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Case Teaching Note – The Movie Exhibition Industry: 2011 / 1
INSTRUCTOR CASE NOTE
“The Movie Exhibition Industry: 2011”
Prepared by Steve Gove
that situation and their effects.
Suggested Assignment
Day 1 Read: “Movie Exhibition Industry: 2011” (pp. 1-8, up to “Possible Alternative Business Models”)
Preparation Questions
1. Assess the situational environment for the movie theater:
explains this?
c. What determines profitability for exhibitors? Consider revenue components,
profitability? What explains this?
d. For 1A-C, which of these are symptoms? Which are causes?
2. What is the key strategic issue facing movie theaters?
3. What are three alternatives (i.e., new actions / initiatives) that exhibitor’s might consider
Day 2 Read: “Movie Exhibition Industry: 2011” (pp. 8-9, “Possible Alternative Business Models”)
Preparation Questions
4. What did theater owners pursue for alternatives?
5. Has their situation improved by 2010?
6. What alternatives can exhibitors take in 2011 and beyond to improve their situation?
Case Teaching Note – The Movie Exhibition Industry: 2011 / 2
1a. Why do people go to the movies?
According to Mintel report (and presented in the case), top reasons are:
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
You can also add:
The movie theater “experience” – a combination of other factors such as nostalgia, the
popcorn, the environment of the crowd, etc.
Note on presentation – if you list the above as column headings on the board you can fill in
the next part - “what changed” – under each heading.
How has this changed?
General Overview - Historically, there were few entertainment options. When films were first
introduced (early 1900s) through the 1940s the only option was radio, live entertainment, and the
family Victrola (record player). In the 1950s, television began to take off, giving people move
entertainment options. These options have steadily increased through today: think about the
availability of movies through DVD purchases and rentals, pay-per-view, HBO & Stars, and
100+ television channels with movies on cable and satellite. This is just alternative ways to watch
movies. Add to these other entertainment forms such as music (more radio stations, satellite
radio, internet radio, CDs and MP3s), and the Internet (lots of ways to waste time). Technically,
substitutes have emerged in a number of forms.
Of the reasons why people go to the movies, there has been erosion in how these are fulfilled at
the movies versus through other options.
The giant theater screen
Not as unique as it once was.
TVs in homes larger
- now average LCD screen is 36”.
- Sharp predicts it will be 60” by 2015
Prices for screens are declining rapidly
- currently $29 per diagonal inch
- expected to be $22 within 5 years
Actual prices are going up as people elect to purchase larger sets
Standard is now high definition (HD)
- Better visual quality
Home televisions bundled with DVD players, now BluRay
Case Teaching Note – The Movie Exhibition Industry: 2011 / 3
Overall – not quite as big as a true big screen, but impressive and already in peoples’
homes
Follow-up Question: Is it always a big screen in the theater? - The “big screen” is not as
big as it used to be – especially in the “-plexes”. Theaters have different size theaters, the big
screens are only in the big theaters, only the major opening weekend films are in those
theaters. If you go to the summer blockbuster after it has been in the theaters for 3 weeks,
you’ll likely be disappointed.
The opportunity to be out of the house - more indirect competition to the movie theater. Coffee
shops now offer a place where you can just go and hang out as do new model book stores
(Borders, Barnes & Noble, etc.). These emerged in the last 10 years.
Not having to wait to see a particular movie on home video
Mixed
This was really an issue before VCR’s & DVD’s – with 3 network TV stations, no cable,
and no other options, if you didn’t see it in the theater you likely never would.
If you want opening weekend, it is still an issue.
Top 5 films in 2000 - average of 37 weeks
In 2007 - 23 just weeks
40 percent time reduction since 2000
Incredible amount of content available elsewhere
- not just movies anymore – television, sports, music
office), widely available
The experience of watching the movies with a theatrical sound system
Uniqueness is also declining.
TV’s bundled with audio systems.
Inexpensive, but impressive, quality sound.
$1,000 - $2,000 yields a pretty solid home theater system.
The theater as a location option for a date
Still an advantage of the theater – anyone want a first date to be movie and popcorn with
their date, mom and dad?
The “Experience”
Widely viewed as in decline.
Largest complaints:
Case Teaching Note – The Movie Exhibition Industry: 2011 / 4
of ads and trailers.
- Others: rude movie goers, lousy movie choices, sound from other theaters, no
ushers, etc
It is unknown if this is truly a decline in service or if it is fond memories.
story.
The reality is attendance is way off historical high and pretty flat in recent years:
- 2007: 1.4 billion tickets sold – 6 per person
- 1997: 1.35 billion tickets sold
- 1946: 4 billion tickets sold – 28 per person
ticket prices
Why is this problematic?
