Expert answer:Discuss and analysis my case

Answer & Explanation:3) SWOT analysis (strength, weaknesses,
opportunities and threats.) (refer Chapters 1-3) ( (use bullets, underlined and
centered headlines)
4).What is the business level strategy,
corporate level strategy and international strategy of the company?
5) What are your recommendations for the
company? Please include well thought recommendations with a rationale. Provide
your reasoning for each recommendation. The recommendations should have pros
and cons. Each recommendation should be elaborated. (Each person in the team is
required to provide a recommendation for this section. Please include the
initials of each student next to the recommendation that they suggest.)
FORMAT
1. 
Title page: (The name of the company and the names of the individuals in
the team.)
2. 
Table of contents page (List the sections of the project and include the
initials of the team members who are responsible for that sections.)
3. 
The case analysis. (Please see the items # 1-5 listed above for the case
analysis.)
i.  Each section should have a
title; centered, bold and in capital.
ii.  The paper will be double spaced,
Times Roman (12 pts)
iii.  Each page will be numbered.
4. 
References (The references will be in the APA format. Please include
detailed information for your sources.)
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CASE 23
The Movie Exhibition Industry 2013
Brett P. Matherne
Georgia State University
Steve Gove, David Thornblad
Virginia Tech
© Vividfour / Shutterstock.com
It is apt that 2012’s top grossing film was The Avengers for
movie studios and exhibitors sought to avenge a dismal
prior year at the box office. Domestic box office receipts
climbed 6% from 2011 to a record setting $10.8 billion.1
Three films, The Avengers, The Dark Knight Rises, and
Skyfall grossed more than $1 billion each in global ticket
sales (Exhibit 1). Behind the scenes, the success, even the
fundamental health of the exhibition industry, is far less
clear. Consider these contradictions:
■ Domestic ticket revenues grew 6% in 2012, but that
volume ranks just 13th since 1980. The 1.364 billion
tickets sold is down 13% from the most recent high
in 2002 of 1.575 (Exhibit 2).
■ 2012’s record revenues resulted from ticket price
increases, not more attendees. At $7.94, the average
ticket price has risen 24% since 2005. But over the
long term, prices keep pace with inflation, raising
questions about the creation of differentiated value
(Exhibit 3).
■ The long-term per-capita trend is negative. In 2012,
the average number of films seen per capita was
3.9.2 In 1946, the peak of moviegoing in America,
the industry sold 4 billion tickets and the typical
American went to 28 films per year at the theater.
■ Movies are more widely available than ever, creating
new substitutes for where, when, and how to view
movies.
Exhibitors are especially anxious for moviegoers
to return to the theater as the industry has invested
an estimated $1.6 billion to convert theaters from film
to digital projection since 2005 (Exhibit 4). The main
promises of digital projection are decreased distribution costs, 3D capability, and the potential to show
alternative content. Despite the sizable investment,
financial benefits have yet to materialize for exhibitors.
Attendance decreased in 5 of the 8 years since conversion began.
Which represents the current and future state of the
movie exhibition industry: The bright lights of a red carpet Hollywood premiere or a dimly lit marquee?
The Motion Picture Value Chain
The motion picture industry value chain consists of
three stages: studio production, distribution, and exhibition – the theaters that show the films. All stages are
undergoing consolidation and technological changes,
but the basic three-phase structure is largely unchanged
since the 1920s.
Studio Production
The studios produce the life blood of the industry: they
create motion picture content. Content drives attendance
and studios are highly concentrated. The top six studios in
2012 created 17% of the films for the year, but these films
accounted for 76% of the box office gross (Exhibit 5).
The top 10 studios constitute over 90 percent of box
office receipts. This concentration, coupled with highly
differentiated content, gives the studios considerable
negotiating and pricing power.
295
Warner Bros.
Yes
Yes
Yes
The Hobbit
Amazing Spider-Man
Brave
Yes
Men in Black 3
Drama Thrl
Drama
Act Thrl
Sci-Fi Act
Musc
Act Com.
West
Act
Anim
Adv
Anim
Hist. Drama
Sci-F Com
Anim
Anim
Anim
Comedy
Anim
Act Adv.
Fant
Rom
Act
Act Adv.
Act Thrl
Act Adv.
