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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 Questions
ANALYSIS: FOCUS ON EXTERNAL AND INTERNAL ENVIRONMENTS
1. Why do people go to the movies? What other options are there to satisfy the same want? How
has this changed?
2. What is the trend in attendance at movie theaters? Why is this problematic? What explains this
trend?
3. How does the rate of technological advancements help or hinder the theaters?
4. What determines profitability for exhibitors? Consider revenue components, expenses, and the
controllability of these by managers. Are any conditions of revenues or expenses changing?
5. What is the trend in profitability? What explains this trend?
6. Do trends in the general environment and industry structure affect profits?
The Movie Exhibition Industry: 2015
TEACHING NOTE
MHE-FTR-040
1259420477
ReV: JUne 11, 2015
Teaching Note — The Movie Exhibition Industry: 2015
7. (Advanced) For 1 through 5, which of these are symptoms? Which are causes?
FORMULATION: FOCUS ON BUSINESS,
CORPORATE, AND GLOBAL STRATEGIES
8. Are the recent exhibitor initiatives helping to change the profit picture for exhibitors? What
types of business-level strategies can you identify for exhibitors?
9. (Advanced) What does consolidation in a domestic industry signal? How does consolidation
influence global strategies? How are global strategies linked to value chain changes?
IMPLEMENTATION: FOCUS ON RECOMMENDATIONS
AND HOW TO IMPLEMENT THEM
10. What are some strategic recommendations for exhibitors to consider?
11. (Advanced) What are the requirements for implementing your recommendations and what
positive outcomes should be expected?
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
7
Copyright © 2017 McGraw-Hill education. All rights reserved. no reproduction, distribution, or posting online without the prior written consent
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
