The Tipping Point

This was originally published at the Patreon site in January 2018.

When it comes to the so-called “theatrical experience”, have we reached the tipping point? By “tipping point”, I refer to the level at which financial declines become so steep that insolvency and bankruptcy are no longer avoidable, at least on a small scale. Before discussing what may lie ahead, at least in the short-term, for multiplexes and megaplexes, it’s necessary to look at where we are now and how we have gotten here.

Hollywood is referring to 2017 as a “down year.” That’s an understatement. Despite having the biggest March and September ever, boasting two $500M+ releases (something that has happened only once previously), and featuring a Star Wars sequel, 2017 was a “down year”? I’d be interested to see what an “up year” looks like. Financially, 2017’s domestic box office dropped 2.7% off 2016’s – despite a ticket price increase of 3.2%. Attendance took a beating, off 5.8%.  The official studio spin is that this was a “blip” and that the upward trajectory will resume. To me, such a reaction comes from a shallow reading of the numbers. I believe this is the beginning of a systemic shift in customer habits – a change to preferring “alternative” entertainment options over theatrical viewing. I don’t believe people are less interested in seeing movies – merely that they are less interested in seeing them in theaters. The studios will adapt (eventually); it’s the theaters that are in trouble.

The following is the graph that the movie industry would like interested parties to focus on. It’s a reflection of the unadjusted domestic box office for every year between 1990 and 2017. As we’ll see shortly, 2002 was the peak year for movie attendance. Every year up until then could (mostly) be seen as increasingly strong. The chart largely reflects this with a pretty consistent upward slope starting with 1991 (1999 was the only anomalous year). After 2002, however, things got very bumpy. Although the general direction was still upward, a sinewave-like instability can be seen. This instability is the first warning sign that all is not well.

Spin doctors use the overall upward trajectory of the domestic box office to argue for health and growth. They fail, however, to overlie that chart with this one, which plots ticket price against year for the same period:

I wrote the following analysis in one of my daily blog entries which explains the relationship between ticket prices and inflation:

The point is to emphasize how much movie ticket prices have increased not just in the short term (jumping by a dollar between 2012 and 2017 – that’s a 12% increase during a time when the national inflation rate was around 2% per annum. If ticket prices were merely keeping pace with inflation, they would cost (on average) $8.59 today not $8.96. That’s $0.37 per ticket unaccounted for which, when multiplied by 1.2 billion admissions, is a staggering $444M. Likewise, looking at the longer trend, a $4.23 ticket in 1990 should cost $7.98 today. So, somewhere along the way, Hollywood has gradually been increasing the price in the (mistaken?) belief that they have a product people are more willing to pay more for today than they were as recently as 25 years ago.

Based on attendance figures, the movie industry reached its peak in 2002. In that year, the average ticket price was $5.81. Breaking down the inflation vs. ticket increase figures and using 1990 as the baseline number, the expectation would have been that, based purely on inflationary influences, a 2002 ticket should have cost $5.82, which is exactly what it did cost. No one was “cooking the books”, so to speak, between 1990 and 2002. Then, beginning in 2003, the big attendance drop started and, in a vain attempt to inflate the box office numbers, ticket prices began a greater-than-inflation climb – gradually at first (2003-2006) then sharply. There was a brief plateau in 2010-2012 before the latest spike happened.

Between 2003 and 2017, the movie industry tacked on an extra dollar of price to tickets. Of course, the studios have an answer for this. Their argument is that the reason for the above-inflation increase is because there are “more customer-focused options” with 3-D and large-screen (IMAX) formats. Since each comes with a hefty surcharge, it stands to reason their impact would be felt in the overall price. Perhaps that explains the cost hike between 2003 and 2012. Since then, however, that cost has become baked-in and the percentage of revenue from 3-D has fallen. So, if anything, we should have seen a slight drop.

Put all of this together and you get the following “summary” chart, which shows clearly the state of the industry. This is total admissions/tickets sold over the 1990-2017 span and illustrates a much different picture from the one in the first chart above.

