Horror Show at the Cineplex: Concepts and Cases Essay (Article)

Abstract

The following paper analyzes the case study Horror Show at the Cineplex, a detailed analysis of the challenges facing the large screen movie theater industry. The analysis employs Porter’s Five Forces of Competition to delineate the specific changes in the entertainment industry that have adversely affected the revenue generating capacity of the large screen movie theater industry in recent years, and offers suggestions as to how the large screen movie theater industry might recover some income and revitalize itself to attract more consumers and more revenue.

Perform a comprehensive analysis of the five competitive forces. Discuss what level of competition can be anticipated amongst industry rivals

This case study employs Porter’s Five Forces of Competition to explain the specific transformative elements that have taken place in the entertainment industry, particularly in the area of technology; these elements have significantly affected the revenue generating capacity of the large screen movie theater industry in recent years

The threat of substitutes offers the most significant competitive force to the movie theater industry. Rapid and sustained advances in home viewing technology, coupled with a drastic reduction in the price of home theater systems, directly threaten the viability and appeal of the theater experience. Gove and Matherne outline that one major attraction of the movie theater experience for audiences remains “the giant theater screen,” however, television size and screen resolution are both on the rise, and high definition technology has become the industry standard (2007).

“Retail price wars during the 2008 Christmas season led to HD Blu-Ray players dropping below $200. These home theater systems offer a movie experience that rivals many theaters, all for $1000 to $2000” (Gove & Matherne, 2007). The combination of low prices and superior technology directly threatens the appeal of the large screen movie theater industry, as it offers consumers the same experience without the need to leave their homes.

Buyer power and supplier power typically exact tremendous competitive force on the movie theater industry. Entertainment consumers enjoy a considerable backward integration threat as the home theater system bests the movie theater experience in many ways. Buyers who choose a home theater system over the movie theater experience control their exposure to advertising, they watch from the comfort and cleanliness of their own homes, and they pay $1.99 for popcorn, as opposed to $8.75.

Similarly, supplier power poses a major competitive force on the movie theater industry through the studios’ continued attenuation of the time lag between theatrical and DVD release, which has “declined 40 percent since 2000” (Gove & Matherne, 2007). Studios have multiple avenues through which to sell their products, and the power to have a significant impact on movie theater revenue as they “are experimenting with simultaneous releases to theaters, pay per view, and DVD” (Gove & Matherne, 2007).

Barriers to entry affects the movie theater industry most notably through the FCC regulatory body’s “requirement that all broadcasters convert to digital broadcasts,” a legislation that galvanized the innovation in the digital home theater system industry (Gove & Matherne, 2007). This innovation now directly threatens the movie theater industry’s existence (Gove & Matherne, 2007).

The movie theater business represents a disciplined industry. Regal, AMC, Cinemark, and Carmike, the dominant four players, “control 42 percent of screens,” and offer “little differentiation…prices within markets differ little, the same movies are shown at the same times, and the food and services are nearly identical” (Gove & Matherne, 2007). Competition between rival companies therefore remains low, and “often comes down to distance from home, convenience of parking, and proximity to restaurants” (Gove & Matherne, 2007). Whatever innovations one chain may adopt are immediately co-opted by the rest (Gove & Matherne, 2007).

Describe the advantages and disadvantages of each of the top four competitors’ situations and strategic approaches

Essentially the top four exhibitors’ strategic approaches “serve different geographic markets in…different ways,” and tailor their services to specific regional markets with specific demographic characteristics (Gove & Matherne, 2007). Regal, whose theater brands include United Artists and Edwards, “focuses on mid-size markets using multiplexes and megaplexes” (Gove & Matherne, 2007). The advantage for Regal here lies in ready access to audiences, especially family audiences and young people, the core theater going demographic. Regal’s disadvantage is the cost per screen, the highest amongst the top four competitors, at $430,000 (Gove & Matherne, 2007).

AMC “concentrates on urban areas with megaplexes and on large population centers, such as those in California, Florida, and Texas” (Gove & Matherne, 2007). Similar to Regal, AMC enjoys prime access to desirable audiences, but although Gove and Matherne do not provide financial data for AMC, the companies “costs are thought to be near or above those of Regal” (2007). Clearly, AMC is at a clear disadvantage when it comes to the cost of maintaining its screens.

