The Future of Movie Theaters

Can movie theaters ensure their survival in the future?

2018.11

The Future of Movie Theaters: Can movie theaters ensure their survival in the future?
The Future of Movie Theaters
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I. The Film Industry and Movie Theater

The movie theater has long enjoyed its monopolistic status as the very first platform to introduce movies to the public. And the term box office has served as a barometer of overall profits generated by movies.

  • The film-making process is divided into four phases: development, financing, production and distribution. Development refers to all pre-production work, including the hiring of directors, writers and major actors, the writing of scripts, and the purchasing of copyrights from existing novels and comics for film adaptation. Financing refers to securing funds for production, either internally within the studio or from outside sources. Production is the overall process of making the movie itself, from casting to choosing the location to the actual shooting, editing and revision of the film. Distribution is the phase in the film-making process where the movie is shown to consumers through various platforms, including movie theaters, VOD, PPV(Pay-Per-View), and DVD.
  • If the customer pays to see the movie, the money is collected by the provider of the platform on which the film was viewed (e.g. movie theater or cable channel) and then dispersed to the other parties who went into the film-making and film-viewing process. A portion of the money given to the platform provider is then paid to the distributor of the film. The distributor will then take their cut of the pie, which includes marketing and promotion costs, as well as a profit. After the distributor takes their share, the remaining portion goes to the film studio (production company). The film studio will then pay the stakeholders involved in the production of the movie, such as directors, writers, actors and investors, according to contracts created before film-production.
  • At USD 11 billion, the US film market is the largest in the world. Despite continued challenge from other platforms, the revenue from movie theaters is still the standard of success or failure for movies. This is because box office performance is a reliable indicator of future success in related markets, such as online streaming and DVD sales. Additionally, ongoing media coverage after the box office release lengthens a movie’s life cycle and increases customer interest, both of which help to maximize the film’s revenue.

The first movie theater in the US opened in 1905. Since that time, the theater industry has grown tremendously alongside technological and societal changes. Today, the market is dominated by 3 companies.

  • The first movie theater in the US was called The Nickelodeon. The price of a movie at this time was 5 cents. The Nickelodeon was very popular, even though the only motion pictures available at the time were short, black-and-white films. Within 3 years, there were thousands of Nickelodeon theaters across the US. At this point, Hollywood began to unveil large, commercialized films. A new, luxury brand of theaters was born, called the Strand Theater, to fit the fame and fortune of the up-and-coming Hollywood movie industry. The first Strand Theater opened in 1914 and boasted a lavish interior with red carpets and impressive chandeliers, as well as high-quality service from uniformed employees and comfortable seats. Nickelodeon theaters could not compare to this high-class competitor and began to lose control of the market.
  • The film market at the time was characterized by an oligopoly of a few large studios, including Warner Brothers, which sought to maintain control over the industry. These studios even owned and operated many of the movie theaters around. The power of these studios led to some adverse circumstances for those in the film-making industry. For example, these studios would often sell their movies in packages, so if you wanted to buy one of their more famous movies, you would have to buy a lesser-known film, as well. Additionally, movie theater owners were often forced to purchase movies from these studios without even having watched the movie themselves. Eventually, anti-trust laws were applied to the film industry to help limit the power of these studios. In the Paramount Decision made by the US Supreme Court, several of these common film industry practices, such as selling different movies as a package or demanding theater owners to purchase movies before watching them, were banned. Later, movie theaters separated from film studios to operate independently, as they do now in the US market.
  • However, the rapid spread of the TV, which came onto the scene in the 1950s, dealt a significant blow to the film industry. After the introduction of the TV, movie theater attendance decreased by 75% over the next 10 years. Large film production companies stopped producing movies, and the industry in Hollywood nosedived. In the following years, movie theaters introduced larger screens and new sound systems, and film production companies increased the number of color movies. Although the TV was still a threat, the continued effort to improve services led to the re-development of the film industry.
  • In the 1950s, AMC first introduced the multiplex system, enabling customers to choose from different movies in a single theater, as if flipping through TV channels. Multiplex movie theaters began rapidly popping up all over the country, fueled by the growth of the US economy and the expansion of residential areas into suburban regions. The film industry was once again booming. The market has continued to see a large increase in the number of megaplexes, which now boast up to 24 screens. Currently, 3 companies, including AMC and Regal, control 80% of the US movie theater market.


