Apocalypse Files - #11 # - Movie theaters
In each issue (bi-monthly), we'll explore the threats to the current business model of a company or of an entire industry, the forces that could take them down or drive systemic changes, and most importantly we'll imagine possible solutions, looking at new and evolving trends, untapped niches, new business models or venture opportunities...
In this issue, right when new blockbusters are starting to become part of our lives again, we will be examining cinemas; their business model, their appeal, their nostalgia and their future. Welcome to the Apocalypse Files.
Please Mr. Postman
In light of recent technological advancements, several industries have struggled to reinvent and have unconsciously increased their exposure to external threats. Some were pushed aside, others were replaced by new entrants with a more relevant answer to evolving user habits & expectations. With that in mind, let’s have a look at an industry we all cherish: cinemas!
Before Covid, cinemas were already fighting the erosion of their audience towards home cinemas and successful movie platforms. After 2 years of being “off the air”, this threat has aggravated: users are shifting away from cinemas like never before, and few are coming back to theaters now that they are open again.
In addition, the movie industry - which fuels our cinema programs - has also undergone a major shift, creating contents for movie platforms. In his 2020 monologue at the Golden Globes, comedian Ricky Gervais made a revealing quip about his industry: “No one cares about movies anymore. No one goes to cinema [...]. Everyone is watching Netflix. This show should just be me coming out, going, “Well done Netflix. You win everything. Good night.” Cinemas have definitely lost the movie distribution exclusivity they used to have.
Facing a significant drop in attendance that’s failing to go up again, cinemas are starting to question their sheer existence in the entertainment space. They must adapt, but how much time do they have left?
Since the early-movies in the 1895, cinemas have been an integral part of the movie experience. Starting simply as a way for movie studios to show their movies, cinemas have grown to become their own self-standing industry... or at least, they have for some time. Under the current magnifying glass, the industry has become extremely fragile - here’s why:
Audiences want to be blown away by state of the art technology: When the Lumière Company first started advertising their ‘cinematographs’, reports state that audiences were in pure disbelief and delight, many comparing it to magic shows because of its overwhelming nature. During the course of the 20th century, technological progress has helped maintaining the magic: After silent films, audiences discovered talking films, then films in color. In the 1980s, the film industry went through genuine upheavals with the progressive commercialization and success of affordable TV sets for homes: computer animation jumped forward (Jurassic Park, Toy Story, ...), which differentiated the films from the home movie offer. In the 2000s, movie theaters made the latest major attempt to upgrade with 3D technology (Avatar, Tron: Legacy, ...), and although it attracted attention, the hype slowly died down and was seen as an inconvenient fad. Movie theaters have always managed to fight for their place in the entertainment industry as the novelty of the technology slowly started wearing off, by advertising technological improvements. So what’s the next big tech move?
Cinemas need to be at the avant-garde of experience, but still accessible: Within the cinema segment, the offering has changed a lot over the past few decades. Multicomplex cinemas have inserted the movies into an already-existing consumer journey (for instance in shopping malls), which has proven very successful. This surge has threatened the existence of smaller cinemas in city centers, some of which have switched their catalog to remain able to differentiate themselves on the contents. In a nutshell, cinemas need to be accessible to a large number of viewers, yet they need to invent a magical experience. This time however, what will bring the necessary fresh new wave of consumer interest?
And of course, they must stay viable despite huge fixed costs: On the revenue side, cinemas largely depend on ticket sales - operators have found a good balance between price (expensive, yet affordable for most) and volume (several viewings throughout the day). However, cinema traffic has taken a severe hit in the wake of Covid: variable costs can remain in control if the operator optimises their film projections. But fixed costs, starting with rent, are very difficult to offset with little and unreliable traffic. As a matter of fact, many cinemas rely on subsidies, especially in Europe, either for production or distribution, which have never been more capital to keep the art of cinema alive.
Covid has been the great accelerator for the industry’s threats. When the pandemic began, theaters worldwide closed for months, re-opening later at limited capacity. Sadly, even once fully open, they did not regain the same attendance as before.
This year’s changes have been fast and painful, highlighting global trends that have existed for a long time and that have changed habits of users into new cinema-less ones :
Ever since the 1940s, movie theaters have employed techniques to ensure their survival like the establishment of the theatrical window (the period of time before a recently released movie can be shown outside of movie theaters, i.e. digitally or on TV). This protective window, that used to be 11 months in 1995, has drastically reduced to 3 months in 2019. This is the reality as hard as is gets: theaters need movie studios to produce the films they show, but movie studios do no longer need theaters to turn a film into a success. Throughout the years, the power dynamic has slowly shifted in favor of studios and unsurprisingly, streaming services. Streaming services have been on the rise for series, old movies and documentaries, but 2021 is the first year that Netflix offered blockbuster movies with A-list actors available directly in their platform without the slightest desire to be seen on the big screen. They have also invested significant amounts of money into original creations and R&D in order to stay on top of the market ($17b in 2021) Warner Bros. has announced that they will release all of their 2021 movies in theaters and HBO Max simultaneously. Making top tier movies that you can pause, play, rewind and watch at your convenience.
But blockbusters aren’t the only item in the streaming platform menu. Niche and personalized cinema is starting to revive, with international movies making it to the limelight replacing the standard, generalized cinema options. Since its creation in 1998, Netflix as an example has always aimed at being closer to customer needs, having a final target to diminish - even remove - the time of looking for the right fit. They are trying to create the best personalization algorithm, powerful enough that the consumer doesn’t even have to look for a film, given his personality preferences, the film is chosen for them. With this objective in mind, Netflix has a very precise idea of consumer needs, and can invest billions in original content (Squid Game, Everest climbing documentaries) knowing approximatively what will be the viewing outcome. New & different content is thus now available, making the Netflix, Amazon Prime, Disney appeal even greater.
