Question from case study What can exhibitors do to reverse the downward trends in attendance?

Case study: The Movie Exhibition Industry 2013

IT IS APT that 2012's top-grossing film was The Avengers, because movie studios and exhibitors sought to avenge a dismal prior year at the box office. Domestic box office receipts climbed 6 percent from 2011 to a record-setting $10.8 billion in 2012. 1 Three films The Avengers, The Dark Knight Rises, and Skyfall grossed more than $1 billion each in global ticket sales (see Exhibit 1). Behind the scenes, the success, even the fundamental health of the exhibition industry, is far less clear, however. Consider these contradictions:

Domestic ticket revenues grew 6 percent in 2012, but that volume ranks just 13th since 1980. The 1.364 billion tickets sold is down 13 percent from the most recent high in 2002 of 1.575 billion (see Exhibit 2).

2012's record revenues resulted from ticket price increases, not more attendees. At $7.94, the average ticket price has risen 24 percent since 2005. But over the long term, prices keep pace with inflation, raising questions about the creation of differentiated value (see Exhibit 3).

The long-term per-capita trend is negative. In 2012, the average number of films seen per capita was 3.9. 2 In 1946, the peak of movie going in America, the industry sold four billion tickets, and the typical American went to 28 films per year at the theater.

Movies are more widely available than ever, creating new substitutes for where, when, and how to view movies.

Exhibitors are especially anxious for moviegoers to return to the theater because the industry has invested an estimated $1.6 billion to convert theaters from film to digital projection since 2005 (see Exhibit 4 ). The main promises of digital projection are decreased distribution costs, 3D capability, and the potential to show alternative content. Despite the sizable investment, financial benefits have yet to materialize for exhibitors. Attendance decreased in five of the eight years since conversion began.

So, which represents the current and future state of the movie exhibition industry: the bright lights of a red carpet Hollywood premier or a dimly lit marquee?

The Motion Picture Value Chain

The motion picture industry value chain consists of three stages: studio production, distribution, and exhibition (the theaters that show the films). All stages are undergoing consolidation and technological changes, but the basic three-phase structure has gone largely unchanged since the 1920s.

STUDIO PRODUCTION

Studios produce the lifeblood of the industry; they create motion picture content. Content drives attendance, and studios are highly concentrated. The top six studios in 2012 created 17 percent of the films for the year, but these films accounted for 76 percent of the box office gross (see Exhibit 5). The top 10 studios constitute over 90 percent of box office receipts. This concentration, coupled with highly differentiated content, gives the studios considerable negotiating and pricing power.

Studios are increasingly managed as profit centers in large corporations. Management is risk-averse because investments are large and a formula for success is elusive. Consider the fate of two comic book-inspired films in 2011. Warner Bros.' Green Lantern was considered a flop, grossing $219 million ($116 million domestic, $103 million internationally) and ending plans for a series. That same year, Paramount's Thor grossed $449 million ($181 million domestically, $268 million internationally) giving the green light to a sequel.

Studios focus on 14-24-year-olds, consistently the largest audience for movies. At just 15 percent of the U.S. population, this group purchases 21 percent of all tickets. More narrowly, 10 percent of the population are "frequent" moviegoers who attend more than one movie per month and are responsible for half of all ticket sales. 3 Studios target this audience with PG and PG-13 fare, including 19 of 2012's top 25 releases. However, domestic demographic trends are unfavorable. While the U.S. population will increase 42 percent by 2050, this core audience will increase just 35 percent (19 million) or 475 per existing screen (see Exhibit 6).

The risks for studios are significant as production costs are considerable (see Exhibit 1). Studios invested $1.6 billion for the 10 films that ranked among 2012's highest grossing ($165 million per film). Costs have increased faster than inflation. In 1980, the production budget for the highest grossing films averaged just $11 million. In the 1990s, films turned to special effects and costs reached $102 million (up 827 percent). Today, special effects alone can top $100 million for a major production. These investments are considerable, yet are no guarantee for success: Green Lantern, the flop, was made for $200 million, while the successful Thor cost $150 million.

