Analysis of Macro Environment Impacting Movie Theatre Industry

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Analysis of Macro Environment Impacting Movie Theatre Industry

  1. 1. THE MACRO ENVIRONMENT BUSINESS & ECONOMIC CONDITIONS 1. Decline of Movie Theatres During the peak of substantial box office revenue generated in 2005, the movie theatre industry experienced exponential growth in the construction of movie cinemas (Silver, 2007). Recently, however, the stagnant growth in movie ticket sales has led to the decline and closure of numerous movie venues (Pemberton, 2012). In 2013, an estimated 1,000 theatres are projected to be in danger of failing, representing almost 20% of all venues in North America (Gimmy, 2013). If the current rate of theatre closure continues, the market for digital projector systems may become saturated in North America. 2. Theatre Exhibitors Upgrading to Digital Systems Digital cinema is becoming the norm for theatre operators as recent technological developments have led to the greater necessity for digital projection equipment. More recently, finished movie products are increasingly formatted into their digital forms, transferred directly to theatres, and operated by digital projectors. As a result, theatre chains will be forced to switch their processes digital if they desire to show Hollywood’s latest features (Andrews, 2010). The growth in digital cinema is accelerating at a steady pace as over two-thirds of the world’s screens were digital in 2012 (Theatrical market statistics, 2012). By moving towards digital formatting, movie studios save costs on creating and transporting physical prints (Pemberton, 2012). However, some theatre owners are reluctant to invest in new digital systems due to high cost as well as low confidence on the return on investment (Anna, 2003). 3. International Expansion Due to the decline of movie theatres in North America, along with the likely saturation of digital projection systems, the motion picture industry is looking towards international expansion to recoup and increase
  2. 2. revenue. For example, between 2007 and 2011, Chinese movie screens doubled to more than 6,000 and that number is projected to increase over 16,000 by the end of 2015 (Theatrical market statistics, 2012). As figure 1 illustrates, from 2008 to 2012, international box office sales have steadily increased each year (Theatrical market statistics, 2012). The key factors in the rise of sales were driven by growth in various international markets, including China, Russia and Brazil. More recently, Chinese box office sales grew by 36% in 2012, making China the largest international market for movie revenue (Theatrical market statistics, 2012). 4. Theatre Chains Developing Company-Owned Digital Systems Noting the economic benefit of digital systems, some theatre chains have developed or are in the process of developing their own digital projection technology. For example, Cinemark NextGen have created theatres that have wall-to-wall screens, 100% digital projection and enhanced sound systems equipped with higher quality speakers (Movie production…, 2012). Similarly, in 2010, Regal Cinema launched their "Regal Premium Experience" which attempted to replicate the IMAX experience. In 2012, Regal doubled the amount of theatres with their new digital systems to 34, compared to 17 a year prior (Dodes, 2012). Similarly, with the revitalized popularity of 3D movies, many theatre companies are quickly capitalizing on this trend, investing in 3D technology produced by third party suppliers. For example, RealD supplies theatres with systems and accessories that enable theatre projectors to play 3D movies (Norton, 2012). The number of 3D screens increased to 35% in 2012, up from 29% in 2011 (Theatrical market statistics, 2012). This is a clear indication that in the short term, there is more room for growth for digital projection systems; also, that differentiation in terms of quality, price, and innovation will become critical factors among projection businesses. 5. Increase in the Number of Screens Per Theater Although the number of movie theatres continues to fall, coincidently, there has been a dramatic increase in the number of screens per venue. In 2012, there were more than 39,900 screens in the U.S., with 81% located at venues with 8 or more screens (Theatrical market statistics, 2012). These multiplex theatres now represent 80% of all domestic cinema businesses (Gimmy, 2013). However, the lack of return on investment observed from these multiplex theatres has left some theatre chains with little capital to devote to digital projection conversion (Silver, 2007).
