Premium on exhibition: Gabelli Conference decides windows must prevail

“The supply of moviegoers will continue,” NATO president John Fithian declared, providing assurance (and humor) to the room full of investors and analysts that had gathered for the third annual Gabelli Movie & Entertainment Conference in New York City.

Quoting demographic information that, unlike their counterparts in equally developed countries, “Americans are procreating and producing future moviegoers in large numbers,” Fithian also asserted that older audiences are enjoying movies more than ever. “Hollywood is beginning to understand that,” he observed, and thanks to the success of recent Oscar-caliber titles, they are also creating a “more diversified meal” of movie options. In the case of dinner and a movie, alcohol and VIP offerings, exhibitors are serving it up quite literally, he noted. Other industry developments that will “bring exhibition sustainable growth over time” include alternative content, advertising and pre-show innovations and, “by far the most significant,” digital cinema and 3D motion pictures.

Fithian’s debut at the gathering hosted by investment advisory Gabelli & Company, Inc. ( perfectly set the tone for subsequent company presentations and questions. Although North American exhibitors realized a 121% increase in the digital footprint of their theatres (Cinedigm and Ballantyne Strong were two presenting companies that saw the benefits), he said that 15,000 converted screens out of some 39,000 is not enough. By year’s end, the industry hopes to have gone from the current 8,000 to at least 14,000 3D-enabled screens. “Still not enough,” Fithian cautioned, calling for 40 to 50% of all d-screens to have the capability to light up in stereo to keep up with the number of films announced.

Canada’s Cineplex Entertainment saw a 16% rise in its percentage of 3D screens in 2010.

Canada’s Cineplex Entertainment saw a 16% rise in its percentage of 3D screens in 2010.

Throughout the conference, numbers and metrics were key. But unlike prior years, analysts seemed content to look at the rises in income—very good to great to “record results” was the positive news here—and to focus on increased contributions to the bottom line afforded by premium pricing and ever-expanding additional revenues, rather than the dreaded downturn in 2010 attendance. Notable exceptions were Cinemark’s plus-sized admissions in Latin and South America (North America alone down 2.4%) and a 0.9% decrease for Cineplex in Canada. Not only was this number way lower than the 2009-2010 U.S. industry average of -5.6%, but company president Ellis Jacob also noted how Cineplex continues “to outperform U.S. circuits in virtually all metrics.” Except box office per person because, “we are deliberately keeping ticket prices lower.”

In a smart nod to tough economic times, which otherwise seemed joyfully absent from the overall discussion, or in an even smarter effort to help raise concession take per person by 2.7%, up-charges for tickets were, in fact, the talk of the conference.

Marcus Theatres and Regal lauded the (en)grossing power of UltraScreen XL3D and Regal RPX, the circuits’ respective proprietary big-screen formats. National CineMedia CEO Kurt Hall extolled the virtues of alternative content, calling The Metropolitan Opera the poster child for its success. He also singled out 3D advertising for allowing circuits to charge a premium of 50 to 100% to advertisers because of exceptional recall metrics and premium inventory status. Given the paucity of 3D television sets, “for once, movie theatres may be ahead of television in terms of distribution,” he opined, making cinemas ripe for live events and more. People like the stereoscopic medium on the big screen and the cinema network needs to continue growing, he concluded.

On the home front, IMAX CEO Rich Gelfond cited the company’s 20-plus years of 3D experience, knowhow, technology and related content catalogue as key reasons for joining the dedicated 3net 3D cable venture with Sony and Discovery. “We are planting a flag outside of our core space,” he declared, envisioning how “the IMAX brand can be leveraged in other areas,” including consumer electronics. (We predict a THX and RealD repeat.) The portable theatres under development are another way of expanding the brand. Gelfond believes that IMAX-izing an event, for instance, will make it better. The company has also invested in Laser Light Engines to stay ahead of the projection technology curve.

Meanwhile, the digital footprint of commercial IMAX theatres is expected to grow to 1,300 by 2014, from roughly 350 screens today (which grossed a location average of $1.8 million last year, by the way). In the process, Gelfond anticipates a second IMAX screen coming to some locations to offer multiple releases at the same time. Such are the interest and demand expressed by studios and filmmakers, he said. IMAX has become the “beachfront property” for new releases, he explained, “as digital allows more flexibility and runs as short as a week.” As costs for mastering and prints have come down and revenues are shared between exhibition, distribution and IMAX, faster turnover allows more titles to be released.