Domestic exhibitors were once the sole distribution channel for films. This has changed dramatically. Films must increasingly cross cultural and language boundaries and appeal to the global market. Over 70 percent of U.S. studio revenues are now international (see Exhibit 7 ). Studios see this as the primary opportunity for growth. While domestic receipts increase on flat ticket sales, both ticket sales and dollar volume are rising rapidly internationally. From 2000 to 2012, domestic receipts grew at an average of just 3 percent, while international growth averaged 13 percent annually. The studios are also changing their perspective on ticket prices in large population markets. In India, for example, attendees paid an average of just $0.50. 4 However, Indian exhibitors sold 3.3 billion tickets in 2008. At current growth rates, the attendance volume increases each year in India alone equals the total current U.S. annual admissions.

This trend of content internationalization shows no signs of abating. While the drama of Argo and the humor of Ted cost less to produce, they are risky in international markets. Franchise films, with known characters, made in 3D and laden with special effects present the least content risk internationally. Yet these films carry their own risk due to large budgets. The special effects alone for a major film may exceed $100 million. The Avengers, The Dark Knight Rises, and Skyfall all rank in the top 10 for worldwide gross. Combined, they constitute an investment of $670 million in production costs.

As studios shift their focus to the international market, they are less dependent on domestic exhibitors. This increases the threat of disintermediation through alternative distribution channels. Studios have increased revenues through product licensing, DVD sales, and international expansion at the same time that exhibitors (movie theaters) have seen their business decline.

DISTRIBUTION

Distributors are the intermediaries between the studios and exhibitors. Distribution entails all steps following a film's artistic completion, including marketing, logistics, and administration. Distributors either negotiate a percentage of the gross from the studio for distribution services or purchase rights to films, and the box office profits from it. Distributors select and market films to exhibitors' booking agents. They handle collections, audits of attendees, and other administrative tasks. There are over 300 active distributors, but most distribution is handled by a few major firms, commonly a division of a studio. Disney Pixar, for example, produced Brave, while the film's distribution was handled by Disney's Buena Vista.

Until 2005, the distribution of all motion pictures in the U.S. entailed the physical shipment of reels of 35mm film, a process little changed from the 1940s. Each theater would receive a shipment of physical canisters containing a "release print" of a film. These prints cost $20,000-$30,000 in up-front costs and $1,000-$1,500 for each print. Print costs for a modern major picture opening on 3,500 screens cost $3.50-$5.25 million. This is borne by the studios and exhibitors, but paid for by movie attendees.

Beginning in 2006, distributors and studios encouraged exhibitors to transition to digital projection technology. The technology works by using high-powered LCD projectors to cast the movie onto a specialized screen. In lieu of film, the movies are delivered on reusable hard drives or via satellite or high-speed internet. The threat of piracy is a major concern for the industry, so all files are encrypted. The cost savings of digital distribution over film are considerable: The cost of each hard drive is $150, just 10 percent of the cost of physical film. Additionally, digital projection allows for consistently high-quality images because there is no physical wear to the film, and enables the exhibition of "alternative content"performances and events other than motion pictures that are obtained outside the studio system.

The transition to digital projection involves considerable capital investment. Each digital projection system can serve a single screen and costs $50,000 to $75,000, including the projector, computers and hardware, and a specialized screen. To encourage the transition, distributors offered rebates in the form of virtual print fees (VPSs) for each film received digitally. These fees, which comprise up to 17 percent of rental costs, will expire in 2013.

EXHIBITION

Exhibitors offer a location where audiences can view a motion picture. The basic business model of exhibitors (using movies as the draw and selling concessions to make a profit) has changed little since the time of touring motion picture shows that would set up in town halls and churches. As the popularity of motion pictures expanded, permanent local theaters were established. Studios soon recognized the potential profit in exhibition and thus vertically integrated, allowing control over audiences and capturing these downstream profits. This practice ended in 1948 with the Supreme Court's ruling against the studios in United States v. Paramount Pictures.

Theaters were divested by studios, leaving the two to negotiate film access and rental fees. Single-theater and single-screen firm exhibitors fared poorly as studios retained the upper hand in setting rental rates. Exhibitors sought to increase bargaining power and economies by consolidating, thus multiplying the bargaining power of individual theaters by the number of screens managed.

