Topic: Theaters make a comeback
From: Dallas, TX
Registered: Feb 2003
posted June 23, 2004 06:29 AM
Please post the full text of the article as outlined in the FAQ.
THE SEQUEL: THEATERS RISE AGAIN
BY JO ELLEN MEYERS SHARP
Coming soon to a theater near you: a drama about the continued consolidation in the cinema business; a feel-good, accountant-pleasing story about blockbuster films, steady attendance and only slightly increased ticket prices; a suspenseful tale about the imminence of new technology and how much it will cost theater owners.
These scenarios define the cinema industry and its relationship to shopping centers in coming years. And for the most part, they make a better story than what has been playing for the past five years, during which at least 13 theater owners filed for bankruptcy protection. A number of exhibitors darkened hundreds of screens and closed dozens of houses, emerging from the bankruptcy courts smaller but infused with new cash from investors. Others lost their moniker as stronger competitors gobbled them up.
“The bull market [of the 1990s] allowed a great deal of building, and the older screens that were displaced were slow to come off-line and out of leases,” said Ray Schleinkofer, a cinema industry analyst at Sturdivant & Co., a Voorhees, N.J.-based investment firm. “Without a question, this is a better time to be in the [movie] exhibition business.”
As that building binge peaked, theater design shifted from the slanted floors of the multiplexes (theaters that typically have a maximum of 12 screens) to the stadium seating found in the much bigger megaplexes (14 screens or more).
As theater company financial woes played out in the bankruptcy courts, out-of-date theaters closed down, leases were abandoned or renegotiated and healthier companies gobbled up competitors and grabbed market share.
“The business has gone through a significant amount of restructuring and, having gone through it, is stronger now that it is freed” from oversaturation, said Stewart Halpern, a New York City-based entertainment industry analyst for Toronto-based investment firm RBC Capital Markets.
Although the industry is much quieter these days, there is activity. In recent months, Cinemark USA, Plano, Texas, the country’s third-largest movie exhibitor, agreed to be acquired by privately held Madison Dearborn Partners, a Chicago buyout firm. The parties expect to close the $1.5 billion deal sometime in the second quarter.
And the owners of New York City-based Loews Cineplex Entertainment Corp., the fifth-largest exhibitor, started shopping the 3,100-screen chain around, which some analysts say will carry a $2 billion price tag. That news follows immediately Loews’ decision to withdraw from merger talks with No. 2-ranked AMC Entertainment, which has more than 3,500 screens.
Regal Entertainment Group, the largest U.S. cinema chain, may be interested in buying Loews, says Michael Campbell, CEO of Regal’s theater operations. (Regal bought 37 theaters, housing 384 screens, for $226 million this year. Thirty of those cinemas belonged to Signature Theatres.)
In recent years, cinema operators have “had problems, but through reorganization and bankruptcy they are stronger companies with money available for expansion,” said Charles P. Stilley, president of AMC Realty, which handles leasing for Kansas City, Mo.-based AMC Entertainment.
AMC Entertainment is a classic example of the industry’s ups and downs. The company holds roughly 9 percent of the market and is among the few large U.S. cinema chains that haven’t filed for bankruptcy. Even so, weak attendance at AMC’s outdated theaters contributed to a stock price that hovered at around $1 per share for several months in 2000 and 2001.
But AMC had in fact been sowing the seeds of success all the while. The company, which is credited with creating the megaplex in the mid-1990s, also secured $250 million in fresh capital in 2001 and went on to acquire GC Cos., owner of General Cinemas and Gulf States Theatres.
“We were expanding when no one else could,” Stilley said.
The result: AMC revenues rose from $1.02 billion in 1999, with 2,735 screens, to $1.79 billion in 2003, with 3,524 screens. The number of theaters dropped to 180 from 230 during some of that period, but by last year the AMC annual report tallied 233 houses. The stock has recovered and now trades in the midteens.
The tech factor
Surprisingly, none of the theater owners SCT interviewed seemed too concerned about impending digital projection technology. Sure, they expect this innovation to greatly reduce movie distribution costs, which, at $10,000 per print, is among cinema owners’ biggest expenses. But the new technology also requires pricey equipment (about $100,000-$250,000 per screen), and it’s unclear whether the cost will be borne by the exhibitors or the distributors, or whether it will be shared.
What’s more, digital projection allows access to movies by satellite or over the Internet, leaving films vulnerable to piracy. The industry, however, has yet to develop technical and digital-security standards or business models acceptable to studios and exhibitors, who are anxious about issues of control and business practice. Last December the National Association of Theatre Owners and its European counterpart, the Union Internationale de Cinemas, wrote to the California-based officials overseeing standards development to voice their members’ concerns and objections.
“Some [of the] suggested draft standards would interfere with normal business operations within cinema facilities,” their letter read.
In March, John Fithian, the theater owners’ association president, addressed the ShoWest trade show in Las Vegas. “Theater owners believe that the potential transition to digital cinema depends on the existence of fair business models, uniform technical specifications and high quality,” he told the audience. “We are very encouraged that business models are finally coming together. We are also hopeful that studios and theater owners can design digital cinema security specifications that will protect us against piracy without interfering with normal business operations within the cinema.”
Yet some form of standards will be approved eventually, so theaters built today can accommodate digital projection, says Keith Thompson, a founder and principal of Phoenix Theatres, Knoxville, Tenn. “The cost savings is so dramatic for movie producers and film distributors that not to find a way is almost criminal,” he said.