  3. 3. Furthermore, the high ratio of screens to low number of in-demand movies has created high overhead expenses, low profitability per movie, and little capital for venue upgrades (Silver, 2007). 6. Increase in Movie Ticket Prices The gradual recovery in business and consumer spending since the recession, coupled by high unemployment rates in some markets, continue to negatively impact movie attendance (Gimmy, 2013). As a result, theatre owners are charging higher prices for tickets to maintain box office sales. As seen in table 1, the average ticket price in 2012 increased by 10% compared to 4 years earlier (Theatrical market statistics, 2012). If ticket prices continue to rise, it may reduce the number of people who can afford to go see a movie, thereby effecting theater attendance and profitability. However, with the recent installation of interactive seats, superior sound systems, large format viewing, and 3D technology, each has helped theatre chains recoup revenue losses against declining attendance (Harris, 2010). These enhanced cinema offerings attract a steady audience of moviegoers, partly compensating for lower consumer spending (Gimmy, 2013). LEGAL & POLITICAL CONDITIONS 1. The Release of Films are Controlled by the Chinese Government As mentioned above, China represents the largest international market for box office sales. This can be attributed to recent amendments by Chinese officials to expand the number of foreign films shown annually from 20 to 34; as long as the additional 14 films are in IMAX format (Hook, 2012). In addition to the number of films allowed for viewing, the Chinese government also regulates the timing of Hollywood films released to the Chinese market. Additionally, the government of China, with the purpose of protecting morals and culture, regulates the content of each film, banning movies if deemed high in sexual and violent
  4. 4. subject matter (Hille, 2011). This represents a significant risk as the uncertainty of the release date of movies, or whether the movie will be shown at all, can negatively impact box office sales, theatre revenue, and future demand for high priced digital projection systems. 2. Protection of Intellectual Patents in Foreign Countries There are high levels of risk regarding the protection of intellectual patents as digital projection systems expand overseas. International companies have already begun developing digital projection processes. For example, China Film Group has launched Dmax, a competing big screen system that mirrors other digital projection businesses in North America (Garrahan, 2012). Recently, however, foreign companies working in China can seek to obtain the protection of their intellectual properties in the courts of some Chinese cities (Hollywood's script…, 2012). But the inability to protect intellectual properties in other jurisdictions can allow other businesses to copy technological processes, thereby reducing product prices, company profit margins and sales. TECHNOLOGICAL CONDITIONS 1. Investment in New Theatre Technology As mentioned above, theatre chains are investing and installing greater technological systems that will help differentiate themselves from competing forms of entertainment. For instance, D- BOX chairs are motion generating seats that vibrate and move to the sequences of a movie (State-of-the-art, 2010). Similarly, theatres have been installing new projector technology for Hollywood blockbusters to be viewed in 3D. This gives theatre chains the opportunity to better distinguish themselves from comparable home theatre setups. These technological advances allow theatre operators to charge as much as 66% above regular ticket prices, thereby maximizing revenue per moviegoer (Pilieci, 2010). 2. Greater Variety in Entertainment Alternatives Movie theatres are facing stiff competition from technological advances in consumer products that until now were not significant factors impacting business operations (Gimmy, 2013). For example, 3DTV allows consumers to enjoy three-dimensional movies, television programs, and video games in their own homes. These 3D formatted productions are based on the same
  5. 5. processes as 3D movies. Sales of 3DTVs are projected to reach $17 billion by 2018, which could negatively impact the purchases of 3D movie tickets (Dong-Hee, 2012). Personal computers as well as DVD movies, video games and smartphones are all mediums of entertainment that appeal to value conscious consumers. The greater variety in entertainment options can influence theatre revenue as the competition to gain a portion of individuals’ disposable income is highly saturated (Gimmy, 2013). 3. New laser projection technology Kodak, an imaging solution company, will introduce their laser projection technology in late 2013. The projector allows theatres to show 2D and 3D films with brighter colours, clearer images and higher contrast ratios than seen in current systems. It was created in response to concerns that 3D films looked too dark through tinted 3D glasses (Edgecliffe-Johnson, 2011). IMAX has signed a 10 year deal which gives it exclusive rights to Kodak’s patents and technology systems over other projection businesses (Edgecliffe-Johnson, 2011). This will force competing companies to keep pace with new standards of theatre picture quality. SOCIAL & ENVIRONMENTAL CONDITIONS 1. The Convenience of Online Movie Downloads Movie theatres are being hit particularly hard as the availability of movies on demand through websites increases (Harris, 2010). Theatres are constantly competing with other forms of movie viewing including computers, televisions, game consoles and cellphones. As a result, theatres have become one of many options available for the consumer to watch a film. Consequently, this has forced several major theatre chains to declare bankruptcy, close some of their key locations, and make significant acquisitions, such as Regal Cinema’s purchase of some AMC theatres, just to stay in business (Gimmy, 2013). Also, the piracy of films made available over the internet, combined with actual physical copies, has continued to plague the movie industry. With greater download speeds, counterfeiting and piracy are becoming more frequent. For instance, film and television account for almost half of the top 10,000 torrents online (Andrews, 2010). With internet usage rising in both developed and emerging markets, downloads via torrents and illegal streaming websites present huge challenges to the motion picture industry.