This reached its zenith in the 1980s with the mass rollout of the multiplex concept. Maximizing bargaining power based on multiple screens while minimizing labor and facility costs, exhibitors constructed large entertainment complexes, sometimes with two dozen or more screens. Most of the original, local, single-screen theaters that had survived were doomed because they were unable to compete on cost or viewing experience and unable to gain access to the capital needed to construct multiscreen locations. Today, the typical exhibitor location has 7-12 screens and is likely to be operated by Regal, AMC, Cinemark, or Carmike. These four operate 1,061 theaters in the U.S. (just 19 percent), but control 45 percent of the screens (see Exhibit 8). This market concentration provides exhibitors with negotiating power for access to films, prices for films, prices for concessions, and greater access to revenues from national advertisers. However, the real power continues to remain with the studios due to differentiated content, the ability to play rival exhibitors against each other, and the increasing potential for disintermediation.

The Business of Exhibition

Exhibitors have three main revenue sources: box office receipts, concessions, and advertising (see Exhibit 9). Managers have low discretion; their ability to influence revenues and expenses is limited. Operating margins average a slim 15 percent; net income may fluctuate wildly based on the tax benefits of prior losses. Overall, the business of exhibitors is best described as loss leadership on movies: the firms make money selling concessions and showing ads to patrons who are drawn by the movie.

BOX OFFICE REVENUES

Ticket sales constitute two-thirds of exhibition business revenues. The return, however, is quite small due to the power of the studios. For large exhibitors, film costs average 53 percent of box office receipts. For smaller circuits, average costs are higher. Rental fees are based on the size of the circuit and the time and seat commitment made to a film. The revenues retained by the theater increase with each week following an opening. On opening weekend, an exhibitor may pay the distributor 80-90 percent of the box office gross, retaining only 10-20 percent. In subsequent weeks, the exhibitor's portion increases. The record-setting revenues at the box office have been the result of increases in ticket pricesthe majority of which has flowed back to the studios.

The complexity of booking is increasing. The majority of revenues historically come from opening weekend. In industry terminology, the "multiple" (the percentage coming after opening weekend) has been declining steadily, falling 25 percent since 2002, 6 putting exhibitors at increasing risk. While exhibition used to be a question of which movie to show, it now also involves decisions as to how many theaters to allocate to analog versus digital and 2D versus 3D. All these factors plus the "make or break" nature of opening weekend complicate the exhibitor's operations.

CONCESSIONS

Moviegoers frequently lament the high prices for concessions. Concessions average nearly 30 percent of revenues. Direct costs of just 15 percent make concessions the largest and sometimes sole source of exhibitor profit. These profits are influenced by three factors: attendance, pricing, and material costs. The most important is attendance: more attendees equals more concession sales. Per patron sales are influenced by prices. The $4.50 and $8.00 price points for the large soda and popcorn are not accidental, but the result of market research and profit maximization calculation. Costs are influenced by purchase volume, with larger chains able to negotiate better prices on everything from popcorn and soda pop to cups and napkins.

ADVERTISING

The low margins derived from ticket sales cause exhibitors to focus on other sources of revenue. The highest margin, and therefore the most attractive, is advertising. Since 2002, advertising revenues, and the time devoted to them at the start of every feature, has increased dramatically, climbing from $186 to $644 million. 7 Exhibitors also generate revenue through pre-show and lobby advertising. Though this constitutes just 5 percent of exhibitor revenues, it is highly profitable (i.e., revenue with no direct monetary costs) and growing. Advertising revenues for exhibitors averaged $16,245 per screen. 8 Audiences, however, express dislike for advertising at the theater. Balancing the revenues from ads with audience tolerance is an ongoing struggle for exhibitors (see Exhibit 10).

The Major Exhibitor Circuits

Four "circuits" dominate the domestic exhibition market, serving different geographic markets in different ways. 9 Regal, which operates its namesake Regal Theaters, as well as United Artists and Edwards Theaters, is the largest with 6,614 screens in 527 domestic theaters. Regal focuses on mid-sized markets using multiplex and megaplexes that average 12 screens per location, with an average ticket price of $8.90. AMC, operating under the 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 multiplexes. It does so by concentrating on urban areas near large population centers such as those in California, Florida, and Texas. By focusing on 3D, IMAX, and other premium viewing experiences, AMC achieves the highest ticket prices, averaging $9.04. Cinemark is the third-largest player, with 3,878 screens in nearly 300 domestic locations under the Cinemark and Century brands. Cinemark serves smaller markets, operating as the sole theater in over 80 percent of its markets. Its average ticket price of $6.72 in 2012 was the lowest of the major chains. Carmike concentrates on small to midsized markets, targeting populations of less than 100,000 that have few alternative entertainment options. It does so with fewer screens at each location. With 237 theaters, Carmike has just 2,254 screens, an average of 9.5 per location. Carmike's ticket price averaged just $6.85 (see Exhibit 11).

