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From Pixels to Popcorn
Part 3 of a four-part series. Movie theaters must reinvent their analog and digital interfaces to recapture customer attention.
It’s the year 2023 and movie theaters seem to have missed the memo on progress. To win back viewers, exhibitors must break free from the past, revolutionize their venues, go all-in on massive screens, and cultivate genuine digital relationships with their customers.
Read Time: 17 minutes
Parts in the Series
Part 3: From Pixels to Popcorn
Part 4: Cementing Cinematic Synergies
In the first part of this series, we outlined a couple of unfortunate truths about the theatrical film business:
Attendance per person has been in permanent, predictable secular decline for 70 years.
Major Exhibitors have massive balance sheet risk due to mismanagement of this decline and exacerbated by the pandemic.
I offered one particular remedy that I’m not totally confident these public companies will take on but that is absolutely necessary to right size the business in the near-term, which is shuttering a significant portion (20-40%) of their available theaters across the country.
In Part 2 of the series, we walked through the significant opportunities Exhibitors have for leveraging standard price discrimination approaches found in similar businesses (airlines and hotels) for both extracting more value from current customers and expanding the customer segments that are most pricing sensitive.
In Part 3 (here), we’ll focus directly on the theatrical product itself - how it has stayed largely frozen in time while home entertainment fundamentally reshaped customer behavior, and how Exhibitors can/must invest their newly-found post-downsizing capital to rebuild the theatrical product for the modern consumer.
Moore’s Law Killed the Theatrical Product Advantage
When the first Megaplex debuted in Texas in 1996, the in-home viewing experience was quite pedestrian by today’s cushy standards:
Televisions were less than 24 inches on average, small boxes with non-HD picture and horrible in-unit audio.
Rarely did a home have additional speakers, let alone a full surround sound setup.
Outside of a home video collection (still a combination of VHS and DVD), the total available supply was effectively whatever was stocked at the local Blockbuster. That is, even home viewing most often required leaving the home.
Compare this to theaters at the time. Massive screens, surround sound, and although total available supply has never been a feature of the theater, with long (8-12 week) exclusive windows, theaters represented the only opportunity to see the hottest new films without having to wait months.
That said, although the relative quality of the theater experience was, on average, better than the home experience, it wasn’t absolutely great. Theaters were always a bit dingy, a bit gross, with each admissions ticket a coin flip representing the chance of having the unenviable “tall person sitting in front of me so I literally can’t see 40% of the screen” viewing experience.
Even still, watching a movie in a theater was, unequivocally and fundamentally, better than watching at home.
Fast forward to the “typical” home entertainment setup today, in which televisions are HD flat screens more than 48 inches on average, with 2k-4k HD resolution, cheap and effective surround sound, and a host of apps that allow the consumer to access more titles than Blockbuster literally ever carried, instantly.
Movie theaters? Yes, they finally “innovated” with stadium seating, so the “tall guy” scenario is no longer an issue, but the rest of the experience? Largely frozen in time.
Improving the Foundational Quality of Theaters
“Movie theaters need to rise a few levels in their standards of quality. They need to clean the floors. They seem pretty understaffed. It’s really basic.” - CAA Partner Maha Dakhil
The experience of attending a movie theater today is perpetually inconsistent, often unpleasant, and still degrading. Lane Brown describes in raw, probing detail just how bad it has gotten:
On brightness issues. “It’s a polarized lens that cuts a picture’s brightness by a third. [Projectionists] just have to push it to the side when they switch to 2-D, but theaters forget to do it all the time.”
On top theaters still being shitty: “At the Regal E-Walk, there’s a torn masking curtain at Puss in Boots: The Last Wish, an out-of-calibration projector creating oddly colored highlights in Titanic 3D, and a presentation of Magic Mike’s Last Dance that bleeds a few inches off the top of the screen. And don’t get me started on the bleak spectacle of the multiplex’s lobbies”
On who manages projection issues: “Now that multiplexes use automated projection, problems fall to house managers, who, in this age of austerity, may be the same overworked employees ripping tickets and selling popcorn.”
On worn out project bulbs: “Projector bulbs are supposed to be used for only a certain number of hours, typically between 1,000 and 5,000 based on their wattage. But since a single one can cost around $1,500, plenty of theaters push them past their expected lifespans.
Every single moviegoer has experienced at least one (and likely all) of the above issues in the past year. It’s no surprise, then, that these home (and mobile) entertainment options have hastened the secular decline with the most active moviegoers.
“A decade ago, the 12- to 24-year-old age group went to almost eight films a year. Today, this same demographic sees fewer than five annually. In the early 2000s, 28% of Americans attended more than 12 films per year. Today, only 12% do.”