Genre
R
PG-13
R
R
PG-13
R
R
PG-13
PG
PG-13
PG
PG-13
PG-13
PG
PG
PG
R
PG
PG-13
PG-13
PG-13
PG-13
PG-13
PG-13
PG-13
MPAA
Rating
$115.6
$2,891.0
45.0
30.0
85.0
130.0
61.0
42.0
100.0
45.0
85.0
170.0
95.0
65.0
225.0
165.0
70.0
145.0
50.0
185.0
230.0
175.0
120.0
200.0
78.0
250.0
$220.0
Prod. Budget
(mil.)
$221.5
$5,536.3
115.3
125.0
126.4
126.5
131.8
138.4
139.4
139.5
146.6
155.3
161.2
161.9
179.0
181.4
214.0
216.4
218.8
237.3
262.0
288.7
290.8
300.9
408.0
448.1
$623.4
Gross
(mil.)
47%
62%
64%
61%
31%
47%
69%
74%
38%
46%
39%
18%
98%
29%
51%
61%
29%
43%
44%
35%
31%
35%
29%
59%
41%
41%
%
Domestic
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Rank
$327.4
$8,184.1
69.3
71.1
81.7
276.9
150.5
63.1
48.4
232.0
173.8
241.3
714.0
3.3
445.0
173.4
134.8
525.7
289.4
298.1
490.2
632.2
532.5
737.6
278.5
632.9
$888.4
Gross (mil.)
53%
38%
36%
39%
69%
53%
31%
26%
62%
54%
61%
82%
2%
71%
49%
39%
71%
57%
56%
65%
69%
65%
71%
41%
59%
59%
%
International
22
21
20
13
18
23
24
15
16
14
3
25
9
17
19
7
11
10
8
5
6
2
12
4
1
Rank
$548.8
$13,720.4
184.5
196.1
208.1
403.4
282.3
201.6
187.8
371.6
320.4
396.6
875.3
165.2
624.0
354.8
348.8
742.1
508.2
535.4
752.2
920.9
823.3
1,038.5
686.5
1,081.0
$1,511.8
Gross
(mil.)
Total
24
22
20
13
19
21
23
15
18
14
5
25
10
16
17
8
12
11
7
4
6
3
9
2
1
Rank
Notes: Data from Boxofficemojo.com, MPAA, NATO, and author estimates. 3D revenues is based on opening weekend. Genres as follows: Act = Action; Adv. = Adventure; Anim = Animation; Com = Comedy; Drama = Drama;
Fant = Fantasy; Hist = Historical; Musc – Musical; Rom = Romance; Sci-F = Sci-Fi; Thrl = Thriller; West = Western. Some production budgets estimated.
Average for Top 25
41%
Warner Bros.
Argo
Total for Top 25
Universal
Sony / Sc. Gems
The Vow
Prometheus
Safe House
Universal
Fox
Les Miserables
25%
Sony
21 Jump Street
Yes
Weinstein
Django Unchained
Sony
?
Fox
Yes
Hotel Transylvania
Taken 2
Universal
Fox
Snow White & the
Huntsman
Buena Vista
Sony
Buena Vista
Ice Age: Cont. Drift
35%
38%
Lincoln
Yes
Yes
Wreck-It Ralph
Universal
Para. – DrmWrks
50%
Yes
Dr. Seuss – Lorax
45%
Yes
Madagascar 3
Buena Vista
Universal
Ted
32%
Sony
Summit
Twilight: Brk. Dawn 2
44%
Sony
Skyfall
49%
Warner Bros.
Buena Vista
LGF
52%
Studio
The Hunger Games
Yes
The Avengers
3D
%
The Dark Knight
3D
Movie
Exhibit 1 Top 25 Releases of 2012
296
Part 4: Cases
297
Case 23: The Movie Exhibition Industry 2013
1,600
$11,000
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1,400
1,200
1,000
800
600
400
200
# Tickets Sold (mil.)
Gross Revenues (mil. $)
Exhibit 2 Domestic Box Office Receipts & Ticket Sales, 1980-2012
0
1980
1990
3D Tickets Sold (est.) – right axis
Gross Revenues (left axis)
2000
2010 2012
2D Tickets Sold (est.) – right axis
Data Source: Boxofficemojo.com and author estimates. 3D ticket volume estimated based on reported 3D revenues with ticket prices estimated as 30% premium over 2D.