While ticket prices vary considerably, differences in net profit margins are due mostly to differences in utilization and the costs of facilities, labor, and utilities. Despite considerable size differences, the actual cost of content for these circuits varies little among the major circuits. Regal's is the lowest at 52 percent of admission revenues, followed by AMC (53 percent), Carmike (54 percent), and Cinemark (56 percent). While the rental costs for these circuits are similar, it is lower than for smaller circuits.

The circuits' ability to efficiently utilize their facilities varies considerably. Cinemark's average of 41,787 attendees per screen is nearly double Carmike's 22,032 per screen. The differences in utilization combined with differences in the underlying costs of facilities, wages, and other expenses results in high variability in their costs on a per-ticket basis. At $5.18, Regal's cost per attendee is the highest, followed by Carmike ($4.20) and then Cinemark ($3.35).

Despite the trend toward internationalization by studios, exhibitors have until recently been exclusively domestic firms. Cinemark has had the largest international presence with 167 theaters (1,324 screens) in Mexico and seven Central and South American countries. In 2012, AMC was acquired by the Chinese conglomerate Dalian Wanda Group Corporation for a reported $2.6 billion. 10 Wanda, with interests in property, entertainment, and tourism, owns and operates 730 screens in China, is responsible for 15 percent of the Chinese box office, and has plans to expand to 2,000 screens. The deal will make AMC the largest global exhibition company.

Overall, while the major circuits focus on different geographic locations, there is little differentiation in the offerings of exhibitors within individual markets. Prices differ little, the same movies are shown at the same times, and the food and services choices are nearly identical. Competition between theaters within markets often comes down to distance from home, convenience of parking, and proximity to restaurants.

Challenges for Exhibitors

Exhibitors are faced with an increasing number of challenges in their operating environment, as outlined in the following sections.

BENEFITTING FROM DIGITAL INVESTMENTS

Exhibitors have made considerable investments in digital projection technology. By the start of 2012, two thirds of the 39,641 screens in the U.S. had been converted to digital, with the remainder expected to be converted by 2014. The total investment by exhibitors is $1.6 billion. The benefits of this conversion should manifest themselves in lower exhibitor costs and increased revenues. To date, these do not appear to have accrued to exhibitors.

On the cost side, digital distribution dramatically reduces distribution costs when compared to physical film. Digital distribution is expected to save $1 billion annually on print costs and distribution. Yet there is little evidence to date that these savings will accrue for the exhibitors. Film rental fees, which include distribution costs, have held steady despite the transition to digital. On the revenue side, exhibitors have seen significant additional per-ticket revenues from surcharges for enhanced viewing experiences, primarily 3D. 3D content requires the cooperation of studios and exhibitors. For studios, 3D adds 15-20 percent to the cost of production. For exhibitors, 3D requires conversion to digital projection and the added costs for 3D-capable equipment. Among domestic digital projection systems, about half are 3D capable. The planned 2009 release of Avatar was used to spur digital installations. The film grossed $750 million domestically, with an estimated 82 percent from 3D viewings. The film was a critical and box office success, introducing audiences to a new age of 3D movies and projection. Avatar 's success led to an increase, and perhaps excess, of 3D releases.

The portion of opening weekend receipts from 3D movies averaged 63 percent from 2009 to 2011 (see Exhibit 12). Today the 3D portion of major releases shows a worrisome trend. In 2011, only 45 percent of Kung Fu Panda 2 's box office gross came from 3D, and Disney's Pirates of the Caribbean earned just 47 percent of its take from 3D. 11 In 2012, the average across all 3D films released declined to 45 percent. 3D may be an aspect of the theater experience that audiences are only occasionally willing to pay for. Some industry observers caution that the future opportunity to capitalize on 3D-driven revenues may be limited. "Certain movies are doing well in 3-D and others failing terribly," Bob Greenfield said. "People are getting a lot choosier. I would be surprised if in 2013 and 2014 we didn't see a more reduced slate that focuses on the films that deserve it."

Declining 3D attendance is a serious concern for exhibitors. With an average investment of $75,000, the payback period for 3D may be more than three years. The extent to which the conversion to digital will benefit exhibitors through cost reductions and revenue enhancement will be determined in the coming years as rental costs and 3D viewership rates are better established.