II. Movie Theaters Facing a Crisis and the Growth of AMC

Combined with significant social change over the years, the emergence of new services (e.g. VOD and PPV) and the growth of Netflix, which is re-defining the film industry by producing its own contents, pose a significant threat to move theaters.

  • Just as the TV inflicted critical damage upon the film industry in the 1950s, recent social changes represent a substantial threat to movie theaters. Namely, technological advancements and the way that millennials use new technology are changing the way people use their downtime and consume movies. To the young, watching a specific movie at a designated time in a certain facility is simply [1] outdated.
  • Traditionally, the movie theater was a symbolic place – it was where movies were first shown to the public. Movie theaters had the privilege of releasing movies before all other media. However, film studios, which supply movies to the movie theaters, have continued to question whether this old business model is suited for the modern era. Instead of going to movie theaters, more and more customers watch movies in their homes with home theater systems or on personal devices such as smartphones and tablet PCs.
  • Netflix leverages the data collected from its subscribers, numbering over 100 million, to produce content (movies and TV shows) suited to the tastes of customers. By supplying these movies and shows exclusively through its own platform, Netflix is successfully vertically integrating. This media-making model is unlike anything the film industry has seen before and has actually led to significant conflict between Netflix and the traditional film industry. For example, the move Okja, which was funded by Netflix and directed by Joon-ho Bong, was very successful in the Korean market. Netflix even explored the idea of releasing this content to mainstream movie theaters. However, traditional film distributors and movie theaters refused to accept Okja for fear that it could destroy the ecology of the domestic film industry. Even Okja’s presence in the Cannes Film Festival competition sparked controversy, as some refused its status as a movie because it had not been shown in theaters. The success of the original content generated by Netflix and other streaming services, such as Hulu, Amazon Prime, and IPTV, poses a serious threat to the profitability of movie theaters.
  • The recently introduced subscription model also poses a potential risk to the movie theater industry. Moviepass is a service that allows customers to watch one movie per day for a monthly fee of USD 10. Securing nearly 3 million subscribers, practically overnight, the service grew rapidly. If a customer uses Moviepass to watch a movie, the company must pay the actual price of a movie ticket to the theater. In the short-term, the growth of Moviepass helps movie theaters expand their revenues. However, the risk lies in customers growing used to watching movies at such low prices through Moviepass. Should Moviepass go bankrupt, and movie theaters do not reduce the price of their tickets, the dwindling theater attendance will likely decrease even faster.

Established in 1920, AMC grew to become the largest theater chain in the world. AMC has overcome serious social and technological challenges by constantly and relentlessly innovating.