Portion of 2012 3D revenue and ticket volume is estimated.
Exhibit 3 Ticket Prices 1980 – 2012
Average Ticket Price
10
20
12
20
20
90
00
$8.63
$7.94
19
19
80
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Inflation Adjusted Ticket Prices (base year = 1980)
Studios are increasingly managed as profit centers
in large corporations. Management is risk averse, as
investments are large and a formula for success elusive.
Consider the fate of two films inspired by comic books in
2011. Warner Bros.’s Green Lantern was considered a flop,
grossing $219 million ($116 million domestic, $103 internationally) and ending plans for a series. That same year
Paramount’s Thor grossed $449 million ($181 domestically,
$268 internationally), giving the green light to a sequel.
Studios focus on 14- to 24-year-olds, consistently
the largest audience for movies. At just 15% of the U.S.
population, this group purchases 21% of all tickets. More
narrowly, 10% of the population are “frequent” moviegoers who attend more than one movie per month and are
responsible for half of all ticket sales.3 Studios target this
audience with PG and PG-13 fare including 19 of 2012’s
top 25 releases. However, domestic demographic trends
are unfavorable. While the U.S. population will increase
42% by 2050, this core audience will increase just 35%
(19 million) or 475 per existing screen (Exhibit 6).
The risks for studios are significant as production
costs are considerable (see Exhibit 1). Studios invested
$1.6 billion for the 10 films which ranked among 2012’s
highest grossing ($165 million per film). Costs have
increased faster than inflation. In 1980, the production budget for the highest grossing films averaged just
$11 million. In the 1990s, films turned to special effects
and costs reached $102 million (up 827%). Today, special
effects alone can top $100 million for a major production.
These investments are considerable, yet no guarantee for
success: Green Lantern, the flop, was made for $200 million while the successful Thor cost $150 million.
Domestic exhibitors were once the sole distribution
channel for films. This has changed dramatically. Films
39,641
2011
0.2%
0.8%
1.0%
−0.3%
1.5%
−1.1%
6.2%
1.2%
2.5%
−4.0%
−1.7%
Change
from
Prior
Year
#
14,020
23,773
31,815
33,319
34,342
36,412
38,862
36,594
36,146
35,280
36,764
37,396
−41.0%
−25.3%
−4.5%
−3.0%
−5.7%
−6.3%
6.2%
1.2%
2.5%
−4.0%
−1.7%
Change
from
Prior
Year
35.4%
60.1%
81.1%
85.8%
88.1%
94.8%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
As % of
Total
Screens
Analog Screens
200
7,418
5,515
4,632
2,003
25,621
15,774
#
62.4%
112.6%
34.5%
19.1%
131.3%
901.5%
Change
from
Prior
Year
64.6%
39.9%
18.9%
14.2%
11.9%
5.2%
0.5%
As % of
Total
Screen
Digital Screens
$1,606
$985
$453
$311
$256
$100
$10
Est.
Digital
Invest.
(mil.)
986
7,837
3,269
1,427
13,001
#
65.9%
139.7%
129.1%
44.7%
Change
from
Prior
Year
32.8%
19.8%
8.3%
3.7%
2.5%
As % of
Total
Screens
D Digital 3D
50.7%
49.7%
44.1%
25.9%
21.3%
As % of
Digital
$975
$588
$245
$107
$74
Est. 3D
Invest.
(mil.)
Notes: Based on author estimates and MPAA reports on # screens. Estimated investments (cumulative) based on estimated cost of digital screen ($50,000 per installation) and digital 3D ($75,000 per installation). Digital
screen counts include digital 3D.
39,233
39,547
2009
2010
38,974
38,843
2007
2008
38,852
38,415
2005
2006
36,146
36,594
2003
2004
36,764
35,280
2001
37,396
2000
2002
Total
Screens
Year
Exhibit 4 U.S. Theater Screens 2000-2011
298
Part 4: Cases
299
Case 23: The Movie Exhibition Industry 2013
Exhibit 5 Top 6 Studios / Distributors 2012
2012
Studio /
Distributor
Rank
$ Share
Total
Gross
2000
# Films
Rank
$ Share
% Change 2000-2012
Total
Gross
# Films
Total
Gross
# Films
Sony / Columbia
1
16.6%
$1,792
25
7
9.0%
$682
29
163%
−14%
Warner Bros.
