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

Introduction Industry Analysis Price Strategies Recommendation

THE MOVIE INDUSTRYTHREE DIFFERENT SECTORS EXIST WITHIN

INDUSTRY:

1. Production

2. Distribution

3. Exhibition

Introduction Industry Analysis Price Strategies Recommendation

THE MOVIE INDUSTRYTHREE DIFFERENT SECTORS EXIST WITHIN INDUSTRY:

1. Production

2. Distribution

3.Exhibition

Introduction Industry Analysis Price Strategies Recommendation

THE EXHIBITION SECTORFIVE 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)

Introduction Industry Analysis Price Strategies Recommendation

THE EXHIBITION SECTORFIVE 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

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

Consumer DemandKey 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

Introduction Industry Analysis Price Strategies Recommendation

Consumers Median age: 32.4 (see chart below) Total HH income of +$75k (frequent moviegoers)

Introduction Industry Analysis Price Strategies Recommendation

COMPETITION: MAJOR COMPANIES3 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%)

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

COMPETITION: BARRIERS TO ENTRYHigh 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

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COMPETITION: EXIT BARRIERSNot as strong as barriers to entry, but some to consider:

1. Cost of ending licensing agreements prematurely

2. Compensating employees

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

External CompetitionCompetition from:

1. Piracy/illegal streaming

Source: IBISWORLD.COM

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

External CompetitionCompetition from:

1. Piracy/illegal streaming

2. Increase in popularity of all other distribution channels

Introduction Industry Analysis Price Strategies Recommendation

External Competition

Introduction Industry Analysis Price Strategies Recommendation

Distribution Timeline

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

Introduction Industry Analysis Price Strategies Recommendation

Comparing 2007 to 2015: VOD, PPV, and DVD/Blu-ray Release Dates

Introduction Industry Analysis Price Strategies Recommendation

Changing the TimelineTimeline 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

Introduction Industry Analysis Price Strategies Recommendation

Industry SummaryLandscape for industry is changing rapidly with

the growth of other distribution channels for movies

Highly competitive Both internal and external competition is high

Introduction Industry Analysis Price Strategies Recommendation

Main Pricing StrategiesSecond Degree Price Discrimination

Third Degree Price Discrimination

Tacit Collusion

Concession Markups & Bundling

The Uniform Pricing Puzzle

Introduction Industry Analysis Price Strategies Recommendation

Pricing DataCollected 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

Introduction Industry Analysis Price Strategies Recommendation

Second Degree Price DiscriminationVersioning

By timeDiscounted matinee rates in the afternoon

By qualityRealD 3DPremium Auditoriums IMAX

One of Regal Cinemas’ RPX Premium Auditoriums

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Matinee Standard 3D Matinee 3D RPX IMAX$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

Average Adult Ticket Price for Different Movie Versions

Movie Version

Pri

ce

of

Movie

Tic

kets

($

)

Introduction Industry Analysis Price Strategies Recommendation

VersioningDiscounts for less crowded times

Average matinee discount = 19.27%

Premiums for additional features/better qualityAverage 3D premium = 32.09%Average RPX premium = 42.58%Average IMAX premium = 47.26%

Introduction Industry Analysis Price Strategies Recommendation

Third Degree Price DiscriminationGroups of moviegoers are

segmented by:Age

Adults, Seniors, and Children

Student or Military discounts

GeographyTicket prices vary by

location

Introduction Industry Analysis Price Strategies Recommendation

1$0

$2

$4

$6

$8

$10

$12Average Movie Ticket Price by Age

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

Age Category

Pri

ce

of

Movie

Tic

kets

($

)

Range of prices over the 28 the-aters analyzed

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

Geographic Price Discrimination for Movie Tickets

Adult

Senior (60+)

Child (3-11)

Location

Pri

ce o

f M

ovie

Tic

kets

($)

Introduction Industry Analysis Price Strategies Recommendation

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

$2

$4

$6

$8

$10

$12

$14

$16

$18

R² = 0.510210844738698

Movie Ticket Prices vs. Housing Costs

Adult Tickets

Median Monthly Rent by Zip Code ($)

Pri

ce

of

Movie

Tic

kets

($

)

Introduction Industry Analysis Price Strategies Recommendation

Competitive AnalysisCollected 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.

Introduction Industry Analysis Price Strategies Recommendation

0 5 10 15 20 25 30 35$0

$2

$4

$6

$8

$10

$12

$14

R² = 0.0676369165182233

Movie Ticket Prices vs. Number of Local Competitors

Adult Tickets Linear (Adult Tickets)

Number of Local Competitors

Pri

ce

of

Movie

Tic

kets

($

)

Introduction Industry Analysis Price Strategies Recommendation

0 to 5 mi. 5 to 10 mi. 10 to 15 mi.$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Difference in Adult Movie Ticket Prices Between Nearby Competitors

Distance Between Two Competing Theaters (miles)

Ave

rag

e D

iffe

ren

ce

in

Pri

ce

of

Mo

vie

T

ick

ets

($

)

Introduction Industry Analysis Price Strategies Recommendation

Tacit CollusionMarkets 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+

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

Over 40 % of total theater profit is Concession

Concessions

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

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?

Introduction Industry Analysis Price Strategies Recommendation

Price Sold for Large Tub of Popcorn

Cost of large Popcornbag

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?

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

Demand Uncertainty

Variable Pricing can be complicated

Distributors can refuse to license to theaters that have variable pricing

Fairness

Why Does it Occur?

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

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

Introduction Industry Analysis Price Strategies Recommendation

Questions?

Thank You!