Cinema
An Insider’s View of the Theater Industry
Editor’s Note: The following was written by a top executive in the movie theater industry. ESP acquired permission to use it on the condition we don’t identify the source.
Coming to a theater near you... “Movie Theater Industry 2000.” It’s packed with thrills and spills, and promises to entertain you. A modern-day version of the classic tale, “David and Goliath.” Watch as industry titans sprint their way into financial chaos by building new theaters on top of their old leased ones, causing downturns in their earnings and upswings in their write-offs. Meanwhile “little David” appears to be left in the dust... fortunately.
This seems to the current picture of the movie theater industry, as depicted by much of what we read in the news these days. The plot of this story is being played out in articles and media reports outlining the financial woes of many of America’s largest theater companies...Carmike, United Artists, Edwards, Regal, General Cinema, Loews Cineplex. Wall Streeters and investors alike are ruminating over the impact a large surplus of old obsolete theaters will have on the future values of these companies.
However, as in any good movie, the whole story has yet to be told, so don’t go get that popcorn refill just yet, the movie’s not over. While the following is admittedly a brief overview of the current state of the theater industry, we hope it may give the reader a more balanced assessment than the numerous sensationally slanted opinions which the media is currently offering.
The industry is in the midst of a paradigm change, arguably only the fourth in the past 100 years. This change is to one of our industry’s cornerstones, its delivery system, the theater itself. The new all-stadium, large screen multiplex theater is replacing the old flat-floored small theater. (By example, the airline industry went through the same experience when they switched from propeller-driven planes to jets.)
The new multiplex is efficient, profitable and it’s the clear preference of moviegoers. This new delivery system’s popularity is growing faster than companies have been able to close their old theaters. The result, the industry has a surplus of old, unprofitable theaters (albeit in big cities) and a shortage of new theaters primarily in smaller cities.
As large theater companies plunged headlong into building the new multiplexes, America’s screen count grew from 26,995 in 1995 to 37,185 in 1999 (an increase of 10,190 screens, according to the National Association of Theater Owners). Today, approximately 12,000 of these are new all-stadium multiplexes. The new multiplexes were built primarily close to old existing theaters in the major cities of America, as the large theater companies rushed to replace their obsolete theaters in order to prevent competitors from entering their markets.
How many movie screens does America need? Using historical formulas, America needs approximately 30,000 screens to meet market equilibrium. Do moviegoers prefer old, flat-floored theaters or new stadium multiplexes? Do movie operators prefer old non-performing theaters or new profitable multiplexes? We all know the answer: New multiplexes.
Of the 37,185 screens currently in operation, approximately 12,000 are new all-stadium screens. To meet market equilibrium theater owners need to first, close approximately 7,200 old screens, reducing the screen count to 30,000. To remain competitive, theater companies are expected to replace (over time) the remaining 18,000 old screens (30,000 - 12,000 new screens) with 18,000 new screens.
The majority of new theaters are performing well, if located correctly and with the right number of screens, according to industry analysts. In the urban markets that performance comes at the expense of the old theaters.
“What wasn’t expected was older theaters started bleeding money so quickly,” said Russell Solomon of Moody’s Investors Services. The cure for the malady is a round of closures, but that’s easier said than done since the large theater companies are committed to leases of up to 20 years. (For example, Regal Cinemas’s current leases commit the company to a total of $1.6 billion in rent on top of its debt, according to the Wall Street Journal.)
Profitability means reducing the number of (old) screens a company operates. That’s where restructuring under bankruptcy comes in. Some companies believe Chapter 11 is a very effective tool for getting out of lease obligations without a substantial penalty.
“Bankruptcies may actually be the prologue to the industry’s recovery,” said Harlan S. Byrne of Barrons.
Recently, companies such as Edwards, Carmike, and United Artists have filed for reorganization under Chapter 11. Other large companies may follow suit.
While the problems of the big 10 theater companies have been well publicized, what hasn’t been is the fact that many of the other 390 U.S. theater operators have survived nicely by avoiding or not expanding in the overcrowded urban markets. The majority of secondary markets are still good, economically viable, and for the most part, still under-screened.
Companies that do not have overhanging inventories of old non-performing theaters have access to capital. A number of them are expanding into other underserved secondary markets and finding competition and economic advantage due to absence of the large theater competitors. Companies like Galaxy Theaters, Harkin Theaters, Rave Cinemas, Signature Theaters, and Wallace Theaters have announced plans to collectively acquire or build over $500 million of new theaters over the next 24 months.
We believe it’s a very opportune time to be a medium sized movie theater company in our industry. It’s exciting.
If you’re one of the large 10 theater companies, you’re currently economically challenged: “Too much old product, not able to make enough new.” However, the Big 10 will work through their problems, get rid of their old inventory and re-emerge much stronger over the next 18 to 24 months. In the meantime, they have halted their expansion into new markets.
The opportunity before us is that only 32 percent of the U.S. is re-screened with the new delivery system...an all-stadium seat multiplex. The medium-sized companies that have NO old product and no drag on earnings from obsolete theaters will continue to operate their multiplexes profitably and enjoy expansion opportunities.
Meanwhile, moviegoers are still going to the theater and movies are as popular as ever. Demand continues its historical upward trends and revenue is still increasing. Despite 75 percent of the country having access to only old style theaters (that need replacing), the U.S. domestic market in 2000 will probably top $10 billion in revenues from movies and concessions.