2
15.4%
$1,665
36
3
11.9%
$905
22
84%
64%
Buena Vista
3
14.3%
$1,551
18
1
15.5%
$1,176
21
32%
−14%
Universal
4
12.2%
$1,324
17
2
14.1%
$1,069
13
24%
31%
20th Century Fox
5
9.5%
$1,025
19
6
9.5%
$723
13
42%
46%
Paramount /
Dream Works
6
8.5%
$914
21
4
10.4%
$791
12
16%
75%
77%
68%
41.4%
66.3%
24.3%
1.0%
Total for Top 6
$8,273
136
$4,664
81
Industry Total
$10,835
795
$7,661
478
Top 6 as % of
Industry
76.3%
17.1%
61.4%
16.9%
Source: Author calculations based on data from boxofficemojocom.
Exhibit 6 U.S. Demographic Trends
Segment
% of Movie Tickets
Purchased (2011)
Under 5 years
# in 2010
(mil.)
% of Population
(2010)
# in 2050
(mil.)
% of Population
(2050)
# Increase
% Change
21.1
7%
28.1
6%
7.0
33%
15%
37.1
12%
50.7
12%
13.6
37%
14 to 17 yrs
9%
17.0
5%
22.7
5%
5.7
34%
18 to 24 yrs
12%
30.7
10%
39.5
9%
8.8
29%
25 to 44 yrs
28%
83.1
27%
110.9
25%
27.8
33%
45 to 64 yrs
24%
81.0
26%
98.5
22%
17.5
22%
65 yrs+
11%
40.2
13%
88.5
20%
48.3
120%
128.8
42%
5 to 13 yrs
Total (mil.)
310.2
439.0
Source: Data: US Census (2008), Table 2. Projections of the Population by Selected Age Groups and Sex for the United States: 2010 to 2050 (NP2008-T2), MPAA Theatrical
Statistics, and author estimates.
must increasingly cross cultural and language boundaries
and appeal to the global market. Over 70% of U.S. studio
revenues are now international (Exhibit 7). Studios see
this as the primary opportunity for growth. While domestic receipts increase on flat ticket sales, both ticket sales
and dollar volume are rising rapidly internationally. From
2000 to 2012, domestic receipts grew at an average of just
3% while international growth averaged 13% annually.
The studios are also changing their perspective on ticket
prices in large population markets. In India, for example,
attendees paid an average of just $0.50.4 However, Indian
exhibitors sold 3.3 billion tickets in 2008. At current
growth rates, the attendance volume increase each year in
India alone equals total current U.S. annual admissions.5
This trend of content internationalization shows no
signs of abating. While the drama of Argo and the humor
of Ted cost less to produce, they are risky in international
markets. Franchise films, with known characters, made
in 3D and laden with special effects, present the least
content risk internationally. Yet these films carry their
own risk due to large budgets. The special effects alone
for a major film may exceed $100 million. The Avengers,
The Dark Knight Rises, and Skyfall all rank in the top
10 for worldwide gross. Combined, they constitute an
investment of $670 million in production costs.
As studios shift their focus to the international market they are less dependent on domestic exhibitors. This
increases the threat of disintermediation through alternative distribution channels. Studios increase revenues
through product licensing, DVD sales, and international
expansion; at the same time exhibitors – movie theaters –
have seen their business decline.
300
Part 4: Cases
Exhibit 7 Domestic & International Box Office Receipts ($ bil.)
$35
80%
$30
60%
$25
$20
40%
$15
$10
20%
$5
$0
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Domestic ($ Bil. Left axis)
International ($ Bil. Right axis)
% Domestic (right axis)
% Global (right axis)
Distribution
Distributors are the intermediaries between the studios
and exhibitors. Distribution entails all steps following
a film’s artistic completion including marketing, logistics, and administration. Distributors either negotiate
a percentage of the gross from the studio for distribution services or purchase rights to films, profiting the
box office directly. Distributors select and market films
to exhibitors’ booking agents. They handle collections,
audits of attendees, and other administrative tasks. There
are over 300 active distributors, but most is done by a few
majors, commonly a division of a studio. Disney Pixar,
for example, produced Brave while distribution was done
by Disney’s Buena Vista.
