Teaching Note —The Movie Exhibition Industry: 2015
Television is not likely to spontaneously self-destruct.
Within the current business model there is little opportunity to increase either revenues or profits.
Key causes of this are:
Box-Office Receipts
Studios take 55 percent of every box-office dollar. All the power rests with the studios that supply,
advertise, and control the motion picture content, and could conceivably go directly to viewers through
DVD and electronic distribution. Exhibitors have some additional negotiating power due to consolida-
Concessions
Need more attendance, increased per-capita spending, or increased prices. The first cause is outside
Advertising
Walking a tightrope. More ads likely equated with decreased attendance among those with home
6. Do trends in the general environment and industry structure affect profits?
General Environmental Analysis
DEMOGRAPHIC
Little increase in the size of the population that is the core audience.
Teaching Note — The Movie Exhibition Industry: 2015
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going to the movies. Teens continue to have a limited number of entertainment options, yet seek time
together outside of the home for dating.
POLITICAL
Content piracy is a growing issue for movies. Attempts at legislation may deter, but have not elimi-
nated this illegal substitute. This is primarily an issue for seeing the movie as opposed to going to the
movies as a social activity.
TECHNOLOGICAL
Rapid rate of creation and adoption of technologies for viewing movies outside of theaters (comput-
ers, home HDTV, iPads, DVR, etc.) combined with a rapid increase in the number of distribution for–
mats (DVD, streaming, VOD, etc.) and distribution means (physical, web-based, satellite-based). Each
Porter’s Five Forces Model of Industry Analysis
From the following analysis (see Exhibit TN-1), the movie exhibition industry faces many powerful
forces that undermine its profitability. The only positive force is the lack of new entrants in the domestic
market. However, the international market has many competitors and new entrants searching for ways
to reap higher bargaining power over the suppliers (studios). Because many movie studios count on
7. (Advanced) For questions 1 through 5, which of these are symptoms? Which are causes?
Teaching Note —The Movie Exhibition Industry: 2015
FORMULATION: FOCUS ON BUSINESS,
CORPORATE, AND GLOBAL STRATEGIES
8. Are the recent exhibitor initiatives helping to change the profit picture for exhibitors?
Either it is too early to tell or they have not had a significant impact on the profitability of the busi-
ness. When analyzing these initiatives, it is crucial to pay attention to both sides (revenues and costs) of
introducing any initiative. Equipment innovations have shown that the ability to recoup these invest-
ments have a very short window. Alternative content holds promise, but it also needs to draw more
attendance on a consistent basis (i.e. a series of concerts or Broadway shows). Immersion experiences
What types of business-level strategies can you identify for exhibitors?
Rural are more cost leader-oriented. Differentiation in technology (digital, 3D, IMAX, etc.) is short-
9. (Advanced) What does consolidation in a domestic industry signal? How does consolidation
influence global strategies?
Moving from many to fewer competitors that control a larger percentage of the market indicates that
there is consolidation of industry participants. Industry consolidation occurs in an industry if there
are dominant players that want to prevent competitors from gaining market share in a niche on which
IMPLEMENTATION: FOCUS ON RECOMMENDATIONS
AND HOW TO IMPLEMENT THEM
10. What is the strategic issue facing all competitors in the domestic movie exhibition industry?
ANNOUNCE: “OK, we now have a pretty good inventory of the situation. Are there any major
Teaching Note — The Movie Exhibition Industry: 2015
The challenge for framing all strategic issues is determining how to do so in a manner that is specific
while not constrictive to potential actions. The most comprehensive approach is something along
the lines of the following:
Other aspects that students may want to include:
Suggestion for Inclusion Counterpoint
• Reductions in the size of the core audience
(low growth in customer base of 12 to 17
and 18 to 24-year-olds)
• Just because the business has 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 earlier discussion in a general sense?
ANNOUNCE: “Good start. We are now at the stage that every junior stock analyst can reach. Now
to earn our keep as managers, what actions can an exhibitor take to resolve the strategic issue(s)?”
Teaching Note —The Movie Exhibition Industry: 2015
Exit: Close the Theaters—This is likely a premature option. 1.3 billion tickets sold, $11 billion
(domestic) industry. Let’s try to improve it before abandoning ship.
Eliminate Other Ways of Viewing Movies—Studio revenue is tied to the aftermarket of DVDs,
VOD, and other items. They will not go for this. Generally, it is hard to put any genie back into a
bottle.
REVIVE THE EXPERIENCE: GENERAL
Decrease Interruptions—Theater chains are adding more ushers and better scheduling show times
and theaters (think loud movies next to loud movies). Others are working with technology firms to
introduce equipment to jam cell phones (this is currently illegal under U.S. federal law).
Resolves the strategic issue? Partly—May reduce bad behavior and interruptions (reduces the
reasons people stay away), but it doesn’t give them a new reason to go to the theater.
Increase the Movie Experience using Fourth, Fifth, and Sixth Dimensions
Smell-O-Vision—This gimmick really existed. The 1960s innovation involved pumping smells into
the auditorium. Think of the swamp smell in a Disney theme park ride. Not expected to return.
Teaching Note — The Movie Exhibition Industry: 2015
of McGraw-Hill Education.
type of experience (action). Some U.S. theaters have adopted this experience. D-Box is the leading
provider of motion-effect seating (MFX) for commercial and home use:
URL: http://www.d-box.com/en/consumer/theater_movies
Resolves the strategic issue? Unlikely—It is already available for in-home theaters.