With greater appeal, and covid preventing cinemas to re-open, the options to recreate the movie-going experience are cheaper and techier than ever. The multimedia projector market is poised to grow by USD 5.88 billion during 2021-2025, home cinema technologies are more and more available with technological advancements making projectors selling from 300€ to 2 000€.
Subscribers now can enjoy a vide variety of worthwhile niche and general public movies at their leisure, from the comfort of their home-theater homes, with better and cheaper home-cinemas ... and paying a monthly cost almost equivalent to a single theater ticket (average price of a ticket in France is 6.7€ and average price of Netflix subscription is 12€). A price that is getting harder and harder to justify for the general public: surveys have revealed that in the US, the majority of participants cited the cost of movie tickets as the main reason for seeing fewer movies in theaters. **Several options have already been considered, Movie Pass created a subscription offer in the US for $10 a month to attract costumers. Even though it seduced 3 million customers in the US, the outcome was financially non-conclusive and they decided to renew the offer next summer under a new format.
So far, the theater industry has been able to stay afloat with a mix of technological advancements, luck and nostalgia, but moving forward it will have to face these challenges and adopt models to maintain profitability.
If you are a company relying on numbers because of high operational costs, how can you adjust your offer to get higher margins? How to keep up with evolving habits in your customer base? These don't apply exclusively to the movie theater industry, any company a complex cost structure that has been relying on long-lasting habits could follow one of the following development paths.
You ain’t seen nothing yet
Cinemas are vital to our culture & entertainment and we need to help them transform at all costs. Since we don’t know how much subsidies governments will grant in the future, we must think of ways to make the value equation look better! Here are some thoughts on the matter:
The following ideas must be adapted to different cinema typologies & needs to be impactful. We have identified two main categories to keep in mind, which are not exclusive but enable to grasp the audience’s concerns and desires:
The multiplex : usually located in the suburbs in commercial areas, they mainly project blockbusters and hosts casual viewings. Clients are very sensitive to price and are looking for a comfortable experience.
The art-house : usually located in downtown areas, these cinemas projects both blockbusters and “niche” movies from all over the world for casual viewers and cinephiles, who are less sensitive to price and very demanding on the quality of the line-up.
Enhance the cinematographic experience: Viewers feel a disconnect between the price and the quality of the experience. To improve it, we have identified two main levers: the movie theater room design for more comfort and immersion; and the line-up preparation. Instead of paying to see a movie, movie-goers could instead book their own seat in the cinema with different categories of comfort and services. New rooms are developed, betting on vertical architecture to reproduce the “theater box”. The global organization of the movie theater is also put into question: instead of large rooms and a reduced selection of movies, a new model with smaller and more numerous rooms could be implemented, linked to it, personalization of the line-up based on users’ demand. A new trend is also to use movie theaters to project content outside of movies with TV shows, sport games, concerts, events (see the new MK2 institute program).
Build flexible pricing models: As lowering the price would not necessarily be the winning solution, dynamic ticket pricing based on demand could help attract new customers and ensure attendance during off-peak periods (students, retired people...). One solution would be to create new subscription typologies including a threshold model: the movie slot is confirmed once enough movie goers have bought a ticket. Consumers could also subscribe to a “movie playlist” at a reduced price, to increase the average spending ticket and visits during off-peak hours. To answer increasingly niche markets, viewers could pay a premium to be able to privatize a room or vote on the projected movie.
Take the most advantage with mutualized third spaces. Movie theaters usually have slots of great attendance in weekends and nights, but often have ‘lost space’ in the daytime. To increase the productivity (or profitability per sqm) of movie theaters, these spaces could be used for new services better suited to daytime activities. Third spaces are increasingly common nowadays, adjusting coveted spaces for many different customer needs while creating new income sources for all involved. Movie theaters could reuse the empty rooms for other external activities including education, conferences, company meetings, gaming events, concerts and performances, ... Could they become the center of alternative activities related to the movie industry?
If you can’t fight them, collab! Streaming services including Netflix, HBO and replay services from main channels like M6 are seen as the ultimate contenders of cinemas. However, there are many partnership options that could put movie theaters one step ahead and give a new life for both parties involved. Movie theaters could become the exclusive distributors for chosen Netflix content, they could provide a discount or even provide movies for free for subscribers, and they could air Netflix series for avid fans on a weekly basis.
Decompartmentalize movie-watching: Cinemas also have immaterial assets in their access to many resources (information on upcoming movies, licensing and diffusion rights in advance, quality versions,...), and since consumer are looking for an “exceptional experience”, they could transpose these assets & expertise to “exceptional places”, be they out of the norm movie theaters, outdoor parks,... To find these exception combinations of location & content, cinemas could collaborate with municipalities, hotels, and transportation providers and give them access to movie diffusion rights in exchange for a fee. This would both generate additional income, and value their expertise.
Major threats and evolving habits facing the cinema industry are not to be taken lightly, even if we are not actively closing cinemas just yet. The movie theaters that adapt will continue to be an integral part of our culture; and companies brave enough to be flexible to modern customer needs will stay relevant in this fast paced time we live in.
That's all folks!
PS: If you haven't guessed, all paragraph titles are from singles in the 1975 Billboard Hot 100, the year Jaws became the first blockbuster.