Business Policy & Strategy

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MGT4394 Business Policy & Strategy Days 2-3 Mini-Case A Horror Show at the Cinemaplex? Steve Gove, Virginia Tech Brett Matherne, Loyola University of New Orleans If the motion picture industry’s performance in 2007 were a feature presentation, the marquee would read “Massive Box Office: Smashing Records the Sequel!” At $9.63 billion, box office revenue set another record in 2007, a full 5 percent above the record set in 2006’s.1 An astonishing 1.4 billion tickets were sold in 2007. But beyond the headlines, the industry is a study in contradictions: the number of theaters is declining, but the number of screens is at an all time high (Exhibit 5) revenues are up, but attendance is largely flat – that 1.4 billion tickets is little improved from 1997 when 1.35 billion tickets were sold and a fraction of the 4 billion sold in 1946. Then the average person attended 28 films a year, today it is 6.2 (Exhibits 1 & 2) the U.S. population is increasing, but the size of the market in the core demographic group is growing more slowly (Exhibit 3) Americans spend more time than ever on entertainment – 3,500 hours annually – but only 12 are spent at the movies.3 The average person spends as much time watching TV every 3 days. Movies remain as popular as ever, but opportunities for viewing outside the theater have greatly increased. While motion picture studios increased revenues through product licensing, DVD sales, and international expansion, the exhibitors – movie theaters – have seen their business decline. Movies are more available than ever, but fewer are venturing to the theater to see them. Many theaters have ceased operation, driven from the market by consolidation and as patrons stayed away. Will the marquee at the local theater exhibitor soon change to: “A Horror Show at the Cinemaplex?” How has this come to be? What can exhibitors do to respond? The Motion Picture Industry 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 of the value chain are undergoing consolidation. Studio Production The studios produce the lifeblood of the industry, they create content. Films from the top ten studios produce over 90 percent of domestic box office receipts (Exhibit 4). Studios are increasingly part of larger corporations, managed as any other profit center. Management is a challenge as investments are large and a success formula elusive. Profitability swings wildly. The cost of bringing a typical feature to market exceeds $100 million, up 25 percent in 5 years.4 Typically a third of costs are marketing expenses. Studios know their core audience: 12-24 year-olds. This group purchases nearly 40 percent of theater tickets. Half are “frequent moviegoers” attending at least one movie per month. Profits are driven by the studios ability to satisfy this fickly audience. In 2008, films based on two successful comic book characters meet with widely different fates.5 Paramount’s successful Iron Man was produced for $140 and grossed $318 million at the domestic box office. Warner Bros. Speed Racer, produced for $20 million less and released the following weekend was flop, grossing just $44 million. Demographic trends are unfavorable. The U.S. population will increase 17 percent in 2025, an increase of 54 million people. But the number of 12-24 year olds is expected to increase only 9 percent, just 4 million more potential viewers. Based on current theaters and screens, this is an increase of under 700 additional viewers per theater, roughly 100 per screen.

A Horror Show at the Cinemaplex? / 2 Distribution Distributors are the broker intermediaries between the studios and exhibitors. Distribution entails all steps following a film’s artistic completion including marketing, logistics, and administration. Distributors select and market films to exhibitors, and seek to maximize potential attendees. Distributors coordinate the...
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