The Reel Feature
The box office is on the rebound in 2007, which is good news for theater operators and shopping center owners.
Jay M. Shapiro

Recently the Motion Picture Association of America (MPAA) released its annual theatrical market statistics report which states the U.S. box office rebounded in 2006 to finish the year at $9.49 billion in revenues compared to $8.99 billion in 2005 — a 5.5 percent increase from the previous year. In 2006, 1.45 billion movie tickets were sold in the U.S. ending a 3-year downward trend in ticket sales.

The average cost of a ticket rose from $6.41 in 2005 to $6.55 in 2006, or 2.2 percent, which the MPAA noted remained lower than the consumer price index increase of 3.2 percent during the same period. In addition, the report indicated that admissions per capita in the U.S. remained at approximately five visits per year.

Parenthetically, global film audiences boosted the worldwide box office to an all time high of $25.8 billion, compared to $23.3 billion in 2005 — an 11 percent increase.

In 2006, 63 films grossed more than $50 million at the domestic box office, a 12.5 percent increase over the previous year. Toppers like Pirates of the Caribbean: Dead Man’s Chest with revenues of $423 million, Cars at $244 million, XMen III at $234 million, The DaVinci Code at $218 million, and Superman Returns at $210 million made a difference. However, the nominees for the Academy of Motion Picture Arts and Sciences’ (the organization which bestows the Oscars) Best Picture category (Babel, Letters from Iwo Jima, The Queen, The Departed, and Little Miss Sunshine) generated lackluster box office returns. As a whole, those five films grossed approximately $270 million — which is a rise over the 2005 nominees’ $190 million — the least popular group on record. For the third year in a row, the Academy did not nominate a true blockbuster in the Best Picture category, but the winner — The Departed — tallied approximately $125 million in box office receipts.

Moreover, the number of new movies released has been steadily growing over the last several years with total releases topping another all time high of 607 in 2006 compared to 549 in 2005 — an 11 percent increase. Consistent with 2005 figures, PG-13 films comprised the majority of the top grossing films for the industry with PG and PG-13 films accounting for 85 percent of the top 20 films of 2006. Of all films in 2006, 18 percent were released by Sony.  The remaining in the top five, in declining order, are: Disney, Fox, Warner Brothers and Paramount.

Industry prognosticators are forecasting a record setting year for 2007 based on sequels in proven franchises including Pirates of the Caribbean, Harry Potter, Spiderman, and Shrek.

Consolidation And New Builds

In 2006, AMC Entertainment completed its merger with Loews Cineplex and Cinemark announced and executed its acquisition of Century/CineArts. Today, Regal Entertainment is the industry leader with approximately 6,590 screens in 575 locations; followed by AMC with approximately 4,590 screens in 330 locations; and Cinemark with approximately 3,380 screens in 275 locations. In 2006, these three exhibitors accounted for 46 percent of the domestic box office revenue generated on approximately 39 percent of the U.S. based screens.

Privately held AMC (parent holding company: Marquee Holdings) and Cinemark (parent holding company: Madison-Dearborn Partners) have filed registration documentation for initial public offerings with the U.S. Securities and Exchange Commission. They have neither determined how many shares will be offered nor the price range for the offerings. The net proceeds from these IPOs are likely to repay outstanding debt as well as provide working capital for growth and other corporate purposes. Regal is already a publicly traded company.

Some industry observers have commented that the exhibition industry has largely stabilized in the past few years after the over building boom of the late 1990s which forced many chains into bankruptcy. These observers now voice concern that with this potential influx of public money flowing into the industry building might restart with a frenzy.

Although each of the three named operators exercised some 21st century discipline in building during 2006, Regal opened eight units/109 screens; AMC opened seven units/109 screens; and Cinemark opened 14 units/196 screens.

Nationally, new builds — from the three aforementioned operators as well as regional and start up operators like National Amusements, Harkins, and Rave Motion Pictures — were geographically disparate and generally in second tier markets rather than the largest 30 standard metropolitan statistical areas (SMSA). Strategically, the units of the class of 2006 appear to have been motivated by real estate opportunities and/or the desire to protect or increase existing market share.