  • True to its namesake, AMC (American Multi Cinema) is a US company established in 1920 by the brothers Maurice, Edward, and Barney Durwood (hence, initially called the Durwood Theater). Stanley H. Durwood, the son of Edward Durwood, introduced the multi-screen movie theater system to the film industry. After Stanley Durwood passed away in 1999, AMC went through several PE funds before being bought in 2012 for USD 2.6 billion by Wang Jianlin, a Chinese businessman and head of the Wanda Group. Under Wang, AMC invested over USD 400,000 per screen to enhance the movie going experience of customers.
  • After the CEO who led this effort left the company, Wang Jianlin brought in Adam Aron, who had built a legendary career in various industries by working for Pan American Airways, Hyatt and the Philadelphia 76ers. Adam Aron created a growth strategy for AMC that included enhancing the customer’s moving going experience, a stronger marketing campaign, and the expansion of the business into new regions.
  • Aron believed that for AMC to compete against online services such as Netflix, the company needed to radically improve the movie going experience for customers. To lure customers, Aron decided to build visual and sound systems that would only be available at AMC theaters. 3D, IMAX and Dolby Cinema were all part of this enhancement package. Furthermore, AMC introduced virtual reality to enable customers to interact with each other through their avatars.
  • Aron also invested over USD 10 billion to develop a new website and a mobile application, so that customers can better enjoy movies at AMC. Not only can customers use the AMC website and mobile application to buy tickets, but they can also pre-order food and drinks for either pick-up or delivery to their seats. Furthermore, Aron expanded the company’s seat upgrade mission, a legacy project from his predecessor, installing reclining seats in 300 theaters. Another move Aron employed to enhance customer satisfaction was to reduce the number of seats per screen.
  • Aron aggressively executed new ideas. He expanded the foods and drinks available at AMC theaters by adding, for example, 4 popcorn flavors and working with Coca-Cola to introduce drink machines that can provide 180 different soft drinks. Moreover, Aron installed bars in AMC theaters that serve wine, beer, and cocktails. In some theaters, customers can now enjoy a full-course meal.
  • Under Aron, AMC turned its attention to foreign markets, such as Saudi Arabia, which were rapidly growing compared to the already mature US market. In 2017 alone, AMC built 12 new theaters and acquired 128 existing theaters abroad. Today, the company is the largest movie theater chain in the world, operating over 11,000 screens in 15 countries.

III. The Future of Movie Theaters

As the title of Cinemacon 2018 suggests – A Glimpse at the Future of Moviegoing – many in and outside the industry are voicing concerns about the future of movie theaters.

  • Some predict that movie theaters could lose up to USD 3.6 billion in annual revenue and 20% of their profits due to Netflix and premium video-on-demand services screening box office movies. Many analysts are advising stock owners to sell their shares of large US theater chains such as Cinemark and Regal. Overall, negative forecasts are [2] gaining traction.
  • In the US, customers generally can watch movies on other platforms within 90 days of box office release. Netflix and other streaming services screen movies on their platforms at the same time as the move theaters, providing customers with an alternative platform and potentially better service.
  • The US National Association of Theater Owners opposes streaming services by reasoning that it destroys the industry ecology and cuts away at profits. The current industry structure allows movies to be watched through DVDs, streaming and other channels only after a certain period has passed since box office release. Reed Hastings, the CEO of Netflix, predicts that this system will eventually collapse, however.
  • Major studios such as Warner Brothers and 20th Century Fox want to offset losses in the additional licensing market, which has decreased rapidly in size, with internet streaming. These studios would like to see the grace period - from box office release to internet streaming - reduced to just 2 weeks, while also introducing premium video-on-demand services to increase profit margins. The National Association of Theater Owners, for the reasons listed above, are in strong opposition to this.
  • When producing their own content, Netflix and other online streaming services allow directors and content producers total freedom over their work. This flexibility offered by streaming platforms could quite possibly lead to an increasing number of directors and producers seeking employment at these companies, rather than for traditional film studios. Such migration will degrade the quality of content for the traditional film industry which, in turn, will lead to even less people going to movie theaters.
  • According to data from the Motion Picture Association of America, online platforms, such as Amazon, Netflix and Hulu, recorded a combined earning of USD 32 billion in 2017. In comparison, worldwide box office earnings in 2017 were USD 40 billion. Only 4 years ago, box office revenue was over 3 times that of online platforms. With the rapid growth of online platforms, the table is about to turn on the film industry.
  • Many insiders are worried about the future of the film industry. Steven Spielberg once told people that there are plenty of cases where a movie would [3] go bust at the box office even after a USD 250 million investment in its production. According to Spielberg, the film industry is headed towards a deadly cliff, as people are now able to utilize other platforms.

There are also those who believe that the movie theater will evolve again in response to emerging threats, as it did in the 1950s after the television was introduced.

