978-1259913747 The Movie Exhibition Industry 2015 Case Part 1

Unlock access to all the studying documents.

View Full Document

Structure of the Case

This case illustrates the changes in the mature/declining domestic movie exhibition industry as well

as some of the international growth opportunities. The case presents the structure of the consolidating

three-stage value-chain, as well as recent changes. From the evidence gathered about the major firms

that control the majority of the domestic market share, the outlook for the industry is uncertain. We

recommend using this case as an introduction to the case analysis process, to highlight changing indus-

try dynamics, and to demonstrate the usefulness of general environmental analysis and Porter’s five

forces model to understand industry forces that firms are sometimes subjected to with little influence

over changing those forces. The first half of the case presents the movie exhibitors situation, while the

second half details initiatives undertaken by exhibitors in response to the changing environment.

Suggested Answers

ANALYSIS: FOCUS ON EXTERNAL AND INTERNAL ENVIRONMENTS

1. Why do people go to the movies?

According to the Mintel report presented in the case, the top reasons are:

• The giant theater screen

You can also add:

Teaching Note —The Movie Exhibition Industry: 2015

What other options are there to satisfy the same want?

If you frame movie viewing via a theater as a form of entertainment, you can challenge students to

list other options they or other age groups might pursue in substitution of movie theater attendance.

Here is a non-exhaustive list of some possibilities to help start the discussion:

non-athletic (more passive-like movie viewing)

• Live theater productions

• Live music concert

Athletic (more active, less like movie viewing)

• Bowling

Follow-up Question: Are theaters competing for eyeballs or just movie viewers?

How has this changed?

General Overview: Historically, there have been few entertainment options. From the time films were

first introduced (early 1900s) up through the 1940s, the only options were radio, live entertainment,

The amount of streaming content has increased dramatically in recent years and movies are just one

type of content being consumed as a form of entertainment. netflix and HBO are creating their own

content available through their streaming services. The adoption of streaming services is also exerting

Teaching Note — The Movie Exhibition Industry: 2015

Substitutes are the causes of many problems.

The giant theater screen

• It is not as unique as it once was.

• TVs in homes grow larger.

• Prices for screens are declining rapidly.

• Actual prices are going up as people elect to purchase larger sets.

• The standard format is high definition (HD: 1080); it rivals theaters’ 4K systems with optimal

viewing distances. However, UHD or 4K television sets are already available on the market and

may become the new standard in a matter of a few short years.

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.” exhibitors have different

The opportunity to be out of the house

Teaching Note —The Movie Exhibition Industry: 2015

Not having to wait to see a particular movie on home video

• Mixed

• This was really an issue before DVDs, VOD, Redbox, netflix, iTunes, HBO, etc.—with three

network TV stations, no cable, and no other options, if you didn’t see it in the theater, you likely

never would. However, DVD sales decreased while digital purchases increased by 47 percent

• Incredible amount of content available elsewhere.

Premium video on demand, DVD purchase, electronic downloads, video on demand, rental—

daily (Redbox), rental—subscription (netflix), streaming—netflix, premium movie channels

(HBO, Showtime, etc.), subscription cable, and broadcast networks.

The experience of watching the movies with a theatrical sound system

• Uniqueness is also declining.

• Size of TVs is still increasing as well as sophistication (4K) bundled with audio systems.

Teaching Note — The Movie Exhibition Industry: 2015

The theater as a location option for a date

Then there is perhaps the most important aspect of all:

The “Experience”

• It is widely viewed as in decline.

• Largest complaints:

Cell phone interruptions—The bane of modern humanity!

2. What is the trend in attendance at movie theaters?

• The headlines report a drop in gross revenue—but that fact doesn’t tell the whole story.

• Revenues = # tickets × $ per ticket. Prices have increased (roughly with the rate of inflation), while

ticket sales have not.

• Over the long term the trend is downward, both in absolute tickets sold and per capita.

1946: 4 billion tickets sold—28 movies viewed per person

Why is this problematic?