Cinemark’s approach scales down to smaller markets and operates “as the sole theater chain in over 80 percent of its markets” (Gove & Matherne, 2007). Herein lies its main competitive advantage – minimal competition. The disadvantage remains less revenue, since the “average ticket price…of $5.11 was the lowest of the majors,” and thus less access to the capital necessary to expand or innovate (Gove & Matherne, 2007).

Carmike targets small population centers “of less than a 100,000 that have few other entertainment options,” thus its advantage is a virtual entertainment monopoly. Carmike also earns the most money from concession sales (Gove & Matherne, 2007). The disadvantage to Carmike, similar to Cinemark, is reduced revenue and less ability to compete in larger markets.

Describe the financial considerations that affect the profitability of major movie theater businesses

Profitability in the major movie theater business derives from box office receipts, concessions sales, and advertising (Gove & Matherne, 2007). While ticket sales contribute the lion share of profit at nearly two thirds of total exhibition business revenues, exhibitor return on this profit remains limited, thanks to a “power imbalance that results in contracts that return the vast majority of box office receipts to the studios” (Gove & Matherne, 2007). Exhibitors generate profit from concession sales and advertising: concession sales make up 25 to 30 percent of total revenue, while advertising nets 5 percent, although Gove and Matherne note that advertising is “highly profitable” (2007).

Both concessions sales and advertising depend on attendance. Direct costs and pricing also influence concession sales, and larger chains such as Regal and AMC can negotiate lower material costs on soft drinks and popcorn via their high purchase volume (Gove & Matherne, 2007). The exaggerated costs of concession sales tend to anger consumers, and detract from the theater going experience, not to mention the fact that “there are significant caps on the volume of concession sales per person and selling prices seem to have reached their maximum” (Gove & Matherne, 2007). Gove and Matherne point to an anticipated 10 percent growth in advertising revenue amongst exhibitors in the next 10 years, however, audiences detest advertising (2007).

Given that exhibitor profit ties directly to attendance, audience satisfaction should be exhibitor’s number one priority; if audiences walk so do exhibitor’s profits. Exorbitant concession costs and 15 to 20 minute advertising blocks at the start of every film negatively affects the theater going experience, and definitely has the power to turn audience members against the big screen for good.

Describe what strategic options are feasible given the situation facing industry participants

Gove and Matherne offer very little by way of strategic options available to movie theater exhibitors. The first logical strategic option for exhibitor’s future success rests on renegotiating a fair cut of box office receipts with the studios; however, the studios hold the power position and exhibitors lack leverage. If exhibitors attempt to derive more profit from box office revenue, studios can choose to cut the big screens out of the chain altogether, and focus on DVD releases, or perhaps even reattempt full vertical integration through acquiring the exhibitor’s screens themselves (Gove & Matherne, 2007).

Less aggressive moves that the exhibitors could make now include reducing the number of screens that they currently operate. Gove and Matherne cite industry analyst’s criticisms that the exhibitors “overbuilt and too many theaters and screens [now] exist to make the business profitable” (2007).

Exhibitors can also cut their costs significantly by converting their screens to digital, according to Gove and Matherne, although switching costs are an issue (2007). Converting an existing eight screen theater to digital involves an initial outlay of over a million dollars, however, the “costs for digital ‘release prints’ are far lower than traditional film” (Gove & Matherne, 2007).

One of the main strategic options not alluded to in the case study lies in the area of innovation. Instead of allowing the home viewing technology to dictate the future of their profits, exhibitors can develop strategic partnerships with cutting edge audio and visual technologies. Given that the core market for movie theaters is the technophile under 30 demographic, movie theaters provide a guaranteed and enthusiastic launching pad and test market for these technologies.

A recent strategic move by AMC Theatres that appears to be successfully adding more coffers to the company’s revenue is the Dine-In Theater concept (Wireless News 2011). According to Wireless News (2011), AMC announced that on May 16 the Dine-In Theater launches at the Orlando location – the concept will combine fine cuisine with an innovative and theatrical display and unique entertainment experience (Wireless News 2011).