Until 2005, the distribution of all motion pictures in
the U.S. entailed the physical shipment of reels of 35mm
film, a process little changed from the 1940s. Each theater
would receive a shipment of physical canisters containing a “release print” of a film. These prints cost $20,000 –
$30,000 in up-front costs and $1,000 – $1,500 for each
print. Print costs for a modern major picture opening on
3,500 screens costs $3.50 – $5.25 million. This is borne by
the studios and exhibitors, but paid for by movie attendees.
Beginning in 2006, distributors and studios encouraged exhibitors to transition to digital projection technology. The technology works by using high powered LCD
projectors to cast the movie onto a specialized screen. In
lieu of film, the movies are delivered on reusable hard
drives or via satellite or high speed internet. The threat of
piracy is a major concern for the industry so all files are
encrypted. The cost savings of digital distribution over film
are considerable: The cost of each hard drive is $150, just
10% of the cost of physical film. Additionally, digital projection allows for consistently high quality images as there
is no physical wear to the film, and enables the exhibition
2011
of “alternative content” – images other than motion pictures that are obtained outside of the studio system.
The transition to digital projection involves considerable capital investment. Each digital projection system
can serve a single screen and costs $50,000 to $75,000,
including the projector, computers and hardware, and
a specialized screen. To encourage the transition, distributors offered rebates in the form of virtual print fees
(VPSs) for each film received digitally. These fees, as
much as 17% of rental costs, will expire in 2013.
Exhibition
Exhibitors offer a location where audiences can view
a motion picture. The basic business model of exhibitors (using movies as the draw and selling concessions
to make a profit) has changed little since the time of
touring motion picture shows that would set up in town
halls and churches. As the popularity of motion pictures
expanded, permanent local theaters were established.
Studios soon recognized the potential profit in exhibition and vertically integrated, allowing control over
audiences and capturing these downstream profits. This
practice ended in 1948 with the Supreme Court’s ruling
against the studios in United States v. Paramount Pictures.
Theaters were divested by studios, leaving the two to
negotiate film access and rental fees. Single theater and
single screen firms’ exhibitors fared poorly as studios
retained the upper hand in setting rental rates. Exhibitors
sought to increase bargaining power and economies by
consolidating, multiplying the bargaining power of individual theaters by the number of screens managed.
This reached its zenith in the 1980s with the mass
rollout of the multiplex concept. Maximizing both bargaining power based on multiple screens while minimizing labor and facility costs, exhibitors constructed
301
Case 23: The Movie Exhibition Industry 2013
large entertainment complexes, sometimes with two
dozen or more screens. Most of the original local single
screen theaters that survived were doomed as they were
unable to compete on cost or viewing experience and
were unable to gain access to the capital needed to construct multi-screen locations. Today, the typical exhibitor location has 7–12 screens and is likely to be operated
by Regal, AMC, Cinemark, or Carmike. These four operate 1,061 theaters in the U.S. (just 19%), but control 45%
of the screens (Exhibit 8). This market concentration
provides exhibitors with negotiating power for access to
films, prices for films, prices for concessions, and greater
access to revenues from national advertisers. However,
the real power continues to remain with the studios due
to differentiated content, the ability to play rival exhibitors against each other, and the increasing potential for
disintermediation.
The Business of Exhibition
Exhibitors have three main revenue sources: box office
receipts, concessions, and advertising (Exhibit 9).
Managers have low discretion; their ability to influence
revenues and expenses is limited. Operating margins
average a slim 15 percent; net income may fluctuate wildly
based on the tax benefits of prior losses. Overall, the business of exhibitors is best described as loss leadership on
movies: the firms make money selling concessions and
showing ads to patrons who are drawn by the movie.
Box Office Revenues
Ticket sales constitute two-thirds of exhibition business
revenues. The return, however, is quite small due to the
power of the studios. For large exhibitors, film costs
average 53% of box office receipts. For smaller circuits,
average costs are higher. Rental fees are based on the size
of the circuit and the time and seat commitment made to
a film. The revenues retained by the theater increase with
each week following an opening. On opening weekend
an exhibitor may pay the distributor 80–90% of the box
office gross, retaining only 10–20%. In subsequent weeks
the exhibitor’s portion increases. The record-setting revenues at the box office have been the result of increases
in t …
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