The Movie Exhibition Industry Case Analysis Essay Sample

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I. Case Synopsis
Motion pictures are a key driver of the market for entertainment products, one of the largest export markets in US. Motion picture industry consists of three stages: studio production, distribution, and exhibition. The studios produce the lifeblood of the industry, the films that are its content. The biggest players at this level are the majors, big studios which integrate production and distribution, as do the slightly smaller mini-majors. The next stage is 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 coordinate the manufacture and distribution of the film to exhibitors. Finally, exhibitors are movie theaters owners, controlling anywhere from a single-screen theater in a local community to a nationwide chain of multiplexes. Exhibitors are not vertically integrated with distributors and fully independent to pursue their own profit-maximizing strategies.

There are three primary sources of revenue for exhibitors: concessions, advertising, and box office receipts. Exhibitors seek to maximize their profit from selling movie tickets and concessions. Overall, the exhibitor has limited control over both revenues and profits. Attendance allows for profitable sales of concessions and advertisements, but there are significant caps on the volume of concession sales per person, and selling prices seem to have reached a maximum. Advertising remains an attractive avenue for revenues and profits, but audiences loathe it. In the late 90s, the industry began converting to digital distribution, a format that is now becoming economically viable. However, the cost for a digital release print is far lower than traditional film; but these cost savings most directly benefit the studio while, in the meantime, exhibitors pay to convert their theaters. Financing these investments was a significant issue for exhibitors due to the total costs. Movie theaters offer many experiences for moviegoers, but the unique value proposition offered by movie theaters, large screens, the long wait for DVD release, and advantages of theatrical sound systems also appear to be fading.

Increasingly larger television sets, DVD content, and the adoption of high definition (HD) technology are all eroding these advantages. With the advancements in home entertainment systems consumers are investing money into their own home viewing systems. They have several options to stream video content into their comfort of their own homes. Movie theaters have implemented digital content and 3D but it’s not enough to keep up with the competition of technology. One of the most ominous reasons is recession. There has been a long-standing effect between economic recession and depression and movie attendance: as the economy declines, attendance increases.

There are some possible alternative business models to be applied in movie industry, some theaters has expanded food offerings, has on-site restaurant or bar service, some also offers valet parking and childcare. Opera’s Live in HD also an alternative content leader. Exhibitors continue to experiment with alternative content, mostly for individual sporting events where exhibitors must compete directly with home viewing. Exhibitors were focusing their attention on the international market where growth is highest. Internationally, both attendance and receipts are growing. There appear to be opportunities to increase revenues from increased attendance and ticket price increases.

II. Problems / Issues Identification
The condition of movie exhibitors in U.S are threatened. With the core demographic group expected to grow slower than the U.S population and with technological advances growing at speeds faster than the industry can keep up, ticket sales will continue to decline if the current business strategy continues to be followed. There is little differentiation in the offerings of the major theater exhibitors, which are: prices within markets differ little, the same movies are shown at the same times and the food and service are nearly identical. Competition between theaters often comes down to distance from home, convenience of parking and proximity of restaurants. Innovations by one theater chain are quickly adopted by others. The differing approaches of the theater chain companies are reflected in their cost of fixed assets per screen. Concession sales and ticket sales are the two biggest sources of revenue for a movie theater but the exhibitors has limited control over both revenues and profits because those two are important aspects.

Attendance allows for profitable sales of concessions and advertisements, but there are significant caps on the volume of concession sales per person, and selling price seem to have reached a maximum. Both continue to increase in cost to the consumers and may have reached a price point that is starting to drive consumers away from going to see a movie. With the advancements in home entertainment systems, consumers are investing thousands of dollars into their own home viewing systems. They have several options to stream video content into the comfort of their own homes. Home entertainment systems have also made a large impact on the theater industry. In 2005, this technological advancement was the most sought after electronic system for new homes. It seems that consumers have finally said no to the rising price of movie tickets and concession stand snacks and beverages. Furthermore, with the introduction of high definition television (HDTV), picture and sound quality in a confined cozy living room is a better attraction than that of sometimes loud and crowded theatre seating.

Theaters have implemented digital content and 3D but it’s not enough to keep up with the competition of technology. Furthermore, focusing only on 3D may result in more action movies and fewer comedies and dramas, which could alienating the non-core audience for movies. Besides, the evidence is mixed that 3D is having a positive impact on exhibitors’ bottom lines. The argument is towards the benefits that have yet to accrue to exhibitors or are being appropriated by studios, because 3D’s cost savings will largely accrue to distributors. Overall, revenues per admission are increased but these are split with studios. There are many things that the movie industry competes with. However, most extracurricular or leisure activity is considered a competitor in the movie industry although still DVD and video rental stores are serious competitors to the movie industry.

In fact, the unique value proposition offered by movie theaters’ large screens, the long wait for DVD release, and advantages of theatrical sound systems also appear to be fading. Finally, we could see that the demand to the movie exhibition industry is huge, the companies should not just think about changing whenever or whatever they want because there is a point when people will literally just stop coming because they can’t afford it. They also should pay attention of their lack of content, even with expectedly high revenues from big-budget movies. So later on, emerge these questions about what can the exhibitors do which are the major forces that have challenged these industry:

1. To improve their performance?
2. To reverse the downward trends in attendance?
3. To improve their profitability at a time when the studios, relying on the box office more than ever, are increasingly looking internationally?

