The Movie Industry - Cornell University · Why the Movie Industry? ... Movie Ticket Prices vs....

The Movie IndustryCharlie Fraioli, Shelly Grinshpun, and Sheryl Quock

Agenda

Introduction

Industry Analysis

Pricing Strategies

Recommendations

Introduction Industry Analysis Price Strategies Recommendation

Why the Movie Industry?

Rapid changing movie consumption in the

information age

Unique Pricing Structures

Pricing Phenomenon with uniform pricing in each

theater despite various levels of time, effort and

money invested per film


THE MOVIE INDUSTRY

THREE DIFFERENT SECTORS EXIST WITHIN INDUSTRY:

1. Production

2. Distribution

3. Exhibition


THE MOVIE INDUSTRY

THREE DIFFERENT SECTORS EXIST WITHIN INDUSTRY:

1. Production

2. Distribution

3.Exhibition


THE EXHIBITION SECTOR

FIVE DISTRIBUTION CHANNELS WITHIN SECTOR:

1. Cinema

2. DVD/Blu-ray

3. Pay-per-view (PPV), video on demand(VOD), and

video streaming

4. Free-to-air TV

5. Subscription-based TV channels (cable/satellite TV)


THE EXHIBITION SECTOR

FIVE DISTRIBUTION CHANNELS WITHIN SECTOR:

1.Cinema2. DVD/Blu-ray

3. Pay-per-view, Video On Demand (VOD), and

video streaming

4. Free-to-air TV

5. Subscription-based TV channels


Cost Structure

Rent & Utilities: theaters

compete on the basis of

facility quality

Industry company’s

largest single expense:

rental of films for

exhibition

This accounts for

32% of revenue


Consumer Demand

Key drivers of demand:

1. Disposable income (affected by employment rates, taxes, and the general state of the economy)

2. Leisure time

3. Marketing efforts of major motion picture studios


Consumers

Median age: 32.4 (see chart below)

Total HH income of +$75k (frequent moviegoers)


COMPETITION: MAJOR

COMPANIES

3 FIRMS ACCOUNT FOR 52.8% of market share:

1. Regal Entertainment Group – 21.2%

2. AMC – 18.7%

3. Cinemark – 12.9%

(Next highest in market share — Carmike Cinemas

Inc.— drops down to 4.5%)


COMPETITION: MARKET

CONCENTRATION

CR4 = 57.3

HHI

Top four share 57.3%

2,000 smaller firms share 42.7%

HHI = 0.2122 + 0.1872 + 0.1292 + 0.0452 + 2000(0.000497142)

= 990.73

990.73 < 1000

INDUSTRY IS COMPETITIVE


COMPETITION: BARRIERS TO

ENTRY

High barriers to entry due to:

1. High fixed costs

Equipment for running movies

High quality facilities necessary to compete

2. Distribution channels

Licensing agreements

3. Economies of scale

4. Brand identification


COMPETITION: EXIT BARRIERS

Not as strong as barriers to entry, but some to

consider:

1. Cost of ending licensing agreements

prematurely

2. Compensating employees


Internal Competition

Movie theaters compete on the basis of:

1. Film offerings

2. Ticket prices

3. Auditorium quality

4. Concessions offerings

Aside from these factors, most theaters offer the

same products

Internal competition is high for this reason


External CompetitionCompetition from:

1. Piracy/illegal streaming

Source: IBISWORLD.COM


Government Regulation:

Piracy

Illegal streaming can steal considerable amounts

of revenue from all distribution channels within

the movie industry

When US government shut down illegal streaming

site Megaupload, the website was accused of

costing copyright holders more than $500 million in

lost revenues

The government does not provide any assistance

to the movie theater industry in terms of tariffs or

subsidies


External Competition

Competition from:

1. Piracy/illegal streaming

2. Increase in popularity of all other distribution channels


External Competition


Distribution Timeline

Sources: iTunes.com, xfinity.com, NATO, Technicolor, Redbox.com


Comparing 2007 to 2015:

VOD, PPV, and DVD/Blu-ray

Release Dates


Changing the Timeline

Timeline of distribution is changing

Example: Netflix will release “Crouching Tiger, Hidden Dragon: The Green Legend” in 2015 on

the same day as its theatrical release

Subscription streaming services on the rise: in

2014 HBO, CBS, and Lionsgate all announced

online subscription streaming services


Industry Summary

Landscape for industry is changing rapidly with

the growth of other distribution channels for

movies

Highly competitive

Both internal and external competition is high


Main Pricing Strategies

Second Degree Price Discrimination

Third Degree Price Discrimination

Tacit Collusion

Concession Markups & Bundling

The Uniform Pricing Puzzle


Pricing Data

Collected pricing data from 28 Regal Cinemas

locations across 27 different states

Controlled for theater size (14 auditoriums)

Analysis demonstrates how the movie theater

industry utilizes:

Second degree price

discrimination

Third degree price

discrimination

Tacit collusion


Second Degree Price

Discrimination

Versioning

By time

Discounted matinee rates in the afternoon

By quality

RealD 3D

Premium Auditoriums

IMAX

One of Regal Cinemas’ RPX Premium Auditoriums


$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Matinee Standard 3D Matinee 3D RPX IMAX

Pric

e o

f M

ov

ie T

ick

ets

($

)

Movie Version

Average Adult Ticket Price for Different Movie Versions


Versioning

Discounts for less crowded times

Average matinee discount = 19.27%

Premiums for additional features/better quality

Average 3D premium = 32.09%

Average RPX premium = 42.58%

Average IMAX premium = 47.26%


Third Degree Price

Discrimination

Groups of moviegoers are

segmented by:

Age

Adults, Seniors, and Children

Student or Military discounts

Geography

Ticket prices vary by

location


$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

1

Pric

e o

f M

ov

ie T

ick

ets

($

)

Age Category

Average Movie Ticket Price by Age

Adult Senior (60+) Child (3-11)

Range of prices over

the 28 theaters


Average senior discount = 25.5%

Average child discount = 26.7%

Senior prices were equal to child prices at 19 of 28

locations.

