..Gary Dretzka
..Noah Forrest
..Leonard Klady
..R.J. Matson
..David Poland
..Douglas Pratt
..Ray Pride
..Michael Wilmington

The ShoWest Must Go On ...

These are grim times for theater owners.

Unless you've been living in a cave, you're well aware that 2005 not only marked a downturn in overall revenues, it also experienced significant erosion in the big screen audience. Then there's a consolidation in theater ownership that's put thousands of people back into the job market this year.

Additionally there were rumblings and a few experiments involving simultaneous debuts of new films in theaters, home video and Pay-cable. The blurring of traditional windows is viewed as the single greatest threat to the future of movie going in the exhibition community and a high priority topic in other sectors of the business.

And if that wasn't sufficient for the big picture, there remains the whole issue of transitioning to digital cinema. It's evolved over the years from theory to inevitability but other concerns have pushed it a couple of slots lower on the priority list. Nonetheless it's marching along with discussions of standards, who will pay the freight and how to convert existing theaters. Today there are barely more than 100 d-cinemas domestically, but tomorrow …

There are others concerns that range from concession stand sales to pre-show programming but it's fair to say that all these issues pretty much obscure whatever bright spots might be on the horizon.

Next week the annual ShoWest convention will unspool in Las Vegas and the person you don't want to be is John Fithian, president of the National Association of Theater Owners. On Tuesday morning his task is to rally the troops with a state of the art and commerce speech that will struggle to put the best face on what lies ahead.

It's not that these addresses have always seen the world through rosy colored glasses. Fithian's predecessor Bill Kartozian was critical of movie chains that were in head-to-head competition and invoked the commandment that "thou shalt not Ontario," a reference to competitive megaplexes that were built within spitting distance of each other in Southern California.

Last year Fithian attempted to make lemonade from the fact that frequent film goers - people that went to the multiplex at least once a month - were going even more often. He also made mention that respondents in their poll that characterized themselves as "nevers" or "rarelys" were also on the rise. While the media generally bit hard on his spin, exhibitors were distressed that their audience was shrinking in numbers and there was a potential manifest destiny that favored younger viewers and that was alienating older customers.

The mainstream of American film exhibition centers on movies from what used to be referenced as the "seven sisters" - the major Hollywood studios. The modern version of that oligopoly embraces most of those antecedents, the specialized and not so specialized companies owned by those entities and DreamWorks. Last year those ranks shrunk when a Sony consortium acquired MGM (though it appears to be officially back in business as a separate distribution company following a news conference this week) and DreamWorks was bought by Paramount.

In 2005, the majors (and their affiliates) accounted for about 93.6% of the roughly $8.9 billion spent at North American movie theaters. By far the most significant independent company was Lions Gate with a 3.2% market share followed by the fledgling Weinstein Company with a little more than .5%.

If you're more than 25-years-old and happen not to live in one of the 25 biggest cities in America, you're viewing choices can be especially dire particularly during the summer months. Hollywood, as reflected by its release schedule, has virtually abandoned what it views as an older movie goer. It's certainly a commonly held belief that there will always be an audience among teens, youngsters and twentysomethings. Movies provide an escape from the home and a comparatively speaking cheaper date experience than professional sports or an upscale restaurant.

The daunting question is why anyone would give up on a sector of the population that used to have the viewing habit. Millions have been spent on encouraging people into cinemas and are now being squandered on these same people as they age. And in the next decade, Americans will continue to see a shift toward older consumers.

Theater operators don't have any say in what they put on screen. They don't sit in on studio story meetings and don't generally invest in film production. The rare instances where that rules been broached have produced less than stellar results.

As operations have evolved from single screens to behemoths with as many as 30 auditoriums, the option of choice for film bookers has evaporated. The grim reality is that one has to play everything in general release and there's rarely enough product to sustain the larger edifices among the 36,000 plus screens in the domestic marketplace. In the cautious atmosphere that pervades this sector of the industry, the few new builds that are occurring appear to be settling in on 12-screen multiplexes on average.

Like the film studios, there used to be seven major national circuits. With the merger of AMC and Loews in 2005, that number has been reduced to two - the new AMC and Regal Cinemas. Each of these circuits accounts for more than 20% of theater sales, followed by a handful of operators that have a market share between 4% and 7% that include Canada's Cineplex, Georgia-based Carmike, Cinemark out of Texas and National Amusements based outside Boston.