Whereas the cinema experience just 25 years ago was fundamentally different and better than the in-home experience, that delta has shrunk so significantly that the theatrical offering is only marginally better (if at all) for many consumers.
Theaters still (sometimes) represent the apex of the technical filmgoing experience, but this differentiation is much weaker and not nearly sufficient for bringing people to the theater, especially when there are other (non-technical) issues to contend with…
“Going to see a film is incredibly affordable compared to other types of cultural experiences. But if you go out, it’s not that you have to spend whatever amount of money [on a ticket]. It’s everything that goes with it. Do you need to park? Do you need a babysitter? Do you have dinner out? That’s where it starts adding up.” - Sundance Institute CEO Joanna Vicente
Consumers have trended toward home entertainment because the overall product experience has improved so substantially, closing the gap with the theatrical experience. But consumers have also trended away from theaters - because Exhibitors have fundamentally neglected to maintain let alone improve on the conditions of its product. .
AMC writes in the “innovation” section of its annual report that “recliner seating is the key feature of our theatre renovations”. When reclining seats constitute innovation, it should come as little surprise that Exhibitors have failed to establish acceptable baselines for their theatrical product quality. Instead, they have focused on money-making schemes that have fundamentally degraded the customer experience:
3D Films are, and always have been, a pricing gimmick. 3D offers no actual improvement to the viewing experience, no improvement to “immersion”, and instead leads to worse projection experiences as theaters cannot be bothered to consistently shift their lenses between screenings.
Dine-in theaters represent the absolute worst of both worlds. Shitty, overpriced food in theaters made less dark because each seat needs lights for ordering, coupled with a constant stream of interloping staff who disrupt sight lines in order to share the on-demand mediocrity to patrons.
If Exhibitors do in fact want to rebuild their businesses, investing in the wholesale cleanup and ongoing maintenance of their theaters to a level of quality that they would actually accept in their own homes is, frankly, the bare minimum.
Beyond re-establishing this quality baseline, however, Exhibitors must also expand the advantage they will always hold over the home entertainment system - overwhelming size and power. Here I’m talking about IMAX.
Large formats like IMAX are key anchors to attracting demand
“As of December 31, 2022, AMC was the largest IMAX exhibitor in the U.S., with 186 IMAX screens and a 55% market share. Each one of our IMAX local installations is protected by geographic exclusivity, and as of December 31, 2022, our IMAX screen count was 96% greater than our closest competitor.” AMC 10-K
AMC’s humblebrags here reveal some interesting data about the current state of Premium Large Format (PLF) screens:
Just 31% of their theaters currently have an IMAX theater, assuming just 1 per theater.
With 340 total theaters nationally, IMAX has a market penetration of less than 10%.
IMAX is not the only PLF format, of course. AMC actually has more non-IMAX PLF screens across its theaters:
But IMAX is the brand most synonymous with MEGA-sized screens and auditoriums. Why does this matter? Put simply, PLF screens drive massive value to a theater (currently about 14% of admissions revenues), and though relatively few films are capable of being shown on these screens today, a proliferation of these screens would likely help boost Exhibitor returns.
Why is that the case? In their piece “Some economics of movie exhibition”, the economists ultimately conclude that:
“Adding an Imax auditorium, to an otherwise observationally identical theater, increases the revenue from its regular auditoria by a staggering 45%”
This figure is a bit overstated. As the authors point out, a theater with IMAX has on average 8.3 non-IMAX screens, so an additional regular theater would be expected to add 11% revenue to that theater, which implies that an IMAX theater adds at least a marginal 34% of revenue.
Fine, it’s not quite 45%, but increasing topline revenue by a third simply by installing one additional (massive) auditorium is silver bullet-adjacent for such a cash-strapped business. Why are these screens so much more valuable?
A single IMAX auditorium is typically about 3x larger than a normal-sized auditorium, so Exhibitor’s can better capture high volumes of concentrated demand.
IMAX-eligible films are relatively scarce, high-budget event films so demand is quite high overall, resulting in significantly higher “seat utilization” rates than normal theaters.
The scarcity and high demand enable Exhibitors to significantly increase prices.
More specifically, the above researchers found that about two-thirds of the IMAX premium is explained by a higher seat utilization rate, with the rest being explained by a price premium. Further, there is a “spillover effect” from popular IMAX films, which bring in higher volumes of people to the theater that “spills over” into regular theaters.
Thus, the inclusion of an IMAX (or other PLF) screen to a theater provides direct boosts to revenue from the screen itself and indirect boosts by exposing the large concentration of consumers to other films at the theater.
The net takeaway here is that every remaining multiplex from the (soon-to-be) great theater purge should have a single PLF to anchor its non-PLF screens, and these screens must be filled with more total content.