The quick response answer - “because it hurts your profits” – isn’t directly so. As the next
question addresses, the exhibitors don’t actually make a great deal on box office revenues, but it
(which are based on attendance).
Decreased attendance is best viewed as a symptom of the problems identified above, not as the
cause. Exhibitors are being disintermediated – they were once the sole route through which
movies reached audiences. Now there is DVD, cable TV, download, etc. At some point, the
industry will lack sufficient scale to remain viable.
What explains this?
- the overall cost – ticket price + concessions
- at home viewing options
- interruptions such as cell phones in the theater
- rude patrons
- the overall hassle – driving, parking, crowds, going out, etc.
- ads prior to the show
Case Teaching Note – The Movie Exhibition Industry: 2011 / 5
controllability of these by managers.
Exhibition portion of the business is not very profitable.
Operating margins among exhibitors average a slim 10 percent
Net income is marginal to negative.
Across the last three years, the average net income for Regal, Cinemark & Carmike is
Revenues, expenses and controllability:
Box Office Receipts
- 2/3 of revenues, very little return as almost all goes to the studios.
- Ticket price increases in recent years not much help
2002 average: $5.81
2007 average: $6.88
draw.
Concessions
- Average 25 to 30 percent of revenues
- Direct costs are less than 15 percent of selling price, so 85% gross margin
- The largest source of exhibitor profit.
- Influenced by the three factors:
attendees = more concession sales
Prices – highly studied, calculated on profit maximization
Material costs - purchase volume (consolidation helping)
- Managerial discretion – not much. Moviegoer complaint is high concession
existing items.
Advertising
- Just 5 percent of revenues
- Highly profitable – any costs?
increases or same rate more time?)
- Managerial control - audiences hate the advertising at the theater. Balancing
the revenues from ads with audience tolerance is an ongoing struggle for
exhibitors.
Case Teaching Note – The Movie Exhibition Industry: 2011 / 6
No idea
prices within markets differ little
the same movies are shown…
… at the same times
the food and services are nearly identical
Choice of a theater comes down to:
distance from home
convenience of parking,
proximity to restaurants
What is the trend in profitability?
No improvement on the horizon. There’s no actual data for the students to look at, but it should
come across as a flat to downward trend. Decreased attendance = decreased concessions &
pretty situation.
What explains this?
Environmental tend is negative, likely flat or decreased attendance. Key causes of this:
Low/no growth in our core audience
Home theater options getting better, more
More general entertainment options.
Televisions not likely to spontaneously self destruct.
Within the current business model there is little opportunity to increase either revenues or profits.
Causes:
Box Office Receipts – more negotiating power due to consolidation (only for the majors),
domestic in 2007!) and DVD sales.
Concessions – need more attendance, increase per capital, or increases prices. First one is
outside theaters control, it is mostly the movie itself, per capital could increase with lower
prices or new items,
Advertising – walking a tightrope. More ads likely equated with decreased attendance
among those with home theater already.
each of the above questions.
Case Teaching Note – The Movie Exhibition Industry: 2011 / 7
Part 2: Identify the strategic issue.
following:
Strategic Issue for Exhibitors: How to create unique value in the movie exhibition
business in the age of home theaters (HD, large screens, and widely available
content) that produces profits?
Now we start considering profits – that is the outcome we are seeking.
transportation business?
If anyone raises the point about dropping the word “movie” on their own and can
explain the rationale, make the comment “Excellent point. Somebody just earned
maximum participation for the day.”
Other aspects that students may want to include:
Possibly Include
Counter Point
Reductions in the size of the core
audience (low growth in customer
base of 12-24 year olds)
Just because the business has over
relied on this group in the past, must
we make the same error in the
future?
Isn’t this audience also already
covered in the above in a general
sense?
“return to the golden age of theaters”
Can you go back with all the new
technology and content availability?
“make the experience better”
Is the attendance decline due solely
to bad experiences within the
theater? Or increase technology and
places to view content effect it as
well? Order of causality? Which is
cause? Which is effect?
“increase revenue”
The business has focused on that for
year – remember the box office
records – but has it fixed the
underlying problem?
Case Teaching Note – The Movie Exhibition Industry: 2011 / 8
additional alternatives for day 2.
Announce: “Good start. We are now at the stage that every junior stock analyst can reach. Now to earn
You want to assess: the degree to which these could potentially resolve the issue. What do they resolve
well? Where do they fall short? Costs? Ability to implement? How to do so?
Note that the following are actions currently being undertaken by the theater chains. Students will likely
raise others.
SOME BAD ALTERNATIVES
Eliminate Other Places To View Studio revenue is tied to the aftermarket of
DVD, etc. They will not go for this. Generally it is hard to put any genie back into a
bottle.
prices for some showing, higher for others).
