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 2010 the U.S. cinema's performance, both boxoffice attendance and revenue, should exceed 2009's results with continued hit driven films and the positive impact of 3D - which is still new and novel with the public. Additionally, in-cinema advertising, which grew by 17% in 2009 to over $900 million, will buck the more general slowdown in overall advertising expenditures and can be expected to increase 9-12%, and exceed the $1 billion mark this year.
EXHIBITION - STEADY AS SHE GOES
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 (large circuits like Regal and AMC} there are limited benefits to industry concentration given strong buyer (moviegoers) and supplier (studios) power present in the industry. Exhibitors are highly susceptible to top-line volatality ss 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 exhibsitors 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.
DISTRIBUTION - IN AN UNFRIENDLY WORLD
Digital initiatives, such as Digital Cinema, are not consequential to the movie industry's overall profitability. The introduction of 3D will provide a boost to both attendance and admission revenue (with premium 3D pricing) but it remains to be seen if this trend will continue over time.
3D or not, 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 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 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.
Distributors must be very careful regarding their adoption of digital distribution as this could lead to the eventual loss of their global distribution control - which exists only because it is film (analog) based. The downside for the media giants would be seeing the film industry succumb to the "digital" fate of the music and publishing industries.
By: Jim Lavorato, President
Entertainment Equipment Corp.