The Movies

Let’s Go To The Movies 

Transformational changes have swept through the entertainment industry in the past two decades.  Major studio new releases went from commonplace multiple-week runs at the top of the box office, beyond the point of saturation, to a level where a two-week hold at the number one slot is a rare and exemplary showing.  

Meanwhile, the at-home “aftermarket” of movie rentals and retail sales of VHS tapes, then DVDs, have surpassed revenues earned at the box office.  Then Video on Demand emerged as a potentially disruptive technology, enabling us to skip the trip to Blockbuster altogether with a few clicks of the remote.  Streaming video over the internet went from a frustrating exercise in lack of bandwidth to the veritable missing link between the convergence of the television & motion picture screens and our computer monitors and mobile devices.   

Independent films rose from the fringe of the awards festivals past critical success and ascended into the realm of commercial competitiveness. The rise of independent film can be attributed in part to the lower entry barriers that come with the advent of digital cameras and linear editing. Somewhere in the meantime, video game revenues surpassed motion picture revenues. Traditional movie theaters, as such, have taken an enormous hit in terms of profitability.  How have cinemas remained viable in an increasingly fractured marketplace?

Increasing Ticket Prices

One of the most noticeable changes movie theaters have undergone through the bulk of these changes is the increase in ticket prices.  This trend is fairly observable as well as it is obvious.  But it obscures the makeup of the most widely-reported number in the industry:  Box office sales.  Since individual ticket prices have risen, that means the number of tickets purchased for a film released in 2011 may be lower than in 1991, but the overall revenue will be higher because of the increased marginal proceeds.  Movie theaters pay a percentage of sales back to studios, so both the studio’s and theater’s revenue shares increase proportionally.

Differentiation:  3D & IMAX

Within just the past few years, 3D films resurrected themselves from a 1980s-legacy niche to mainstream ubiquity.  This is just one example of how theaters have incrementally changed their product offering in exchange for a premium price.  The 3D ticket sales yield a higher return with capital investment in digital projection technology.  Similarly, IMAX screens and picture and sound technology have been implemented with premium pricing attached.  After a large initial investment in fixed costs involved with upgrading their old-school film projectors to modern digital projection capable of 3D and enhanced digital picture and sound, cinemas are able to provide these services without incurring any additional as-used expenditures, or variable costs.  In other words, the upgrade in technology is cause for a large, albeit tax-friendly outlay, but incrementally the ownership of this enhanced projection and sound in a theater costs relatively little in terms of incremental use, suggesting that the larger portion of 3D and IMAX showings drop straight to the bottom line.  

These differences in the film quality are ostensibly enough to the sophisticated movie goer that they’re willing to pay the few extra dollars per ticket for the enhanced experience, but these premium services are only a portion of how cinemas have kept up with the changing industry.

Concessions

It’s no secret that the bulk of the sustainability of cinemas is rooted at the concession stands.  Why are theaters able to charge such outlandish prices for popcorn, candy, and sodas?  The simple explanation is that once the ticket taker has you inside, there are no ins-and-outs.  The theater guest is a captive audience.  You experience a similar squeeze inside the airport terminal when you’re waiting for a flight.  There’s really only so many places you can go eat, and those places are intently aware of that fact.  In the theater as well as the airport terminal, you’re going to be there for a while.  Chances are you’re going to want to eat.  You probably should’ve packed a lunch or eaten before you went to check in for your flight, but par usual, you were rushing just to catch your flight.

The phenomenon which a premium price is commanded because of the lack of alternatives is known in economics asasset specificity.  In short, asset specificity is the notion that an asset (in this instance, your hard-earned American greenback) only has a limited number of options available, and the next best use of that asset (letting those dollars sit in your wallet) is infinitely less valuable towards solving the problem at hand.  You can pay five dollars for that box of Goobers or you can go hungry.    You can go to the same place and get a trough of popcorn with unlimited refills for only the same amount of the ticket you bought.  Don’t like it?  Good luck.    

In addition to the exorbitant prices of everyday theater fare, recently cinema theaters have increased their offerings to include alcohol sales and revived the notion of the dinner theater.  Some theaters have expanded from their traditional fifty-fifty stake in the “dinner & a movie” offering into the “dinner with a movie”, capturing an even larger share of your wallet with more extravagant menu items.  In accordance with this same broadening of the menu, sometimes a high-margin coffee shop like Starbucks or Coffee Bean & Tea Leaf can be found in the lobby.  Throw in the occasional movie character themed gift shop and the obligatory arcade, and that time you thought was going to ensure you a seat at the 9:00 show just turned into another opportunity for the theater to put some distance between you and your money.

Repeat Viewership

Maybe one of the biggest reasons for the seeming irrationality of the movie theater business model is that you’re probably not in the target market that gains so much of the theater proceeds.  Fanboys at the first midnight showing of the latest action hero popcorn blockbuster and teenage girls dying to see the newest installment of the Twilight series are the kind of customers that theater owners salivate over.  They see movies over and over and over again.  They learn what the characters lines are and those memes become a part of media-driven culture.  

Television appearances by stars on talk shows reinforce the publicity machine when they plug their latest film.  Increasingly the largest part of a studios expenditures are spent on marketing.  The better the opening weekend, the virtual inevitability that the popular press will broadcast the success, bolstering the chances of success the following week with more free publicity.  The fact that a few large conglomerations own the bulk of the entertainment options available is one reason major industry shifts are slow in coming.  It’s simply in the interest of the existing power structure to keep things more or less the same as they always were.  

The Experience

Whether or not the traditional movie theater will remain a sustainable business is largely dependent on what marketing professionals call experiential value.  There are a few factors that contribute to the movie going experience beyond mere dollars and sense.  The value that consumers attribute the intangible notion of watching a movie with a large audience is a large aspect of “going out” that a home theater experience, by definition, can not provide.  What is that value worth?  Interestingly enough, the individual experience is highly dependent on the dynamics of crowd behavior.  

Someone is going to yell something out at the screen, and it’s probably going to be funny.  Maybe some kid is going to get out a laser pointer and circle a buxom actress’ chest during one of the trailers.  The crowd reacts to scary scenes and laughs together in comedies.  Granted, there are good things about it and things you could probably do without.  But the path dependency of the cinematic experience, our long cultural history of shared experience watching a new release with relative strangers, suggests that we value our surroundings as much as the quality of the picture and sound.  No matter how clear high definition television sets achieve, no matter how great the volume mimics that of a cinema, the audience members (for better or worse) and the act of “going out” provide two reasons to see a movie, as cinephiles are wont to say, “The way it was meant to be seen". 

AE - 05.29.2011

The Ambidextrous Economist should be in pictures.  Send your questions and comments to  AmbidextrousEconomist@gmail.com.