In the ever-present discussion of release windows, Gelfond feels IMAX plays a unique role in creating excitement and buzz. (Consequently, for the upcoming negotiations of digital remastering terms with studios, he anticipates allocation of more money to the marketing side.) “IMAX is a premium experience that will always have a place in the eco chain,” he assured investors—possibly a place ahead of everyone else. Based on the success of limited IMAX-format-only pre-releases internationally, the executive confirmed talks with studios about the potential of launching select films earlier. Relaying studio concerns that potentially negative buzz generated from such pre-events could impact the rest of the theatrical runs, Gelfond does not “really think there will be a ubiquitous pre-release window.” But he acknowledged that “there is an opportunity, particularly in delayed-release markets, to leverage the platform.”

Providing IMAX with its own window, no matter how short, would be in line with the ongoing development of different distribution platforms that the film industry has already done successfully over the past 40 years. “Selling one movie multiple times is very good business,” noted Gabelli’s media/entertainment sector analyst Brett Harris, in his most recent analysis of “Movie Windows: Can They Survive the Digital Age?” “Impressively, new distribution models have not yet jeopardized the old.” Since 1980, home-video and pay-cable have driven industry profits up, he wrote. “Despite the implementation of VHS and, later, DVD, theatrical box office and television revenue grew throughout the last three decades. More windows have equaled more profits.”

The need to generate just that was confirmed by all speakers during the conference. Nobody is against Premium VOD as long as it does not change established windows with a negative impact on our theatrical business, the consensus went. Cinemark CEO Alan Stock acknowledged that the “home space has problems” and that studios need to experiment to offer services that keep up with what consumers want.

John Fithian provided the reasons why home-video has declined. “While our admission prices have risen continually, the studios have never been able to maintain price points at home.” First declining disc prices and, now, offerings like Netflix subscriptions and Red Box rental kiosks “have devalued the movie product.” Not surprisingly, Fithian foresees charges for Premium VOD following a similar path, not to mention that, unlike theatrical admissions, there is no control over how many eyeballs are watching. “The higher the premium, the more people will be invited to come over.” Going early and shortening the theatrical window is just “a bad business model,” not to mention that Premium VOD would provide thieves and pirates access to “a pristine digital copy earlier than ever,” Fithian warned.

By contrast, “theatres have been a good story” for the studios, Stock advised. Like co-presenters Regal and Cineplex, Cinemark is talking to their distribution partners, who all seem to favor a slightly different approach, to find a solution “together as an industry.” The job for exhibitors is to stay “united in keeping the future of their business… We have to make sure that we keep hold of our assets and keep the perceived value of the theatrical experience” alive in consumers’ minds. Home and cinema are “two different experiences and moviegoing remains the cheapest form of out-of-home entertainment.”

Many analysts wanted to know what exhibitors are going to do to protect their turf. Everybody was in agreement that keeping movie theatres at a premium, both in pricing and as a shared communal experience, as well as in the distribution chain, is key. “A theatrical release itself provides buzz and a certain aura of prestige that cannot be replicated with direct-to-home,” argues Gabelli’s Harriss. All four circuits are also throwing marketing considerations and previews into their defensive play. Taking National CineMedia’s spot-rates as the basis, Harriss put the value of 15 minutes of trailers and 1.4 billion tickets at nearly $1.5 billion to studios—thereby providing “the equivalent of 42 billion 30-second ads to a targeted audience of demonstrated moviegoers.” Last but certainly not least, Regal Entertainment CEO Amy Miles confirmed to Film Journal International that rental terms and splits would definitely be (re)negotiated as part of the Premium VOD release equation.

After all, “the health of the theatrical window is important to maintaining the attendance on which exhibitors rely,” Harriss noted in his report. “With high fixed cost, even a small decrease in theatrical attendance would result in a significant loss of profits for exhibitors.”

Just as company presentations and statements made at the conference and reflected in this article come under the usual disclaimers regarding forward-looking statements, the analysis provided by Gabelli & Company and quoted in our article also reflects “personal views about the subject companies and their securities.”

Gabelli & Company on Movie Windows

“To date, the shrinking window has not had a dramatic effect on the revenue generated by the theatrical window. From 1995 to 2010, total box-office receipts grew from $5.5 billion to $10.5 billion at 4.7% CAGR, in line with the 4.7% CAGR from 1980 through 1995. In the same ’95-’10 period, attendance increased from 1.2 billion to 1.44 billion at 0.5% CAGR, slightly below North American population growth of 1%.”