

X = Tickets per customer

REGULAR PATRON: X * ($9.67 ticket price — $5.80 cost to movie studio) + X ($5.06 concession sale — $1.01 food cost)

STUBS-A PATRON: $19.99-(X * $5.80 cost to movie studio) + X ($5.06 concession- $1.01 food cost)

If X = 1 time a month

REGULAR PATRON: $7.92 Net Profits and $15.47 Revenues.

STUBS-A PATRON: $19.24 Net Profits and $25.05 Revenues.

If X = 2 times a month

REGULAR PATRON: $15.84 Net Profits and $29.46 Revenues.

STUBS-A PATRON: $16.49 Net Profits and $30.11 Revenues.

If X = 3 times a month

REGULAR PATRON: $23.76 Net Profits and $44.19 Revenues.

STUBS-A PATRON: $14.74 Net Profits and $35.17 Revenues.

If X = 10 times a month

REGULAR PATRON: $70.92 Net Profits and $150.47 Revenues.

STUBS-A PATRON: $2.49 Net Profits and $70.59 Revenues.

For a Stubs-A customer who previously attended less than 1.5 movies a month, AMC can make far more profits with the subscription plan. Even if the customer increases the number of movies per month she attends, the concession revenues offset the higher movies fees. There are some outlier customers who may attend 10 times a month, but those are probably a very small percentage of Stubs-A customers. How many good movies come out in one month anyways?

As well, the 10 tickets a month comparison is inaccurate. Surely the participation for a customer taking in 10 movies a month for the all-you-can-eat plan is very different when the customer has to pay for each ticket.

Verdict: Unlike the disastrous MoviePass business model, Stubs-A is a good plan for AMC.

— END OF MATH SECTION

2018 and beyond

2018 is proving to be an up year for movies. The strength of “Black Panther” and “Avengers, Infinity War”, as well surprise hits such as “Crazy Rich Asians” and “Venom”, is leading to a strong 2018.

Although I presented some of the downsides to assigned-seating and reclineable seats, there are many who welcome the convenience and comfort of these new amenities.

The question is whether these upgrades will allow the theaters to charge more and slow the migration of customers streaming movies at home over the long term. If the answer is yes, then AMC can breathe a sigh or relief knowing that their investments have been well made. If customers tire of the novelty, the theater operators will have to come up with other ideas to survive.

It is a tough time for movie theaters. Credit AMC and Cinemark for taking decisive and bold action. Whether they can hold back the tide that seems to inexorably trending towards home viewership of movies and for how long is unclear. One sure bet that 5 years from now our movie viewing habits will be radically different than they are today. Whether AMC and Cinemark continue to be a part of that movie experience, only time will tell.

CEO & Founder. Gogocater.