Not so much mind you that the relative scarcity/value of a “made for IMAX” movie is diminished, but it seems pretty clear from Exhibitor statements that this piece of the content puzzle is not yet saturated.
Leveraging the Digital Relationship
In 2023, it’s insufficient for businesses who specialize in physical products, especially place-based experiential products, to stop with these IRL products - they also must establish strong digital relationships with their customers, to ensure that connections are at worst maintained in the periods between visits.
Forging digital relationships with customers is, yes, the digital form factor itself - the apps, the websites - but it’s also the types of interactions with customers. Transactional methods are quite obviously a key part of this UX, and we’ll get to them, but a theater’s app offers the opportunity to understand a given moviegoer far beyond the 3.5x she actually attends the theater today.
Taken together, the Big 3 must develop greater expertise within the realm of software, using mostly off the shelf B2C design principles, to improve and transform the customer relationship, in three primary ways:
Building a great digital experience
Designing and expanding subscriptions
Evaluating whether rewards programs are value accretive
Build Great Digital Experiences
Exhibitors need to build persistent (digital) relationships with their customers which, until the last decade or so, was simply not prioritized. The first touchpoint here is through the Exhibitor’s owned digital properties - its app and website.
Digital sales now represent more than 60% of all tickets sold and an even higher proportion (as expected) within younger cohorts:
But this isn’t the key opportunity here; it simply establishes that there is already a strong digital transactional relationship between customers and Exhibitors. No, the opportunity here is building direct, bi-directional communication:
About the customer’s ongoing experiences with the theater itself (for quality control).
About the customer’s specific ratings of the films.
And most importantly, about film recommendations and reminders.
I don’t want to do a full UI/UX breakdown of the current versus optimal theater apps (perhaps a future piece), but the basic principle is to use the app (and site) as a persistent push/pull mechanism for data collection and application.
Projector issues in theater 5? Send a quick note to the app’s chatbot and the theater’s technical director (a role that must be mandatory for every theater moving forward) will immediately queue it for fixing.
A new film is releasing from a director I previously saw at the theater but for which I haven’t yet purchased a ticket? Let me know!
Once urgency pricing is enabled, ping me DIRECTLY to let me know that “last minute” discounts are available!
This is all very trite UI/UX for standard B2C apps these days, but Exhibitors have significantly lagged in investing in their digital infrastructure to enable 1:1 relationships with their customers, and this piece is absolutely necessary for (re)building a longer-term relationship.
Design and Expand Subscriptions
Rapid expansion of price discrimination should significantly improve the transactional revenues of theaters today which, though I don’t have specific numbers, represent the overwhelming majority of theatrical revenues.
What these improvements don’t provide is recurring revenues, nor do they directly incentivize customer retention. The obvious next step in the Exhibitor’s digital development is subscriptions.
Yes, everyone is over-subscribed and yes, Exhibitors were largely pushed in this direction by the Moviepass gambit. Neither changes the fact that subscriptions are super useful monetization maximization mechanics for entertainment products. Economically subscriptions offer a number of benefits:
Explicitly improving retention by shifting the transaction decision from opt in to opt out.
Smoothing highly volatile transactional demand with more predictable payment schedules.
Providing a bit of float, derived both from annual subscriptions and from breakage.
Ah yes, breakage. The term is traditionally used for gift cards (analog or digital) to describe funds that are deposited but never actually redeemed, providing the issuer with “free” cash flows. Breakage here is a bit more like how gym memberships operate.
A gym’s physical space is demand-capped (i.e., only so many people can work out at a time) but memberships (subscriptions) are massively oversold because redemption rates are known, predictable, and quite low.
Similarly, a significant portion of theatrical subscriptions will not be redeemed every month, and there is little worry of the “mass redemption” problem gyms face because seat utilization rates are so low (as I’ve already discussed).
Although it’s not something ANY company ever touts, subscriptions for redeemable goods (whether lattes, gym visits, or theater seats) provide a mechanism for capturing at worst 0% loans and at best unredeemed deposits from customers. For a business in dire need of cheaper capital, this is a clear (secondary) benefit to more aggressive subscriptions rollouts.
But subscriptions aren’t just financial mechanisms; they offer Exhibitors the opportunity to alter the customer experience itself. When we switch from a transactional entertainment relationship to a subscription, our consumptive behaviors fundamentally change.
We tend to consume more content but also more broadly, expanding into secondary or tertiary areas of interest, specifically because the purchasing decision is decoupled from the film selection decision.
That is, subscriptions are a key feature not only for increasing ARPU and smoothing demand but they actually alter demand - requiring changes to how Exhibitors program their theaters and requiring different types of subscription offerings.