COUNTERING THE DECLINING ALLURE OF THE THEATER

Traditionally, the draw of the theater may have been far more important than what film was showing. Moviegoers describe attending the theater as an experience, with the appeal based on: 12

The giant theater screen

The opportunity to be out of the house

Not having to wait to see a particular movie on home video

The experience of watching the movies with a theatrical sound system

The theater as a location option for a date

The ability of theaters to provide these above what audiences can achieve at home appears to be diminishing. Of the reasons why people go to the movies, only the place aspects, the theater as a place to be out of house and as a place for dating, seem immune from substitution. Few teenagers want movie and popcorn with their date at home with mom and dad.

The overall "experience" currently offered by theaters falls short for many. Marketing research firm Mintel reports that the reasons for not attending the theater more frequently are largely the result of the declining experience. Specific factors include the overall cost, at-home viewing options, interruptions such as cell phones in the theater, rude patrons, the overall hassle, and ads prior to the show. 13 A recent Wall Street Journal article reported on interruptions ranging from the intrusion of soundtracks in adjacent theaters to cell phones. "The interruptions capped a night of movie going already marred by out-of-order ticketing kiosks and a parade of preshow ads so long that, upon seeing the Coca-Cola polar bears on screen, one customer grumbled: 'This is obscene.'" 14 Recounting bad experiences is a lively topic for bloggers. A typical comment: "I say it has gotten worse. I hate paying $9.00 for a ticket and the movie is 90-100 minutes long, people talking on the cell phone, the people who work at the theaters look like they are bored, and when you ask them a question, the answer is very rude." 15

The time allocated to pre-show ads can be eye opening, even for industry insiders. Toby Emmerich, New Line Cinema's head of production, faced a not-so-common choice: attending opening night in a theater or in a screening room at actor Jim Carrey's house. Said Emmerich in an LA Times article, "I love seeing a movie with a big crowd, but I had no idea how many obnoxious ads I'd have to endureit really drove me crazy. After sitting through about 15 minutes of ads, I turned to my wife and said, 'Maybe we should've gone to Jim Carrey's house after all.'" 16

THE HOME-VIEWING SUBSTITUTION

For many, home viewing is growing as a viable substitute to theater attendance due to rapid improvements and cost reductions in home-viewing technology and the widespread availability of timely and inexpensive content. The unique value proposition offered by movie theaters' large screens, the long wait for DVD release, and advantages of theatrical sound systems are also fading.

HOME-VIEWING TECHNOLOGY

The average home television set is increasingly a large, high-definition set coupled with an inexpensive yet impressive audio system. Compared to home equipment options of the past, at-home technology increasingly represents a significant substitute for movie going. Prior to 2009, television transmissions were formatted as 480 interlaced vertical lines (480i) of resolution, the standard since the 1950s. FCC-ordered changes resulted in all broadcasters converting digital broadcasts by February 2009, setting the stage for high-definition (HD) digital broadcasts providing up to 1,080 vertical lines of resolution (1080p). 17 This transition started a consumer movement to upgrade televisions. The transition also reduced the difference between home technology and the giant theater screen and sound system offered by theaters.

The average size of TVs has increased dramatically: from 23 inches in 1997 to 36.8 inches in 2012. As LCD technology became the standard for both computer and television screens, manufacturing costs declined. Wholesale prices for televisions fell 65 percent from the late 1990s to 2007. 18 Between 2011 and 2012 alone the average retail price of a 32-inch TV declined from $546 to $435. 19 Consumers, however, spend more on every television, consistently electing to purchase larger and more advanced sets. In 2012, the average TV sold for $1,200. 20 Features such as 3D, Internet connectivity, and applications for Netflix, Hulu, and other services are becoming common and add little to retail prices. Sharp, a leading TV manufacturer, predicts that by 2015 the average screen will be 60 inches. 21 Home-viewing technology may be reaching its apex. While, technologically, image size and quality can continue to increase, they are limited by practical realities. The ideal distance for viewing a 42" TV is 5'3". A 70" TV should be viewed from 8'9" away. The adoption and benefit of 80" 1 sets will require a viewing distance that exceeds the size of most living rooms they would be installed in.

