THE MOVIE INDUSTRY 2009

A sub-sector of the larger Media and Entertainment industry, the 'movies' are under much less pressure from the cyclicality of the global economic downturn as their venerability is driven more by the absence of boxoffice hits than economic weakness. Moreover, movie attendance does not make up a significant enough proportion of a consumer's overall entertainment/recreation spending to be cut dramatically in a downturn.

For 2009 the U.S. cinema's performance, both boxoffice attendance and revenue, should match or exceed 2008's results with continued hit-driven films and the absence of the Olympics and Presidential election, which negatively impacted this year's results. Additionally, in-cinema advertising, which grew by 17% in 2008 to $860 million, will buck the more general slowdown in overall advertising expenditures and can be expected to increase 9 - 12%, and touch the $1 billion mark.

Exhibitors although somewhat burdened with escalating operating expenses and high fixed costs, carry limited inventory and all sales are essentially immediate (cash or credit card), making for a very low level of receivables while payables are extended and paid on traditional business terms. Although the movie exhibition business does have some concentration - with large circuits like Regal, AMC, etc. - there are limited benefits to industry concentration given strong buyer (moviegoer) and supplier (studios) power present in the industry. Exhibitors are highly susceptible to top-line volatility as they are completely reliant on the studios for the quality and quantity of their product stream, making for limited opportunities to differentiate particularly in the case of the large circuits. However, direct competition for exhibitors is low, their threat comes from indirect competition - the distribution of movie content through non-traditional channels such as DVD, VOD, and the Internet coupled with a collapsing window of exclusive theatrical release.

Nonetheless, movie going remains popular and affordable, although I would be cautious regarding exhibitors ability to maintain boxoffice and concession pricing increases over the next several years. Therefore, movie operators must pay particular attention to operating costs as debt levels and lease obligations are high on average, as are capital expenditures meaning that excellent cash flow and operating expense management is imperative.

OUTLOOK

Digital initiatives, such as Digital Cinema, are not consequential to the movie industry's overall profitability and can be viewed as being more detrimental than positive to stability and profitability for exhibitors.

The movie industry is a hit-driven business. The large studios are housed within media/industrial conglomerates (Time-Warner, Disney, GE, Sony, News Corp., Viacom) and are viewed as relatively modest profit contributors to the consolidated operations of these media giants. However, there are huge barriers to industry entry by outsiders, the most notably being control of a global distribution network. Moreover, there is limited direct competition between the studios as they do not compete on price but on content delivery that can fluctuate significantly year-to-year. Quality of film product (or should I say the public's perception of quality) will continue to be the main driver of movie attendance and revenue. Going forward, I would expect the studios to focus more on titles, characters and stories that can be leveraged into other licensing and ancillary products and outlets. This should be good news for exhibitors as well given that these concept/character-driven movies - particularly the fantasy and superhero films - are the current boxoffice center spikes.

Moving forward exhibitors should look to improving operations by increasing productivity and efficiency. Implementing environmental sustainability programs which reduce energy, water, and waste costs, improving local community relations, introducing non-movie (alternative) content and activities, and finding ways to enhance their patrons' entertainment experience.

(December 2008)