  • CGV is the largest multiplex chain in South Korea, and the 5th largest in the world. With its Cultureplex, CGV has come up with a model for the future. CGV is working to turn its theaters into a forum of social exchange – an experience which streaming services cannot provide. To this end, CGV has created various services and facilities, including Cine de Chef (meals while watching movies), Cine Shop (movie merchandise), Cine Pub (beer and other alcoholic drinks), Sports Arcade (archery and baseball), and V Buster (virtual reality, webtoon, games). Moreover, CGV is shaping its theaters into cultural complexes by hosting concerts and art exhibitions.
  • Also, to maximize the movie going experience – the essence of movie theaters – CGV continues to expand technology-driven services including: 4DX (motion seats combined with water sprays, wind and aroma for various scenes), which allows the viewer to experience the movie through different senses; Screen X, which projects the movie on the screen as well as the side walls to enable a wider field of view and, therefore, better immersion into the movie; and New Imax, a super-sized screen (31 meters in length and 22 meters in height).
  • Moviepass, mentioned above, is accepting short-term losses for, potentially, long-term growth. Its goal is to generate profit in the long-run by using customer data for marketing purposes. However, Moviepass has recently reduced the number of available movies per month from 30 to 3, as the company was unable to tolerate any further short-term costs. AMC, having kept a close eye on the growth of Moviepass, began offering a new service just as Moviepass was reducing its own. Customers can now watch 3 movies every week if they pay USD 20 to AMC, including 3D movies – which were not part of the Moviepass service. AMC quickly secured hundreds of thousands of subscribers, taking the theater subscription market from Moviepass.
  • Some insiders are still optimistic about the future of the theater business. James Cameron said, “I think there will be movie theaters in 1,000 years. People want the group experience, the sense of going out and participating in a film together. People have been predicting the demise of movie theaters since I started in the business.”


IV. Lessons

There are 2 lessons to be learned from the future of moviegoing.

Lesson 1: The emergence of a new, groundbreaking service in a market can result in a reshaping of the entire industry. This sometimes can result in the destruction of traditional market ways.

  • The introduction of the television caused an existential threat to the film industry. At the same time, it was an opportunity for the film industry to develop and expand their services to better meet the needs of customers. The spread of Netflix and other streaming services is facilitating the next round of evolution in theater services.
  • In the past, film studios made decisions about large-scale investments based on the information producers and market forecasters gathered from limited poll data. These investment decisions were often a shot in the dark, however. No one could be sure about a movie’s potential for commercial success. Netflix, on the other hand, leverages the data it collects from customers, ranging from preferred genres to plots and actors, to plan and produce content.
  • Moviepass, which once worried movie theaters, represented a business model with a low probability of success. However, to customers, it was a great deal. The type of service offered by Moviepass pushed AMC and other theater chains to explore ways to improve their services. This, in turn, brought about a new subscription model, which was both sustainable for the company and satisfying to the customer.

Lesson 2: Survival in the midst of social and technological change requires relentless innovation, fueled by a deep understanding of products and services at their core.

  • Movie theaters are facing a significant threat from a fundamental change in the way customers consume movies, which consequently has impacted the way that film studios produce and distribute content. Movie theaters once enjoyed their exclusive status as the first platform to supply customers with movies. It now seems that they will inevitably be only one of many platforms to offer movie-watching services. The movie theater industry will have to continue exploring innovative ways to lure customers away from the comfort of their own home theaters, where they can now watch the latest movies without going to a theater.
  • AMC has survived to this day by overcoming several crises. It did so by understanding that the essence of the theater business is to provide customers with an exceptional moviegoing experience. The theater industry as a whole is still profitable – despite TV, online streaming, and studios questioning the reason for the very existence of theaters – because it has continued to re-invent itself and provide customers with an experience that cannot be matched by other platforms.

Have a 1:1 debate in English with your Ringle tutor about the future of moviegoing as you improve your English skills.

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