The quick response answer “because it hurts your profits” isn’t entirely true. As the next question

addresses, the exhibitors don’t actually make a great deal on box office revenues, but it hurts sales of

Teaching Note —The Movie Exhibition Industry: 2015

of McGraw-Hill education.

Decreased attendance is best viewed as a symptom of the problems identified earlier, not as the cause.

exhibitors are being disintermediated—they were once the sole route through which movies reached

audiences. now there are DVDs, cable TV, Redbox, VOD, iTunes, and other media formats. At some

point, the industry may lack sufficient scale to remain viable.

What explains this?

• The preceding factors—TV, viewing options, bad experience, etc.

• Mintel: reasons for not attending—the declining “experience”

• Also, there is an emerging trend that is highly problematic for the exhibitors—the population

among core movie audience (12- to 24-year-olds) is basically flat.

Overall, from 2010 to 2035 the U.S. population will increase 19 percent or by 65.8 million people.

3. How does the rate of technological advancements help or hinder the theaters?

As exhibitors upgrade their equipment for better sound (Dolby 3.1, 5.1, 7.1, Atmos) and picture

are decreasing.

Follow-up Questions: How does Moore’s Law impact this industry?

If additional technological advancements are more quickly adapted for TVs, what are the distin-

guishing characteristics of theaters?

Teaching Note — The Movie Exhibition Industry: 2015

4. What determines profitability for exhibitors? Consider revenue components, expenses, and the

controllability of these by managers.

exhibition portion of the business is not very profitable. (See Case Exhibits 10 and 12.)

• Operating margins among exhibitors average about 12 percent.

• net income is marginal and has been negative.

Box-Office Receipts

• One-half to two-thirds of revenues remitted to studios; very little return as almost all goes to the

studios.

• Ticket price increases in recent years do not help increase attendance

2007 average: $6.88

3. Little managerial discretion beyond which movies are shown (but all theaters show the

same movies). If you can increase the experience, you can increase draw.

Concessions

4. The averages are from 25 to 30 percent of revenues.

Teaching Note —The Movie Exhibition Industry: 2015

6. They are the largest source of exhibitor profit.

7. Influenced by the three factors:

Attendance at the movie—so the draw of films is still critical; more attendees = more

concession sales

9. Theaters have expanded the concession options available in an attempt to increase

food sales. Data on this too is mixed; concession sales per ticket have not increased

Advertising

10. Just 5 percent of revenues and stabilized. There is not much more growth in this revenue

category without consequences to attendance.

Follow-up Question: Why do all the exhibitors look the same?

• Little/no differentiation in the offerings of the major theater exhibitors

Prices within markets differ little

Same movies are shown . . . at the same times

Teaching Note — The Movie Exhibition Industry: 2015

of McGraw-Hill education.

• Innovations by one theater chain are quickly adopted by others. The chains do serve different

geographic markets and do so in different ways.

• Regal (Regal, United Artists, and edwards theaters) focuses on midsized markets using multiplex

and megaplexes that average 12 screens per location, with an average ticket price of $9.08. AMC,

operating under AMC and Loews chains, is the second-largest domestic exhibitor with 5,128

screens in 346 theaters.

Averaging nearly 15 screens per location, AMC leads the industry in the operation of large mul-

tiplexes. They do so by concentrating on urban areas near large population centers such as those in

California, Florida, and Texas and try to differentiate the viewing experience by offering 3D, IMAX,

and other premium options. not surprising, due to these additional and costly urban locations, AMC

has the highest ticket prices, averaging $9.43.

Both Regal and AMC typically face competition from exhibitors as well as other entertainment

options.

5. What is the trend in profitability?

no improvement on the horizon. There’s no actual data for the students to look at, but (as shown in

Case Exhibit 2) it should come across as a downward trend. Decreased attendance equals decreased

so on. Overall, this is not a pretty “picture” for exhibitors.

Follow-up Question: What explains this trend?

environmental trends are all negative. exhibitors may reasonably expect continued declines in per-

capita viewing, and may see an increased box office gross, but they expect a continuation of relatively

flat ticket sales. Key causes of this are:

• Low/no growth in their core audience