Though the industry as a whole continues to shutter multi-screen, antiquated, sloped floor cinemas in favor of new or replacement 14- to 16-screen megaplexes with stadium seating, wide screens, state of the art sight and digital sound, and enhanced concession menus, in 2006 net screen count grew to just over 37,000 (not including some 650 drive-in screens).

Specialty Venues

Was the box office rebound driven by product or an enhanced movie-going experience? No one knows the “reel” answer to this much-debated rhetorical question. As the conventional exhibition industry continues to consolidate and traditional regional and start up operators continue to add units there is a surge in the proliferation of specialty venue operators.

Recently, at the Urban Land Institute (ULI) conference, Reinventing Retail – Community, Lifestyle, and Entertainment, operators, developers and architects discussed various emerging concepts.

These exhibition industry experts commented that the traditional operators continue to experiment and to introduce a mix of movie-going experience enhancement amenities such as online ticketing, valet parking, and tiered pricing. They remarked that the art and independent niche was robust and growing citing the successes of Landmark, CineArts, and Sundance. They observed, too, that there was a greater number of Spanish language oriented units in demographically appropriate areas.

The focus of their commentary, however, was on the proliferation of new specialty venues. Among the venues cited were: operators showing first run, commercial release product at a discount price to patrons who could enjoy wine and beer and regional snacks; operators showing art and independent product, providing scheduled, related lectures, and serving gourmet concessions; operators showing first run commercial release product in deluxe seated, screening room sized auditoria with wide screens and digital sound while offering beer, wine, and liquor as well as bistro food service to an over-21 clientele; and lastly, operators developing entertainment destinations which offer a movie-going experience, various dining opportunities, billiards, bowling and child care.

Unanimously, this group of industry experts challenged the business models that support each of the various hybrids and pledged to track the rollouts in order to determine and evaluate the risks and opportunities attendant to incorporating these hybrids into future development projects.

Industry Trends And Issues

The single biggest change in the next 5 years for movie theatres will be digital projection. Several years ago operators began “wiring up” the appropriate infrastructure for full length feature digital and, at the same time, equipped their theaters with digital capability that is suitable for pre-feature entertainment. That entertainment content is being provided largely by National CineMedia (NCMI), a joint venture of Regal, AMC, and Cinemark, which recently went public. NCMI focuses on the development of pre-feature entertainment, cinema and lobby advertising products, meeting and event services, and alternative forms of entertainment content.

The fundamental issues confronting the next phase of the total digital evolution include: addressing the ever developing sophistication of hardware, delivery systems, and virtual programming as well as determining who will bear the burden of the capital investment of the conversion. For in the end the studios, exhibitors, developers, and patrons will each derive variable benefits from the augmented digital alternative programming.

At the National Association of Theatre Owners (NATO) confabulation — Sho- West — the mantra from the executive committee was seeking cooperation of the studios and distribution on such major issues as: restricting/limiting product release to theatres thereby constricting simultaneous product release to venues like pay per view and DVD; maintaining windows between theatrical release and DVD release; preventing movie piracy; and upholding film ratings systems. In addition, the executive committee urged the membership operators to aggressively continue their campaigns to ensure quiet and courteous movie-going behavior from their core patrons.

According to an analysis conducted by Nielsen Entertainment/NRG, technology continues to provide new opportunities for the film industry. The analysis indicates that movie goers who own or subscribe to four or more technologies (e.g., large format TV, DVD player, video on demand, and MP3 players) were actually more avid movie goers than movie goers who own or subscribe to fewer home entertainment technologies. The Nielsen research pointed out that movie going continues to be the overwhelming choice for out of home entertainment drawing more people to theaters than to theme parks and major professional sports leagues combined.

So, for developers — whether the rebound was driven by product or an enhanced movie-going experience — cinema remains a location based traffic generator that can integrate with and support various synergistic co-tenancies and is never the same place due to continuous new product releases. Therefore, cinema can generate and maintain a steady flow of pedestrian traffic to a center.

Jay M. Shapiro is president of JMS Advisory, a cinema consulting firm, and provides cinema market due diligence, strategic planning and real estate deal making as well as cinema valuation services to institutional investors, developers, redevelopment agencies, and colleges and universities.

©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.