  6. 6. 2. Increase in frequent moviegoer young and old: Annually, the Motion Picture Association of America releases a report on the current condition of the movie industry. In 2012, the MPAA noted that the typical moviegoer bought 6 tickets over the course of 2012, an increase from 5.8 tickets in 2011 (Theatrical market statistics, 2012). However, frequent moviegoers – those who go to the cinema once a month or more - continue to drive the movie industry. As figure 2 illustrates, frequent moviegoers purchased 57% of all the movie tickets sold in 2012 (Theatrical market statistics, 2012). Also, the number of frequent moviegoers increased in every age group. This included the largest age group (18-24 year olds), but also included the 40-49 age group, which had 5.8 million frequent moviegoers in 2012, compared to 3.3 million in 2011 (Theatrical market statistics, 2012). While the increase in the younger cohort represents a significant trend to theatre operators, it is the rise in older frequent moviegoers that is worth noting. Films and movie venues that cater to the needs and wants of this older segment offer real revenue possibilities in the short and long term. CURRENT TRENDS 1. Quick turnover of movie theatre to online releases: Typically, when movie distributors license their products to theatres, the terms of the agreement specify that they will not license their movies to other distribution channels for a particular period of time. This is known as the theatrical release window (Gimmy, 2013). This period can range from three months to twelve months for a film released in theatres to become available on DVD. Additionally, the typical time frame is about six months for motion pictures to be released on cable and online streaming websites (Gimmy, 2013). Recently, the collapse of the theatrical release window has been a growing concern for theatre owners. Movie studios have started to push the release dates of DVD titles closer to their theatrical release dates (Andrews, 2010).
  7. 7. Indeed, such a shortening of intervals may warrant cost conscious consumers to wait for movies to become available on lower priced formats and platforms. 2. Online streaming of movies will increase: Lately, several media and retail companies are in the process of developing online streaming services for movies. For instance, Wal-Mart, Best Buy, and Apple have all expressed the desire to offer Hollywood features to their consumers online (Barnes, 2012). These companies would be competing with Netflix and Hulu, well-established video streaming businesses, who have previously negotiated successfully for studio films (Andrews, 2010). The competition to stream movies online also includes international players. For example, NetMovies Entertainment signed a deal to stream materials owned by Disney to their Brazilian customers (Barnes, 2012). Further research is needed to determine how new online streaming options impact movie attendance and box office sales.