The simplest form of subscription here is the MoviePass way - one monthly price for unlimited screenings. This is…fine, but as I just spent an entire essay elucidating the virtues of price discrimination, Exhibitors can and should leverage the same tools for subscriptions packages.
As such, subscriptions should be designed explicitly for different customer segments as part of the core theatrical product offering.
Those weekday passes for cost conscious (and older) moviegoers? Offer a subscription.
Are there substantive affinities for specific distributors (like A24)? Test a subscription.
What about taking a page from the local orchestra’s playbook and offering customers the opportunity to design their own multi-film packages1?
My point here is not to outline every permutation of subscriptions but simply to say that subscription design and testing must be a core piece of the exhibitor’s core competency moving forward. And as I’ll discuss in Part 4 of this series, this approach aligns directly with a refocusing on programming as an adjacent competency that must be (re)learned.
Is a Rewards Program Worth It?
Cultivating a robust, bidirectional relationship with customers, and pushing an ever-increasing proportion of customers into subscriptions are no-brainer areas of weakness and opportunity for Exhibitors. The final piece of the digital program is not so clear-cut.
“loyalty programs almost always destroy value”.
Why would this be the case? There is a massive selection effect at play here - customers who spend the most are also the most likely to join a rewards program. Even without the program they would (likely) retain the same level of spending; that is:
“the most frequent, highest-spending customers tend to be [the] LEAST price-sensitive customers.”
They are “rewards inelastic”. And in these cases, when loyalty programs are misapplied, rewards are not incentives to spend more but discounts on current spending. As such, many “loyalty programs” are effectively just a value destroying couponing program for the highest value customers.
Designing a value accretive loyalty program for movie theaters is complex. Exhibitors must contend not only with the two-tiered, sequential purchasing flow (concessions can only be purchased after an admissions ticket is purchased) but with fundamentally different margin profiles for each purchase (85% for concessions, 40-55% for a ticket).
There are two questions to start:
What customer segment are we focused on?
What customer behavior are we primarily attempting to incentivize?
The program will look fundamentally different if the answer to question 1 is “price sensitive customers of moderate attendance” compared to “most frequent customers”.
And given what I just wrote about the destructive nature of many loyalty programs, it should come as no surprise that I think the former customer segment is a better starting point than the latter. The Cinema Foundation found that:
47% of respondents see movies more often because of rewards, and 39% because of subscriptions.
64% say they purchase more concessions because of rewards programs, and 77% of subscriptions.
So there’s at least directional, self-reported (and encouraging) data to suggest that the combination of subscriptions and rewards might be a significant value add for Exhibitors.
AMC has certainly leaned in the hardest here, reporting that, as of 2022, 28.2M households subscribed to one of their Stubs loyalty programs, representing 58M individuals, and that rewards members currently represent 43% of total attendance.
They don’t unfortunately break out PAYING members, and without diving into their internal testing can’t actually determine whether this program is boosting or discounting purchases. But the largest Exhibitor is, at the very least, attempting to build a significant incentivization system with its customers.
As we’ve discussed ad nauseum in this series, theatrical attendance has been in secular decline far before streaming launched, and considerably before home entertainment setups were of comparable quality.
But the Moore’s Law-catalyzed improvements to home entertainment technology did effectively neuter much of the advantage that theaters had with regard to the “optimal” viewing experience.
More damagingly, Exhibitors fundamentally squandered this meager advantage by both disregarding the maintenance of its theaters to acceptable levels of quality, and by failing to actually experiment with improvements to the in-theater customer experience. Instead, they rolled out obvious cash grabs in the forms of 3D projection and in-theater dining that fundamentally degrade the customer experience.
Further, Exhibitors have been extremely late to the digital then mobile revolution of the last 20 years - failing to build a great digital experience while allowing a third party to completely undermine their base economic model. To have any hope at resetting the demand curve, Exhibitors must retrain their eyes on the basics of optimal customer experience, which likely requires a resetting of company cultures that have never put the customer first.
I’m a cheating a bit here because this isn’t technically recurring revenue, but it IS multi-ticket bundling and improves retention.
Nevraumont's bona fides, self-presented in that linked article, if you’re wondering why I leaned so heavily into his feedback: "I built the core of my marketing career on the establishment and refinement of loyalty and reward programs. During four years as a consultant with McKinsey, I helped increase the lifetime value of existing and potential customers for telecom and retail companies. Following my time at McKinsey, I joined Expedia to oversee “Customer Loyalty and CRM.” In practice, my position involved supervision of two distinct teams: one was responsible for Expedia’s loyalty program (a partnership with Citibank), an obsolete “elite customers” program, and the Expedia Credit Card (also with Citi). The second team was responsible for customer-level analytics across the global business."