III. Case Analysis
A. PEST Analysis
Political Factor, refers to all those things pertaining to and perpretated by the government that affect the economic and business scenario in general. Government regulation and policies that impact the business environmental the most may include trade and labor laws, tax policies, environmental laws and regulation, etc. * Government regulations on tax would be affecting the film price become more expensive thus affecting the theater profit. * In 1948, the court between government vs Paramount Pictures resulted in a rule that studios and exhibitors to negotiate themselves without distributors. This rule shortening the supply chain of the industry. * The National Association of Theater Owners exist to support the exhibitor in US so they have bargaining power, like the union in a company. Economic Factor, refers mostly to the macroeconomic factors as these factors may have a high impact upon the business environmental but a firm does not have any control over them. These economic factors may include the currency exchange rate, interest rate, economic growth rate, rate of inflation, etc. * Economic recession in US makes a decline in theater attendance thus affecting the theater margin.

In 2009, the overall attendance was down 4,1 percent. Social Factor, may include demographic aspects like age distribution, population growth rate, employment and income statistics, education, and career trends, etc. * International market growth higher than US market. This factor makes the studios increase their focus on international market thus expand the exhibitor market in overseas. * Core audience is 12 to 24 years old which is the most potential market. But the growth rate of this age predicted just 9 percent on 2025 compared to 17 percent total population growth rate. Technology Factor, may include the level of automation available in the current times, technical facilities and infrastructure, rate of technological progress and research and development activities. * From time to time, theater screen size become wider and bigger from single screen until megaplex. This fact makes theater upgrade their screen to follow market needs. * Innovation 3D and digital projection system replacing 35 mm projection system. This innovation makes the new trend in 3D movie for the audience. B. Porter’s Five Forces Analysis

To know better about the American movie industry competitive environment can be analyzed by Porter’s Five Forces. This tool makes easier to seeing the industry movie competitive analysis from five factors; (1) threat of new entrants, (2) bargaining power of buyers, (3) bargaining power of suppliers, (4) substitute products or service, and (5) intensity of rivalry among firms in an industry. The American movie industry competitive environment could be elaborated based on Porter as; For the threat of new entries in American movie industry could be categorize as high barrier to entry, because making an exhibition need a lot of capital. For instance to make digital projection screen needed about $ 75,000/screen and add $25,000 for 3D. It requires a lot of capital to make a new exhibit. So there are only big players that participate in exhibit industries, in America there are four big players; Regal, AMC, Cinemark, and Carmike. For the suppliers bargaining power, it could be considered as high because the studio have high bargaining power to the exhibition. Because, if an exhibit want to rent or showing the movie that one studio produced it must negotiate with the studios that produced the film.

Exhibit often didn’t have options to choose because the films were produced under one studios (one supplier).That made the exhibit must recognize the prices that have been specified by the studio. Buyers also could be categorize having high bargaining powers, if we look on when AMC wanted to raise their price it causes a public outcry and unwanted media attention that will affect their income and attendance numbers, in the end AMC revised it prices. This kind of backlash makes exhibit difficult to raise their prices, while ticket price become the primary way for exhibits to increase their revenue. Substitute to exhibitions with the existence of home theater and DVD makes film accessibility become easier so moviegoers can watch the movie without going to theater.

Moviegoers describe the attraction of going to the theater as (1) the giant theater screen, (2) the opportunity to be out of house, (3) not having to wait to see a particular movie on home video, (4) the experience of watching movies with a theatrical sound system, and (5) a place for dating. The moviegoers thinks that the ability of theater to provide this benefit already diminishing. The industry rivalry became a factor that should not be worried in movie industry. Even tough they experienced the same problem and on the same industry, they tried to gain attendance in different way so they have their own market segmentation (strategic group). For example, Regal chooses to focus on midsize market using multiplexes and megaplexes, AMC concentrate on urban areas with megaplexes and on large population such as; California, Florida, and Texas. While Cinemark concentrates on small to midsized markets, Carmike is almost the same.

IV. Case Solution
| Strength a. The exhibitor have their own market segment, so they will not fight with each other. b. The barrier to entry the exhibitor industry is high.| Weakness a. The film prices determined by the studios. b. The buyer have strong reaction to ticket price. c. The benefit of seeing movie in theater is diminishing because there are other substitutes.| Opportunity a. They have NATO to support exhibitors. b. International market growth higher than market growth in US.| Solution * Expand to overseas (S1, S2, O2). * The exhibitor could strengthen their bargaining power (S1, S2, O1)| Solution * NATO could be used to increase exhibitor’s bargaining power (W1, W2, O1)| Threat a. Government put high tax for a movie. b. Economic recession in US. c. Potential market growth is slow. d. The operational cost become higher because of technology advances (3D and wide screen).| Solution * Higher price for ticket to cover high movie tax and operational cost (S1, T1, T4) * Create horizontal integration to maximizing profit (S1, S2, T2, T3)| Solution * Improve the service to satisfy customer (W3, T1, T3) * Provide alternative to customer by adding 2D movie as their option (W3, T4)|

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