Enhanced audio—Dolby’s Atmos system offers more sound “zones,” including speakers in a
theater’s ceiling. When incorporated into soundtracks, it could make for far more realistic surround
sound.
Video URL: https://www.youtube.com/watch?v=oGgwDkwF03s
Go Upscale—The VIP approach is being rolled out in both mainstream theaters (AMC, for example)
as well as specialty chains (iPic Theaters, for instance). Think airline first class—still on the plane,
but much more comfortable than coach. Two approaches:
1. VIP Experience—Individual theaters within a complex are designated as VIP areas,
accessible only with a premium priced ticket. From plush, assigned seating with waiter service
to couch-style atmospheres with usher service, this approach seeks to mimic a private screening
room, even offering reserved seating in some locations. At Muvico Theaters in Thousand
Oaks, California, for example, patrons can select 21-and-over screens, 3D, theaters with digital
projection, and they can also choose motion seating (detailed in the following).
Teaching Note —The Movie Exhibition Industry: 2015
2. The VIP Theater—Solely upscale location. iPic Theaters is one example. The theater lobby
looks more like a high-end hotel than a cinema. Features include memberships, custom seating
with optional footrests, complimentary pillow-and-blanket service, in-lobby restaurant and
Downside—What to offer and how to do it in an economically viable way? Reconstructing
theaters can be very expensive. Is this about the movie at all? Some in the industry are skeptical
of the all-luxury concept. Michael Whalen, president of the firm that operates the Oaks 14
multiplex, says “The idea of an all-premium concept strikes me as a recipe for disaster.”
Resolves the strategic issue? This option can resolve the strategic issue for exhibitors that seek
REVIVE THE UNIQUENESS OF THE EXPERIENCE: CONTENT
Go Beyond Motion Pictures—There are no technical reasons that theaters, once equipped with
digital projection, can’t be used as extra-large television screens. Look for more concerts, sporting
events, television season openers and finales, corporate and shareholder meetings, and other “events”
to appear at your local theater. The NFL, NBA, and college football are among those who have
Bud Mayo, Digiplex’s CEO, describes the approach: “What happens with those [alternative content]
performances is that a single event will out gross certainly the lowest-grossing movie playing that
theater that day, but in practice [it will] have averaged more than 10 times the lowest-grossing movie
for the entire day.” In marginal dollar terms, alternative content can be a boon on otherwise slow
nights. A recent Wednesday showing of Broadway’s West Side Story at a Digitech theater had an
Teaching Note — The Movie Exhibition Industry: 2015
of McGraw-Hill Education.
URL: http://www.dcdcdistribution.com/
URL: http://www.digiplexdest.com/
Business model URL: http://www.digiplexdest.com/investors.asp
Investor presentation:
http://www.digiplexdest.com/images/pdf/InvestorPresentationOctober2012.pdf
Ticket prices typically $12.50–$25 per event.
Upside—Largely untapped revenues. This option may bring in non-peak audiences (Sunday
afternoon, Monday night) when only 5 percent of seats are filled.
Downside—want to watch the Super Bowl in a dark theater for four hours? Beer (theaters typically
now get special one-day permits), social aspects (stuck in theater seat versus moving around; Is
talking permitted?) This approach may need VIP-type areas to fully work. How to get audiences in
regularly Monday through Thursday?
Resolves the strategic issue?—Has a real possibility to resolve the strategic issue. This may
be the only option that reduces dependence on the film studios and may, over the long term,
reduce costs.
11. (Advanced) What are the requirements for implementing your recommendations, and what
positive outcomes should be expected?
Many of the options listed earlier require additional investments in equipment that need significant
capital and must generally use existing space. Caution the students to think of the recommendations as
the CEO rather than as a movie attendee. For recommendations that have additional equipment invest-
ments required but have enhanced revenue associated with those investments (i.e., VIP theaters), it is
Recommendations that involve alternative content need to consider equipment, content availability,
and how to attract an audience (especially during off-peak times). The recent entry of firms, such as
Teaching Note —The Movie Exhibition Industry: 2015
EXHIBIT TN-1 Applying Porter’s Five Forces Model to the Movie Exhibition Industry
Factors
Leading to…
Threat of New
Entrants Power of Suppliers Interfirm Rivalry Power of Buyers
Threat of
Substitutes
each supplier.
Little buyer loyalty
Increasing variety of
substitutes
Content widely
and increasingly
available
Moderate
threat
Slow industry
growth
Low threat High capital
requirements
Incumbents face low
switching costs
Fewer industry
competitors
Multiple small
buyers
Other activity /
location options for
profitability
same geographic area
Teaching Note — The Movie Exhibition Industry: 2015
Endnotes
1 Sources on Smell-O-Vision: Stanley, T. L. (2008), “To boost attendance, industry seeks Smell-O-Vision sequel,”
2 iPic theaters. https://www.ipictheaters.com/default.aspx, accessed February, 2013.
3 Friedman, J. (2008), “Upscale chain aims to be the BMW of movie theaters,” Los Angeles Times, September 7.
4 Cinedigm. (2012). Investor Presentation: Jefferies 2012 Global Technology, Media & Telecom Conference.
Cinedigm. Retrieved from http://files.shareholder.com/downloads/AIXD/2302444840x0x567367/4a213e2c-
11ae-4cdc-8dd1-970919ac80ac/CIDM%20IR%20deck%20050712%20Short.pdf.
5 Ellingson, A. (2012), “Who’s stressed about digital cinema? Not Digiplex’s Bud Mayo,” The Business Journal –
LA, October 15.
6 Ibid.