In January 2002 Knoxville-based Regal Cinemas, the biggest U.S. cinema chain, re-emerged as Regal Entertainment Group from three months in bankruptcy protection, still holding the No. 1 spot and controlling some 17 percent of the market with its 6,000 screens. Later that year the new company hit Wall Street with shares closing at $21.75. Today Regal trades in the low to mid-20s.
Regal has already introduced a low-end version of digital projection technology that allows certain types of feeds. The quality is fine for advertising, conferences and simulcast concerts (Regal used the technology to feed pop singer Prince’s Musicology tour live from Los Angeles to movie houses across the country), but it’s inadequate for films, experts say.
To be sure, people are still going to movies. Since 1970 the trend has been upward, with the only hiccup occurring last year, when U.S. admissions fell about 4 percent, from 1.64 billion to 1.57 billion, according to industry observers.
“In 2003 admissions remained strong, and screen count did not increase,” said Fithian during the March trade show. “That is a good formula for theater company profitability.”
Industry experts predict high attendance this year too, pointing to the record-breaking The Passion of the Christ and anticipating the coming Harry Potter and the Prisoner of Azkaban; Shrek 2; and Spiderman 2.
“Film product remains the key driver to demand,” said Suk Han, an analyst at New York City-based investment brokerage and research firm Smith Barney. But the prevalence of megaplexes notwithstanding, the number of screens hasn’t grown, Han’s research shows. She found that megaplexes actually have 10 to 20 percent fewer seats per screen than multiplexes, so though there are 35,000 screens today, more than in 1997-’98, actual seating capacity is closer to the lower levels of those years.
Modest expansion plans, a function of the fear of overbuilding as well as high construction costs, will limit long-term capacity growth to between 2 and 3 percent annually, she says. “This, combined with 2 to 3 percent attendance growth and 3 to 4 percent price increases, is expected to drive mid-single-digit, long-term industry revenue,” she wrote. “The industry will also benefit from further consolidation, upgrading of the theater asset base and a continuous stream of products, which look good for 2004.”
Of malls and movies
But will good movies mean increased sales for other shopping center tenants?
ICSC research indicates that “cinemas and malls derive some benefit from each other, [but] the benefit is variable across centers and the top-line contribution is difficult to quantify.” The association found that 52 percent of moviegoers visited other mall tenants, primarily food vendors and department stores.
“That is much less than anticipated,” said Bill Speer, a principal of Coronado, Calif.-based market research firm Speer Consulting, who has worked on several ICSC research projects. Movie theaters, he says, do not generate the traffic mall owners might like.
Before the rash of bankruptcies, developers worked out sweet deals with cinemas, expecting huge benefits, but “that did not turn out to be the case,” he said. “Now, at least, eyes are wide open and developers are cutting deals that make more sense.”
AMC’s Stilley says theaters want to be a part of the mall and relish proximity to other entertainment venues and restaurants.
“With movie theaters, you are drawing a different group of people,” said Rick Kuhle, president of Vestar, a private development firm in Phoenix that specializes in power and lifestyle centers. “They may not be there for shopping, but they will see some of the shops and come back for that experience. The more restaurants the better, and [we need] more better restaurants.”
Stephen D. Lebovitz, president of CBL & Associates Properties, a Chattanooga, Tenn., REIT, agrees.
“Movies and food go hand in hand,” Lebovitz said. “I’ve always viewed movie theaters as a critical component of a mall, and we make an extra effort to have [them as] part of the mix. Malls are more than shopping, and what you want is to create an experience for the customer that is social, entertaining, eating and shopping.”
Movie theaters can’t operate in every center, however, because film distribution rules limit how many screens may show a movie within a certain distance. Movies still play well in lifestyle centers, especially when there’s an entertainment component to the plan, says Robert A. Michaels, president of General Growth Properties. Some megaplexes, though, are an “awkward size, with 30 screens built across from each other, making 55 or 60 in a block.” General Growth will not allow that kind of theater concentration, he says, because it defies good business sense; theater complexes with 12 to 18 screens will fit in better.
Developers with theaters as tenants are realizing new ways of gaining revenue from them. Cinemas are doing more “four wall deals,” in which the house is rented out for such off-hour events as church or business meetings, says Donald H. Pollard, a senior vice president for development at Simon Property Group. This income doesn’t usually count when determining percentage rents, he says, nor does the ad revenue theaters get from pre-feature programming.
“As we address the selling of time and advertising and negotiate new lease documents, we will work harder and harder to see that those revenues are included in percentage rents,” Pollard said.
While landlords try to boost their box-office take, theaters are looking at new revenue sources on their side, such as the sale of tickets online.
“The growing advertising [revenue potential] is helpful,” though not significant, said RBC Capital’s Halpern. “They’d probably make more money raising the price of popcorn a nickel.”
| IP: Logged
From: Sacramento, CA
Registered: Jul 2003
posted June 23, 2004 07:27 PM
Good post Adam, and one further little addition of wistful irony... it seems like the theatre business thrives in bad economic times. During the depression of the thirties, the studio system was at it peak, churning out fabulous product week after week. Then in the late sixties and early seventies, our economy went into a recession. Once again, the product produced such blockbusters like East Rider, Godfather, and 2001 A Space Odessy. Kind of odd, isn't it??? I think cimema will be around for a long time. Any thoughts, anyone?
| IP: Logged