  8. 8. Works Cited Andrews, M. (2010, Apr 22). Movie theatres 'must adapt'; age and ethnicity provide challenges for the industry. Times - Colonist. Retrieved from http://search.proquest.com/docview/89165082?accountid=3455. Anna, W. M. (2003, May 19). Technology (A special report): Movie distribution --- coming attraction: Digital projection of movies promises to transform the film industry; but getting from here to there isn't easy. Wall Street Journal. Retrieved from http://search.proquest.com/docview/398827977?accountid=3455. Barnes, B. (2012, 02 24). Web deals cheer hollywood, despite drop in moviegoers. The New York Times. Dodes, R. (2012, Apr 19). IMAX strikes back; go big or stay home. directors and studio executives are clamoring to have their summer blockbusters released on supersize screens, reviving a technology that was once a mainstay of science museums. Wall Street Journal (Online). Retrieved from http://search.proquest.com/docview/1002731508? accountid=3455. Dong-Hee, S. (2012). 3DTV as a social platform for communication and interaction. Information Technology & People, 25(1), 55-80. doi:http://dx.doi.org/10.1108/09593841211204344. Edgecliffe-Johnson, A. (2011). Imax snaps up kodak patents deal. FT.Com, Retrieved from http://search.proquest.com/docview/898678644?accountid=3455 Garrahan, M. (2012). Imax rides on soaring chinese 3D demand. FT.Com, Retrieved from http://search.proquest.com/docview/1011298173?accountid=3455. Gimmy, A. E., M.A.I., & Condon, W. (2013). The business of show business act II: Appraising the movie theater. The Appraisal Journal, 81(2), 112-128. Retrieved from http://search.proquest.com/docview/1398483699?accountid=3455. Harris, M. (2010, Nov 24). How canada's movie theatre industry is making more money on fewer funnies. Postmedia News. Retrieved from http://search.proquest.com/docview/849243606?accountid=3455. Hille, K. (2011). Silver screen strikes gold in china. FT.Com, Retrieved from http://search.proquest.com/docview/822103358?accountid=3455. Hollywood's script in china. (2012). The China Business Review, 39(3), 50-53. Retrieved from http://search.proquest.com/docview/1030090402?accountid=3455. Hook, L. (2012). China's wanda to buy AMC for $2.6bn. FT.Com, Retrieved from http://search.proquest.com/docview/1015156156?accountid=3455.
  9. 9. Movie production and theater companies; cinemark announces new 16-screen NextGen movie theatre in pharr, texas. (2012). Food Weekly News, , 26. Retrieved from http://search.proquest.com/docview/963971873?accountid=3455. Norton, L. P. (2012). 3D springs back to life. Barron's, 92(26), 20. Retrieved from http://search.proquest.com/docview/1022369022?accountid=3455. Pemberton, K. (2012, Apr 12). Drive-in owner goes digital, but misses reel deal; twilight theatre to switch to computerized system as film industry parts with aging technology. The Vancouver Sun. Retrieved from http://search.proquest.com/docview/1000325760? accountid=3455. Pilieci, V. (2010, Dec 23). Shakin' all over; canadian motion-seat maker is energizing the movie industry. The Ottawa Citizen. Retrieved from http://search.proquest.com/docview/821136381?accountid=3455. Silver , J. (2007). Is the imax mpx system a solution for multiplex under pressure?. International Journal of Case Method Research & Application, XIX(1 ), 87-94. State-of-the-art santikos movie theatre to add D-BOX's motion technology. (2010, Apr 27). Canada NewsWire. Retrieved from http://search.proquest.com/docview/89244653? accountid=3455. Theatrical market statistics 2012. In (2012). Motion Picture Association of America, Inc. Retrieved from http://www.mpaa.org/Resources/3037b7a4-58a2-4109-8012- 58fca3abdf1b.pdf.
  10. 10. Movie production and theater companies; cinemark announces new 16-screen NextGen movie theatre in pharr, texas. (2012). Food Weekly News, , 26. Retrieved from http://search.proquest.com/docview/963971873?accountid=3455. Norton, L. P. (2012). 3D springs back to life. Barron's, 92(26), 20. Retrieved from http://search.proquest.com/docview/1022369022?accountid=3455. Pemberton, K. (2012, Apr 12). Drive-in owner goes digital, but misses reel deal; twilight theatre to switch to computerized system as film industry parts with aging technology. The Vancouver Sun. Retrieved from http://search.proquest.com/docview/1000325760? accountid=3455. Pilieci, V. (2010, Dec 23). Shakin' all over; canadian motion-seat maker is energizing the movie industry. The Ottawa Citizen. Retrieved from http://search.proquest.com/docview/821136381?accountid=3455. Silver , J. (2007). Is the imax mpx system a solution for multiplex under pressure?. International Journal of Case Method Research & Application, XIX(1 ), 87-94. State-of-the-art santikos movie theatre to add D-BOX's motion technology. (2010, Apr 27). Canada NewsWire. Retrieved from http://search.proquest.com/docview/89244653? accountid=3455. Theatrical market statistics 2012. In (2012). Motion Picture Association of America, Inc. Retrieved from http://www.mpaa.org/Resources/3037b7a4-58a2-4109-8012- 58fca3abdf1b.pdf.

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