Only one location offered student and military

discounts.

Price Discrimination by Age


$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

Pric

e o

f M

ov

ie T

ick

ets

($

)

Location

Geographic Price Discrimination for Movie Tickets

Adult

Senior (60+)

Child (3-11)


R² = 0.5102

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$0 $250 $500 $750 $1,000 $1,250 $1,500 $1,750 $2,000

Pric

e o

f M

ov

ie T

ick

ets

($

)

Median Monthly Rent by Zip Code ($)

Movie Ticket Prices vs. Housing Costs

Adult Tickets Linear (Adult Tickets)


Competitive Analysis

Collected data on the number of local

competitors for each of the 28 Regal theaters.

Collected proximity and price data on 4 Regal

Cinemas and 8 AMC Cinemas in the New York

Metro Area.

Data analysis indicated that tacit collusion may

be occurring.


R² = 0.0676

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

0 5 10 15 20 25 30 35

Pric

e o

f M

ov

ie T

ick

ets

($

)

Number of Local Competitors

Movie Ticket Prices vs. Number of Local Competitors

Adult Tickets Linear (Adult Tickets)


$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

0 to 5 mi. 5 to 10 mi. 10 to 15 mi.

Av

era

ge

Diffe

ren

ce

in

Pric

e o

f M

ov

ie T

ick

ets

($

)

Distance Between Two Competing Theaters (miles)

Difference in Adult Movie Ticket Prices Between Nearby Competitors


Tacit Collusion

Markets with lots of movie theaters do not display

price cutting behavior

Competitors in close proximity have low

variability in ticket prices

The three largest firms have nearly identical

criteria for age segmentation:

Child Age Group 3 to 11 2 to 12 1 to 11

Senior Age Group 60+ 60+ 62+


Used to be a monopoly of 8 studios/distributors

Directly and indirectly owned theaters

Controlled ticket admissions, show times, types of

films

Forced independent theaters into block booking

1984 US V.S. Paramount - end of collusion

Concession History


prohibition against price-fixing, joint ownership,

major franchises and block licensing

End of Block Booking

higher selectivity

higher production cost

led to less movies made per year,

Higher licensing rate charged to theaters

Studios forced to sell theaters led to an increase

in rent for movie theaters

Consequences


Over 40 % of total theater profit is Concession

Concessions


How much do theaters get from ticket sales?

1st week- between10%-25%

2nd week-25%-45%

3rd week-45%-55%

After 4th week- up to 80%

Admission Ticket Sales


By placing a premium on concessions prices for

tickets can be lower

This allows price sensitive consumers to see films

Research shows that there are proportionally

higher sales during low attendance period-

indicating the existence of people who are die hard movie goers and have WTP for expensive

popcorn

Fun Fact: Research shows that people who

purchase tickets online tend to buy more snacks

Why are the Markups High?


Price

Sold for

Large

Tub of

Popcorn

Cost of large

Popcorn

bag

Cost of

Popcorn Tub

Cost to

make of

large

Popcorn

$8.00 $0.22-$0.35 $0.85-$1.00 $0.08

Why are the Markups High?


A tub’s worth of popcorn could carry around an 800% markup!

Prices still high and almost the same as buying a la carte

Prices depends on Theater Chain

Examples:

Regal-

For 2 medium drinks & large popcorn

$18.50 for bundle, same price as a la carte

AMC-

For large drink and large popcorn

$13.75 for both a la carte and bundle

Muvico-

For 2 medium drinks and large popcorn

$16.50 for bundle and $17.50 for a la carte

Bundling


Two Characteristics of Movie Industry

Movie Puzzle-price uniformity across movies that run at the same time

Showtime Puzzle-refers to the lack of price

differentiation between weekdays and

weekends or across seasons (Exceptions are

Matinees)

Uniform Pricing Puzzle


Demand Uncertainty

Variable Pricing can be complicated

Distributors can refuse to license to theaters that

have variable pricing

Fairness

Why Does it Occur?


Opportunity to have variable pricing based on

popularity

Research shows sequels do about as well as originals

Correlation between Revenue and Production Cost

Success of film typically determined by sales on the

first weekend

Allows for price adjustments that Monday

Opportunity for Variable

Pricing

Cons

Pressure from

distributor

Raising prices would

anger consumers-

reduce # of price

sensitive consumers

Lowering prices might

seem like an indicator

of quality

Variable Pricing


Pros

Boost Independent Films (Non Blockbusters)

Encourage Early Purchase of Ticket

Potentially boost Concession sales

As prices go down more people will be WTP for tickets

Investments

Negative

Protection Window Shrinking

High Entry Barriers

High Fixed Costs

New Technology

Recommendations


Pricing Strategies

Continue 2nd and 3rd degree price discrimination

Long Term- Variable Pricing

Fluctuating Prices on Per Movie Basis Based on:

Popularity

Performance over time

Disclaimer: Price Variability would only work in an

ideal situation. Distributors still have power to prevent

changes from occurring

Recommendations


Questions?

Thank You!

The Movie Industry - Cornell University · Why the Movie Industry? ... Movie Ticket Prices vs....

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