The 2002 peak is there. Leading up to 2002, there was an upward trend in theater attendance. Yes, there were some down years (1995, 1999, and 2000 in particular) but they were always followed by robust rebounds. After that, the trend has been downward and, after a seeming plateau in 2005-2009, the downhill slope is undeniable. Attendance in 2017 was at its lowest since 1992. To put that in perspective, 2017 had the lowest attendance in the Internet Age. (1992 was pre-Internet for all but the most advanced tech companies and universities.)

Based on the recent pattern (down big/up/down little/down big), one might expect a recovery of sorts in 2018, but we’ll have to be patient to see if that happens. The first half of the year looks strong but as for the second half... There might once again be two $500M+ blockbusters (Black Panther and Avengers: Infinity War), but overall box office health is skewed, not founded on, the fortitude of its strongest performers. Even if the recent pattern continues in 2018, it will most likely repeat in 2019 and 2020. It seems likely that some time in the next three years, we could see the lowest attendance figure since the early 1980s.

The best case scenario would be to stabilize the decay and retain an audience in the 1.20 to 1.25B range. That would stave off disaster. Can that be accomplished? Part of the reason for 2017’s downturn is a result of product dissatisfaction but a greater reason is the diminishing allure of the concept of a “night out at the movies.” Families get better value from renting or buying a Blu-Ray and watching it at home. Younger viewers prefer the fare available on Netflix, Amazon, Hulu, etc. Theaters become the go-to destination only for hugely popular blockbusters. That’s a losing proposition.

So where could all of this lead? There will likely be at least three near-term impacts. These will become apparent within the next five years (perhaps less).

First, budgets will come down. Only proven tent-poles will be allowed nine-digit production costs. Studios will likely once again get into the business of making “mid-budget” films and investing more in indies. Larger films will still be made but they will be scaled-back. Star Trek Beyond is an example of the kind of bloated movie that, had it been made economically, would have turned a nice profit. With a $90M budget (instead of the $185M it actually cost – and that doesn’t include publicity), it would have likely broken even (or come close) on the strength of its meager $158M domestic take. That would have allowed the international accrual to be profit. Instead, its worldwide theatrical gross wasn’t sufficient to cover its costs. Would the box office total have dropped if the movie hadn’t been so special effects-heavy? Almost certainly not. Outside of Star Trek fans, no one saw it.

Second, studios (trying to avoid being caught flat-footed) will begin to shift resources toward the home-streaming market. That’s the current growth area and everyone is rushing to exploit it. For a studio, there are two ways to approach this: shrink the window between the theatrical opening and make content directly for release on a streaming platform. As the on-line competition for eyeballs heats up, studios will become increasingly aggressive with what they make available. It won’t just be bottom-of-the-barrel fare. Netflix has already upped the ante with Bright. It won’t be long before we’ll start seeing films with $50-80M production budgets going directly to streaming. That will gut the already struggling theatrical market. Worse still for multiplexes, studios are going to be pushing to release the biggest movies onto streaming sites within 2-3 months after the theatrical debut (perhaps a little as 3-4 weeks with a premium cost). This will create a rift between theaters and studios but, in that relationship, the former has increasingly less leverage.

Third, theaters will start closing. If you know a theater that’s pretty empty even during peak times (Friday and Saturday evenings, Saturday and Sunday afternoons), it probably won’t be around in another 2-3 years. AMC and Regal are working overtime to “downsize” their multiplexes by installing recliners – renovations that diminish capacity by 50-67%. Eventually, however, all those empty seats are going to translate into a reduction in the number of screens. Contraction is inevitable and the biggest megaplexes may be the most vulnerable. It’s a lot easier to operate an 8-plex in a down market than it is a 24-plex. Perhaps the megas will be remade. One possibility is that 24 screens could be reduced to 12 with the other dozen auditoriums transformed into a restaurant-and-game area. There are a lot of creative ideas out there but the concept that there will be the same number (or even close to the same number) of theaters in 2023 that there are in 2018 is a fantasy.

For now, we’re in a wait-and-see game but it’s a fair bet that the losers in the next few years will be the traditional “brick-and-mortar” multiplexes and the winners will be the virtual screening rooms of Amazon, Netflix, Disney/Hulu, and any new challengers that go toe-to-toe with them.

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