Large-screen televisions, low-cost high-definition DVD players, and audio and speaker components are commonly packaged as low-cost home theaters. The average Blu-ray DVD player now costs under $125, and 3D players under $150. Bundled home theater systems offer a movie experience that rivals many theaters, all for under $1,500. Mike Gabriel, Sharp's head of marketing and communications, stated, "People can now expect a home cinema experience from their TV. Technology that was once associated with the rich and famous is now accessible to homes across the country."

CONTENT AVAILABILITY AND TIMING

The best hardware offers little value without content. Channels for renting or purchasing movies are increasing. "We're seeing a cultural shift occurring where people are consuming their entertainment from Netflix, the iPad, [and] Hulu," said Paul Dergarabedian, president of Hollywood.com 's box-office division. "There's more competition for the eyeballs of consumers."

Since the 1980s, studios have relied on VHS, and then DVD, sales to fuel profits. DVD sales peaked at $13.7 billion in 2006. 24 This revenue stream fueled studio profits, but is in decline. In 2011, studio revenues from physical and digital sales totaled $9.5 billion. 25 Physical DVDs are widely available, but are now exceeded by digital purchases (e.g., Apple's iTunes and Amazon). To spur sales, studios have been consistently reducing the time period between the theatrical and the DVD release. This "release window" declined from 166 days in 2000 to 120 days in 2012. Exhibitors express concern that these declines cannibalize theater sales. Studios, meanwhile, continue to seek ways to stem declining DVD sales and increase their return from each film. Decreased sales also result in lower prices for content. DVDs average $25, with upgrades to Blu-ray HD adding $5, and 3D and a digital copy for tablet or PC viewing adding another $3 each. Each sale nets the studio $12 to $15.

Both studios and exhibitors are facing pressure from streaming and rental services. Once dominated by physical stores, movie rentals expanded into physical DVD channels with subscription (e.g., Netflix and Blockbuster) and one-up (e.g., Redbox and Blockbuster) options, as well as subscription streaming (e.g., Netflix and Hulu). These offer very attractive prices for consumers, but have been identified by studios as a contributing factor for declining DVD sales. Studios net about $1.25 per DVD sold to a rental company. 27 This allows Netflix to offer a physical DVD subscription service of two DVDs out at any time for under $15 per month. Redbox's kiosk-based rentals are attractive to occasional viewers, costing as little at $1.25 per night.

Content streaming services grew from $992 million in 2011 to $2 billion in 2012. 28 Streaming is among the most cost-effective for viewers and providers. Estimates put Netflix's average streaming cost at $0.51 per viewing. This is offset by fewer content options. Apple's iTunes provides perhaps the greatest selection, but with rentals at $4 to $6 per viewing, it emphasizes selection and HD quality over Netflix's low cost. Streaming sufficiently cannibalized DVD sales to the point that studios imposed a 28-day delay from DVD sales to the availability of streaming. Exhibitors expressed strong encouragement when several studios expressed a desire for a 56-day delay to increase DVD sales.

Studios are seeking to increase their share of the rental market, putting them increasingly in direct competition with exhibitors. For the studios, each current video on demand (VOD) showing contributes $3.50 in revenue, far less revenue than DVD sales. 29 Studios continue to develop premium VOD as an alternative. The main feature of premium VOD (P-VOD) is a decreased release window, including simultaneous releases of films in theaters and through P-VOD. Exhibitors threatened a boycott due to Universal's plan for a P-VOD release of Tower Heist just three weeks after it opened in theaters. The plan was scrapped due to the threats. While exhibitors won the battle, the potential revenues from the planned $59.99 premium VOD will remain attractive to the studios.

Premium cable networks (e.g., HBO, Starz, and others) offer a programmed lineup of movies, albeit at scheduled times and with monthly subscriptions, but at low per-viewing rates. All major cable and satellite providers offer VOD services and carry multiple channels focusing on films. Overall, the availability of content and the visual and audio experience available in the home is rapidly converging with the offerings available at a movie theater. As a blogger on the movie fan site Big Picture posted:

I used to go to the movies all the time - Even my blog is called the Big Picture. Then I started going less - and then less still and now - hardly at all. My screen at home is better, the sound system is better, the picture is in focus, the floors aren't sticky and the movies start on time. My seat is clean. And there's no idiot chattering away two rows behind me, and (this is my favorite) THERE'S NO CELL PHONES RINGING. EVER.

