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Movie theaters becoming obsolete?
The Master , 1/10/2006 12:47:54 PM

What's wrong with the movie theater industry and how to fix it

These are tough times for the movie theater industry. Box-office revenue fell 5.2 percent to $8.9 billion. While the usual excuse is that "there are no good movies," the real problem may be that the public's appetite for movies is shifting toward home-based entertainment. If lousy films kept people from going to the movies, they certainly didn't keep them from paying to watch these same lousy movies at home. DVD sales and rentals were up 6.6 percent to $23.4 billion -- more than double the box office take -- and on "video on demand" rose 51.4 percent to $530 million.

Beyond the hard stats, how many times have you said to yourself, when contemplating going to the movies, "The hell with it. I'll wait for the DVD"?

Things are not likely to get better for theaters as movie studios look for ways to further boost profitable DVD sales and rentals, and to jump-start the promising video-on-demand industry. Movies were once released on VHS or DVD in "windows" of six months or more after theatrical releases. Now the norm is closer to three months. The studios are currently considering even shorter windows, and in moving up release of films on cable. Indeed, Disney CEO Robert Iger suggested last year that movies could be released on DVD and in the theaters at the same time. Theater owners screamed in outrage and the suggestion went nowhere, but the handwriting is on the wall. As box-office revenues continue to pale in comparison to home-based sales, theaters will lose their clout and DVDs will be released sooner and sooner.

Home entertainment continues to improve at a rapid pace. Dozens of companies compete to offer the best and cheapest widescreen TVs and home theater systems. For under $3k, you can outfit your home with a 40+ inch HDTV and surround-sound. These systems provide more thrills in the comfort and convenience of your own home than dragging your ass to the theater and spending a gazillion dollars on tickets and popcorn. And home systems are only going to get better: next generation "Hi Def" DVDs are around the corner, and promise incredible picture quality to rival that of film.

The continued rise of mail-order DVD services (such as Netflix) has given consumers cheap and near-immediate access to tens of thousands of movies from all over the world that they would never have a chance to see in theaters. In the modern age of a million choices, theaters can't compete with mail-order services.

All these factors are likely to accelerate the shift to home-based film entertainment. The theater industry needs to do something radical to stem the tide. Here are my suggestions:

1. Reduce ticket pricing. It's the price, stupid. This sounds counter-productive, but the current price of $10+ is just too high. Few families can afford to drop $75 to $100 on tickets and soda to go to the movies. More people will go, and go more often, if they could better afford the tickets. It costs the theater the same amount to show a film in front of 100 people or 10 people. Why not fill the extra seats, even at a group discount, especially when you're likely to sell some additional concessions as well? Movie studios learned this lesson well, when they realized they could sell many more copies -- and thus have more overall profit -- of movies on VHS or DVD for $25 than at their original prices of $75. The theater industry needs to learn it too. And fast.

2. Overhaul pricing strategy. The overall pricing strategy needs work too. The theaters should consider staggered ticket pricing based on how long the movie has been out, the time of the show, etc. The key is to create incentives for people to go to movies at later or earlier times (thus reducing annoying crowding at peak times) and to drum up some additional revenue for films that have been in the theater for a while (and thus fading in terms of generating ticket sales). Most other industries stagger their prices effectively (the hotel and travel industries in particular) to take advantage of periods of reduced demand.

The theaters should also consider selling "multiple pass" tickets that would allow you to see several films over the course of a week, month, or whatever. Many industries use this "bulk" approach effectively, such as the ski-resort and fitness/spa industries, and it can work for the theater industry too.

Another idea would be to sell "premium" tickets that would entitle ticketholders to better seats, waiter service at their seats (an idea that could work for general admission tickets as well), and maybe even private bathrooms. Again, the travel industry does this well. Many travelers are willing to pay for expensive first-class tickets and entry into executive lounges. I don't see any reason why this strategy wouldn't work for the theater industry.

3. Reduce the price of concessions. $15 for two sodas and popcorn is ridiculous. See #1 above.

4. Sell beer and wine at concession stands. Nothing makes money like booze with its sky-high profit margins. In addition, people are much more accustomed to paying $5 for a beer than $3.50 for a water-down soda.

5. Get rid of annoying pre-show advertisements. Theaters starting showing these ads before the movies a few years ago, in order to offset declining ticket sales, but they only made the problem worse. Nothing is more annoying that arriving on time for a 7 pm movie only to sit through 15 minutes of advertisements.

6. Make the theaters more inviting. Some theaters are old and dirty. Others are poorly laid out resulting in annoying crowds at peak times. Few have enough bathrooms. The seats can be ratty and uncomfortable. Renovate! In many theaters, inconsiderate jerks disrupt the audience with loud talking and ringing cell phones, and management does nothing. If you want people to pay to come to your theater, you need to make the experience as comfortable and enjoyable as possible.

7. Do something really radical. The current theater model is of several huge theaters showing films on huge screens. Why not break a few of them down into smaller theaters showing films on plasma? Show more and different films. Rent out the smaller theaters for parties, etc. This "smaller is better" approach works for the restaurant and lounge industries, where comfort and intimacy is key.

In addition to my suggestions to fix the industry, here are a few ideas that have been floated around that I think are duds:

1. Produce movies that people will pay to see. Like duh. This is not a solution as much as a fantasy, and as mentioned above the quality of films has not stopped people from pouring money into DVD sales and rentals. Quality of the films is not the issue. The pricing and quality of the theater experience is.

2. Converting theaters to an all-digital format. Releasing films in digital format was hyped to the moon and back a few years ago. The actual product failed to live up to the hype, however, and the costs of converting all the film-based theaters to digital is stupendously expensive. Personally, I think digital distribution of films is a ploy by the movie studios to reduce their costs of printing and distributing film prints, and wouldn't do much to drive up ticket sales for the theaters. They should pass on this one -- unless they try it in connection with suggestion #7 above.

3. Further increase ticket prices. Insanity! Prices should be lower, as I explain above.

Unfortunately, even my suggestions are likely to just reduce the theater industry's slide. Their biggest problem is that they are a mature industry facing relentless competition from newer and rapidly advancing home entertainment technologies and distribution schemes. Home systems are the gee-whiz "gotta have it" products now and in the foreseeable future. Theaters are old and boring by contrast. Newer and more advanced doesn't always win, but that's the way to bet.

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About the author: Dont be a lazy bastard and just read my short bio. Read my full bio!

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