Disney Should Open Up Movie Theaters

I know what you’re thinking - why would the general public pay a ridiculous $8.97 (the average movie ticket price for 2017), to just watch Mickey Mouse.

Well, the reality is - in 2 years time, you will pay to watch content at Disney owned-and-operated movie theaters.

Here’s why:

The movie theater industry is slowing down.

Though responsible for $17.5B in revenue, and $1.6B in profit, the projected growth for the next 5 years is 0.7%. For reference, non-alcoholic beverages are projected to grow at ~6% and alcoholic beverages are projected to grow at ~3.5%.

Adding onto that, theater attendance hit a 25-year low in North America, with a decrease of over 1 billion tickets in comparison to the previous year.

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So in short (which you might have already guessed), movie theaters aren’t doing well with neither popularity nor profitability - two of the most critical pieces for ensuring success in such an industry.

There’s a caveat:

Even though the industry isn’t doing as well as it has in the past, interest in watching content has skyrocketed.

How is that possible?

Well, instead of watching content at movie theaters, consumers are flocking to other cost-efficient mediums to get their movies - Just think about the success that Netflix has enjoyed over the past half decade, reaching over 130 Million subscribers as of last month, not to mention on-demand options and satellite TV.

Additionally, per-capita disposable income has been and is projected to be on rise in the coming years - which usually implies that individuals are more open to “frivolous” spending on items like entertainment.

So, even though income is rising and movie theater revenue isn’t suffering (yet), the number of people attending movie theaters has decreased.

Translation - prices of tickets are going up as 3D and IMAX options become increasingly common, but the number of people willing to pay for those expensive options is decreasing.

Let’s take a look into why theaters can’t just cut prices - or at least, keep prices the same.

You see, on the whole, some 67% of revenue of total revenue for movie theaters comes from selling tickets, and another 21% from food and beverage sales, and the remaining from sources like advertisements, arcade games, etc.

There is a reason that half the time you go to a movie theater, it ends up being a Regal or an AMC. There are only 3 big players in the space (Cinemark being the 3rd I haven’t mentioned), and the barriers to entry are enormous.

Running a successful movie theater involves the following - buying enough land, building luxurious individual theaters for multiple showings, paying employees, owning high-end equipment to show 3D movies, and finally - buying the rights to show the hottest movies of the week.

Without scale (which all the 3 aforementioned companies have), this is a futile endeavor.

Last year, when the new Star Wars movie came (The Last Jedi), Disney demanded a ridiculous 65% cut of all revenue from theaters who wished to show the movie to their audiences. They also demanded that the movie be shown for 4 straight weeks - regardless of popularity and demand. Refusal to comply would result in an increase in the revenue-share to 70%.

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Movie theaters had 2 options - comply and look to make very little, or refuse to give in to the demands and lose thousands of customers to competition.

The capital-intensive industry requires huge upfront costs to build and then works on a model of recouping those costs over time.

This yields an incredible opportunity

There is a whole segment of previously avid movie theater fans, who are now being forced to roll away from movie theaters and onto more affordable options like Netflix and Hulu because of rising costs (which can be connected back to massive production houses like Disney and Fox).

And this is exactly why Disney needs to move into movie theater industry.

With the acquisition of 21st Century Fox nearing completion, Disney has access to content like no other (Lucasfilm, Marvel, Pixar to name a few). Disney movies were responsible for over 20% of the entire US movie theater industry, and that was before they acquired 21st Century Fox.

“Okay, but this still doesn’t explain why they should have movie theaters”

As I mentioned in my last article, Disney is already building out an online streaming service, set to debut sometime next year. They have the power to provide the latest movies, tv shows, live sports, news, and much more - all on one service.

The real motivation behind the streaming service is that Disney is running out of places to sell their content to their consumers.

Cable TV is dying.

Movie theaters are getting too expensive.

Netflix is getting too powerful, and taking too much of the profit.

The partial solution - build your own streaming service to compete with the likes of Netflix.

The complete solution - provide an add-on for an additional fee (as small as $5 a month) to allow Disney subscribers to watch a movie of their choice at a local Disney theater with the complete 3D, Dolby-surround-sound, popcorn-crunching immersive experience.

The reason Disney can afford to do this, and why it’s very different from the likes of Regal and AMC, is because Disney doesn’t have to pay for the content.

Let me reiterate that just because of how important that fact is - Disney doesn’t have to purge 65-70% of all the revenue associated with selling movie tickets.

The bottleneck that keeps ticket prices rising and customers away from theaters can be absolved with the snap of a finger if Disney chooses to do so.

Disney would also be able to offer private live sports rooms with movie theater level quality experiences, along with grand TV show pilot premieres, showings for the presidential debates, and everything in between.

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Granted - it is still capital extensive, and Disney will have to purchase existing theaters, but this could be the golden ticket that gives them a competitive advantage over other streaming services, and gives them a permanent safe-haven for their content.

I’d sign up for something like this - would you?