Then there are a lot of regional players that matter in places such as California, Arizona and parts of the mid-west but account for about 1% of the national picture. Landmark, the only national chain for specialized movies, sometimes rises close to 2% of the marketplace.

Objectively, there's something akin to a Darwinian evolution in both the distribution and exhibition communities. The surviving regional and niche players that own theaters are holding fast largely because film bookers know they have a better sense of the peculiarities of their audiences.

Theoretically, ShoWest ought to bring production, distribution and exhibition together in one giant and cathartic experience. I have a vague recollection of this but not in the past decade. The majority of the studios used to sponsor lunches with double and triple banks of movie luminaries coming to the dais to put in a good word for their upcoming movies.

Now event organizers are lucky to involve more than one or two of the major players and this year have coaxed Disney to screen its forthcoming Pixar-produced Cars and get Warner Bros. to put on an event. But in general ShoWest doesn't make economic or strategic sense for distributors that can more effectively and frugally put on their own show and know the 25 to 50 people they need to invite.

There remain issues that the exhibition community - with or without distribution participation - might confront if ShoWest were a true convention. Several years back I asked a senior officer at one of the major theater chains how exactly NATO elected its board and even he was unclear about the process. Ultimately he just shrugged and said that anyone foolish enough to be an officer was more than welcome.

There is no visible campaigning at the event and apart from a few self-congratulatory awards and the opening session with Fithian and Motion Picture Association of American chairman Dan Glickman, the agenda is ultra flexible. There are screenings, panels, a trade show and of course myriad social events but any sense of a program reflective of immediate concerns is negligible.

How quickly a film segues from theaters to DVD is the hottest issue and no doubt Fithian will make that a principle part of his address. The old chestnut about theatrical exhibition being the engine that drives all other film revenue streams isn't weathering well with the passage of time. Ancillaries now account for the majority of a picture's gross and theatrical exhibition is the least profitable component of the equation.

The majors want the shortest theatrical window possible that can generate maximum box office and translate into the optimum gross from secondary exploitation. Finding that perfect balance is simply a matter of time and will occur whether theater circuits assist in the process or not. The only viable economic solution may be for the studios to ramp up its investment in theaters.

Ticket sales remain the top revenue generator for the theater chains but there's no question other areas are being enhanced in an effort to shore up declines in its primary business. NATO estimates that the average admission price in 2005 was $6.41. A study it does not publish is what the typical patron spends at the candy counter. However, according to an exhibitor from one of the significant chains that figure is about $2.78, or less than what most theaters charge for a bag of popcorn and a drink.

If there's any question about whether the value of a movie ticket is line with its cost, you can multiply by 10 to get a reading about how movie goers relate cost to satisfaction at the concession stand. There's been sufficient ink spilled about the enormous mark up for such staples as popcorn and soft drinks at movie theaters and no amount of combo deals can ease the perception of a rip off. Like DVDs for distributors, the concession stand is the most lucrative profit center for exhibitors and they're smarting from significant drops in the ratio between the average ticket price and the average amount spent on comestibles.

Then there's the thorny issue of pre-show advertising packages. If you talk to distributors they will provide data that demonstrates patrons don't like this relatively new wrinkle. However, exhibitors have their own studies that prove it's gaining acceptance.

Regardless of who one believes, it's an area that's just about reached capacity. According to one industry source once these programs exceed 25 minutes, they begin to eat into the number of daily screenings. There's a finite number of advertisers one can cram in and no more, so as they say in the industry, it a revenue source that has fully matured.

According to the MPAA last year's domestic box office fell 5.7% to $8.99 billion. For the record my calculations vary by less than 1% at $8.91 billion for a 5.4% decline. Of course, the MPAA claims its number does not include revenues from Canada and that is patently ridiculous.

Its report also attempts to put the best face on the situation with data and charts extolling the record number of $200 million grossing films and five-year boosts in the average return per member release.

However, the more nettlesome aspect of last year is that the critical wrap up pieces all seemed to conclude that the quality of movies showed a marked improvement from 2004. That's of course a judgment call that cannot be empirically quantified but if it has even a shred of credibility, one has to wonder why fewer people went to the movies. Until that thorny question is addressed and resolved it's fair to anticipate that things will not improve for any part of the industry.

March 10, 2006

- by Leonard Klady