Recent Exhibitor Initiatives

Exhibitors are well aware of the increasing number of ways in which to view motion pictures. They have a long tradition of adopting innovations that increase attendance or reduce costs. Exhibitors were among the first commercial adopters of air conditioning, which perhaps drew in as many customers as a refuge from summer heat as for entertainment. Advanced projection systems, screens, and sound systems have been continuously adopted to improve the viewing experience. Other innovations have increased the quality of the experience while lowering costs. Stadium style seating, now ubiquitous, was originally viewed as an experience differentiator, but equally beneficial was a reduction in the square footage needed per seat. This reduced the size and cost of the facilities. Exhibitors continue to pursue a number of strategic initiatives aimed at improving attendance, increasing the viewer's willingness to pay, and lowering costs.

TECHNOLOGICAL INNOVATIONS

The conversion to digital projection and the rollout of 3D are not the only projection innovations being pursued. Some directors are opting to increase image quality by doubling the number of frames per second (fps) of film from the long-established standard of 24 to 48. Peter Jackson's 2012 The Hobbit was shown in the 48 fps format at a limited number of screens with the required projection technology. The increased frame rate results in an especially crisp image with no blurring that, while jarring to some, is said to include a sense of being part of the live action.

Several circuits offer extra-large-scale screens as a feature. 31 Traditionally located only in specially constructed dome-shaped theaters in science museums, the original IMAX format utilized film that was 10 times the size of that used in standard 35mm projectors. IMAX now operates more than 600 screens. These circuit-based IMAX digital screens are far smaller than the original IMAX screens, but can be much larger than the typical theater screen. Located within a Regal or AMC theater complex, the screens are often booked and operated by IMAX. Action films, usually in 3D, are a staple. To capture more of this differentiated revenue, several circuits have begun creating their own super-size screens.

Sound systems are also being upgraded. In the 1980s, theaters impressed viewers with 7.1 sound systemstwo rear channels (left and right), two channels mid-screen, two near the screen, one under the screen, and a subwoofer channel for bass. Such systems have long been available for homes. To keep theater sound as a differentiator, Dolby Laboratories has created Atmos, 32 a full surround system with up to 64 individual channels for theater speakers, including multiple ceiling speakers that can truly immerse the audience in sound. Given the number of speakers involved, this technology may only be viable in a very few homes. For those seeking still more, there is motion seat technology. 33 The heavy footsteps of a dinosaur, for example, are simultaneously seen on the screen, heard through the sound system, and felt through a motion seat that rumbles as if being shaken by the footsteps. Both IMAX and motion seats are offered as upgrades, commonly at premiums of $3 to $7 per ticket.

ALTERNATIVE CONTENT

Exhibitors' transition to digital projection is an enabling technology for alternative content, which consists of virtually any content that is not a motion picture. Revenues for this totaled $112 million in 2010. 34 Some estimate it will reach $1 billion annually, or 10 percent of current box office.

Events have included concerts, live concerts and theater, sporting events, television series premiers and finales, even virtual art gallery tours such as 2012's Leonardo Live35 that was broadcast one night only in 500 U.S. movie theaters. 36 The Metropolitan Opera is the most successful alternative content. Now in its seventh season, the series features 12 live events on Saturday afternoons, broadcast to nearly 700 domestic theaters. A distribution network for alternative content has emerged with companies like National Cinemedia, which provide a single contact point for a variety of music, sports, television, and other alternative events. Having a large-scale intermediary for a distributor is essential for exhibitors since the cost of pursuing and licensing content is cost-prohibitive for all but the largest exhibitor circuits.

Most exhibitors seek to incorporate alternative content in ways that attract new attendees during off-peak times, particularly Monday thru Thursday when only 5 percent of theater seats are occupied. 37 Bud Mayo, CEO of Digiplex Digital Cinema Destinations, describes the approach: "What happens with those [alternative content] performances is that single event will out gross certainly the lowest-grossing movie playing [in] that theater that day. The relationship has averaged more than 10 times the lowest-grossing movie for the entire day." 38 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 average ticket price of $12.50 and grossed $2,425. In comparison, screens showing films that night grossed just $56 to $73. The alternative content also brought in nearly 200 additional potential customers for concessions.