Movie watchers “will be able to watch the latest movies while enjoying their favorite food and beverages at AMC Downtown Disney 24 located in Downtown Disney at the Walt Disney World Resort in Orlando, Florida” (Wireless News 2011). AMC Dine-In Theaters represents the only entertainment and dining experience of its kind in the Orlando area, and combines restaurant cuisine and cocktails with AMC’s noted immersive movie theatre experience and hit movies” (Wireless News 2011).

AMC has also invested in a major upgrade of its technology at work in the Orlando Dine-In Theater location, a move designed to support the distinctiveness of the experience for AMC patrons. According to Wireless News (2011), AMC Downtown Disney 24 now “offers 18 traditional auditoriums featuring stadium seating, the Marketplace concession area and an ETX auditorium. ETX includes a 20-percent larger screen, 3D technology, digital projection and an upgraded sound system. Specifically, the digital projection system produces images at a higher resolution than HD and there are nearly twice as many audio channels compared to typical auditoriums” (Wireless News 2011).

Has it worked? According to AMC’s CEO and president Gerry Lopez, the combination of fine dining and high end cutting edge technology is a hit with consumers and provides an entertainment experience that is unique and has wide appeal. In Lopez’s (2011) words, “since the launch of this concept, we’ve received tremendous feedback from our guests about the enhanced experience and variety of food and beverage options. More than 90 percent of our surveyed guests who attended a Dine-In location said it met or exceeded their expectations” (Wireless News 2011).

Describe what recommendations you would make to improve their likelihood of future success

The single most important recommendation for exhibitors must be to put audience needs first. Overpriced popcorn and advertising inundation sours the experience of the big screen now, and audiences turn away in droves. Audience loss equals death of the industry. Exhibitors can offer commercial free viewings and charge more per ticket. More discreet advertising represents another recommendation. Exhibitors can place more advertising billboards within the theater and less on the screen, and include advertising logos on seats, ticket stubs, concession packaging, carpets, and parking lots.

Exhibitors might consider private screenings for their core audiences, such as high school students, at reduced rates and screen the films more often during afternoons and weekends.

Exhibitors would benefit if they made their screens more conducive to dating purposes. Typically, daters visit the movie first then go to a bar or restaurant afterward. Exhibitors can set up a licensed area or a smaller, more intimate screening space where daters can watch the film and have an alcoholic beverage. Exhibitors also have the option to set up restaurant and bar franchises in close proximity to the theater, or even within it. These restaurant and bar franchises would need to be of a classier ilk than the standard fast food chains that currently exist, and exhibitors would need to think in terms of how to impress a date in order for this idea to work.

Exhibitors also have the opportunity to generate profit from their screens using content independent of that derived from the studios. Renting the screens to local independent film and video artists and professional training academies for their screenings would net a modest yet consistent source of income.

A recent example of this kind of innovation occurred with Canadian-owned company Cineplex Entertainment (Internet Wire 2011) Cineplex Entertainment (TSX: CGX) developed a partnership with Twentieth Century Fox to make popular big budget movies available in the digital download formats “Download To Own (DTO) and Video on Demand (VoD) from the Cineplex Store on Cineplex.com” (Internet Wire 2011). Top quality titles from Twentieth Century Fox become available for download on Cineplex.com on their release dates – the same date they become available in DVD and Blu-ray formats (Internet Wire 2011).

Twentieth Century Fox audience favorites such as 127 Hours, Black Swan, The Chronicles of Narnia: The Voyage of the Dawn Treader, and the X-Men franchise are listed among many other DTO and VoD titles accessible at the online Cineplex Store. According to Internet Wire (2011), both “DTO and VoD purchases made from the Cineplex Store can be stored either on a customer’s computer hard drive or in their Cineplex digital locker. The locker enables purchasers to store their movies safely and securely without depleting space on their computer hard drive while still allowing future downloads of DTO titles” (Internet Wire 2011).

Reference List

Gove, S. & Matherne, B.P. (2007). A horror show at the Cineplex? In M.A Hitt, R.D. Ireland & R. E. Hoskisson (Eds.), Strategic management: Competitiveness and globalization (Concepts and cases) (9th ed.) (pp. 217-223). Mason, OH: South Western Cengage Learning.

Internet Wire. (2011). The Cineplex store adds Twentieth Century Fox Movies to its digital download service available at Cineplex.com. Internet Wire. Web.

Wireless News. (2011). AMC offers Dine-In theaters at AMC Downtown Disney 24. Wireless News. Web.