DYNAMIC PRICING

Movie theaters are among the minority of entertainment outlets that have not incorporated differentials based on content, schedule, and seating options. Most events have multiple pricing levels based on seating, night versus day, and weekday versus weekend. Movie theaters, partly due to existing exhibition contracts, commonly have limited flexibility. Matinee and youth and senior discounts are the primary pricing tiers. Ticketmaster, a leader in event ticket sales, is developing a "dynamic pricing" system that incorporates demand into pricing models. 40 This could mean radical changes, with lower ticket prices for off-time and poorly attended movies and increased prices for prime seats at peak times on opening weekend. Thus far, no studio or exhibitor will acknowledge investigating the technology. 41

CONCESSION INITIATIVES

Expanding beyond the standard concession stand offers exhibitors opportunities to capture new revenue streams. Three main formats for concessions have emerged.

Expanded In-Lobby. Many theaters have expanded the concession counter beyond candy, popcorn, and soda. This expanded in-lobby dining causes many theater lobbies to resemble mall food courts. In- and off-lobby restaurants operated or licensed by the exhibitor allow for pre-theater dining. Taking a page from restaurants where a primary profit center is often the bar, some theaters now configure the lobby around a bar, with expanded and upscale fare, beer, and alcohol service.

In-Theater Dining. Many theaters have adopted an in-theater dining format where orders are placed from the seat in the theater by a wait staff. Chunky's Cinema Pub, with three New England locations, locates theaters in lower-cost underutilized former retail locations. The format combines burger, salad, and sandwich options with beverages, including beer. The format is a flat theater with banquet-style tables. The seating is unique: Old car seats on castors that allow for easy cleaning. Alamo Drafthouse Cinemas takes a similar approach, using a stadium seating configuration. A single bar-style table in front of each row of seats serves as a table for customers' orders. In comparison to traditional theaters, these formats see significant increases in food and beverage sales.

Upscale Within-Theater Dining. Several circuits are targeting the high end of the theater market, focusing on the experience of the theater with luxurious settings and upscale food. In addition to their standard theaters, AMC has developed Dine-In Theaters with two theater configurations. Their Fork & Screen theaters are much like the Alamo Drafthouse Cinema, with enhanced stadium theater seats and an in-theater wait service featuring an expanded menu. Their Cinema Suite theaters make the experience more intimate. Customers, age 21 and older, purchase tickets for specific seats in smaller theaters with reclining lounge chairs that include footrests and an in-theater wait service.

Theater chain iPic offers perhaps the most luxurious theater experience available outside of a private screening room, and includes reclining leather chairs, pillows, and blankets. Lobbies resemble stylish high-end hotels and feature a cocktail lounge and full restaurants. Complete with a membership program, the theaters operate more like social clubs than traditional theaters. Tickets, which range from $16 to $27 per seat, are purchased not from a ticket booth but from a concierge.

ADVERTISING INITIATIVES

Exhibitors are keen to expand advertising revenues, but must do so in ways that do not diminish the theater experience. Revenues are generated from advertisements both on- and off-screen. Off-screen advertising such as promotional videos, lobby events, and sponsored concession promotions bring in 9 percent of revenues. The majority, 91 percent, comes from on-screen ads for companies, upcoming releases, and products that play before the feature presentation. Both exhibitors and advertisers seek ways to make on-screen ads more palatable to audiences. Many ads are produced in 3D with a production quality rivaling a studio release. Theaters are also incorporating innovative technologies such as crowd gaming into ads where the movement or sound of the audience controls on-screen actions. In October of 2008, audiences in the UK attending Disney's Ratatouille "drove" an on-screen Volvo XC70 through an obstacle-laden course, waving their arms while scoring points for avoiding obstacles. Results were ranked in real-time to audiences in other theaters. 42 The equipment required? A wireless video camera placed above the screen, a web-enabled laptop containing the game linked to the developer's website, and specialized motion-sensing technology. These were linked to the theater's digital projector.

More interactive approaches are on their way: fans at a formula one race in Singapore played the video game Angry Birds, controlling in-game slingshots used to fling birds at the rival pigs based on voice volume. The louder the crowd, the further the birds were launched. 43 Making ads enjoyable, rather than loathed, may include an opportunity to increase this small but high-margin component of exhibitor revenues.

Bright Lights and Red Carpet, or Dimly Lit Marquee?

Are these initiatives enough to return people to local movie houses? Is the future of the movie exhibition industry a return to red-carpet glamour? Or will the lights on the marquee dim?