Revenge of the multiplex

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Revenge of the multiplex: illustration

Revenge of the multiplex: title image

Consolidation among movie theater chains has raised their bargaining power. If the film studios aren t scared by this new kind of owner, they should be.

The McKinsey Quarterly, 2002 Number 4

Movie studios are warily eyeing consolidation among US theater chains. During the past two years, a small number of finan-cial buyers have acquired several large ones, thereby gaining control over nearly a third of the nation s 35,000 screens and 44 percent of the box-office revenues (which totaled $8.4 billion in 2001).1More consolidation is likely, giving these emerging megachains the clout to demand a larger portion of the revenue from the sale of tickets and to influence how and even whether the industry shifts to digital cinema, as the studios would dearly like.

It was overexpansion by theater owners and the subsequent financial disarray that led to the present flurry of consolidation. The number of screens in the United States rose by 58 percent in the decade up to the year 2000, far outpacing the rise in admissions (Exhibit 1). The result was fewer tickets and lower revenues per screen. At the same time, the theaters share of ticket receipts shrank. The studios typically get 80 percent of first-week ticket revenues, a percentage that goes down as time passes if the movie endures, that is to bring the studios aggregate average closer to 50 percent. With a larger number of theaters, movie runs have become shorter and revenues are stacked toward the earlier, studio-centric phase of the run. Without having rewritten the rental splits, the studios are therefore gaining a greater share of revenues than they did in the past. By the late 1990s, four of the top six theater chains had gone bankrupt.Chart: Overcapacity strikes back

Major financial buyers were quick to spot an opportunity. In 1998, the average price of a screen stood at $700,000. By 2001, however, it had collapsed to $135,000, and several acquisitions were reportedly completed at well under $100,000 a screen. These acquisitions have concentrated assets in just a few hands (Exhibit 2). Anschutz, Apollo Advisors, Oaktree Capital Management, and Onex are not traditional industry insiders; they are financially savvy buyers that aim to maximize the value of their new assets. That could well mean still more consolidation, perhaps through the swapping of theater assets to create concentrated regional markets. Either way, the studios can bet that the new owners won t hesitate to shake things up to increase their cash flow.Chart: A fistful of dollars

The new-breed exhibitors could use their dominant position to seek more favorable rental terms from the studios. In Australia, for example, Hoy ts Cinemas and Village Roadshow, the two most important theater chains, retain 70 to 75 percent of all money spent at the box office, compared with 40 to 50 percent for their US counterparts. In the United Kingdom, where theaters also exercise substantial power, the revenue split is 60-40 in their favor. Given the increased screen capacity in the United States, it may be difficult to change box-office splits, but even a return to the average split of 1995 would shift more than $300 million from the studios to the theater chains.

In fact, the theater owners have a powerful bargaining tool: a switch from celluloid to digital projection systems would save the studios more than 90 percent of their film distribution costs but only if theaters play along. Theaters may attempt to turn the move to digital into a competitive Trojan horse by leaping into new entertainment offerings, such as digital broadcasts of concerts, sports events, and other traditionally live attractions, which would give theaters an alternative to the studios products and, in the process, help reduce the surplus of screens.

Any prolonged tug-of-war in the value chain could benefit the studios, however. Although box-office success is the major predictor and creator of their revenues in the long term, movie theater releases generally represent less than 25 percent of the total. The studios get a similar share of their revenues from TV rights, but home video yields as much as the two other sources put together. For exhibitors, by contrast, concessions are the only source of revenues other than the showing of films. To head off aggressive demands by theaters, a studio could release films selectively or withhold them entirely from chains it regarded as too strident. Alternatively, it might itself invest in theater chains to block the megachains from gaining too much power in regional markets, or it might turn to the US Federal Trade Commission (FTC) if consolidation or asset exchanges began to pick up. Finally, a studio could seek to protect itself from the emerging megachains by negotiating new agreements and trade-offs agreeable to both sides.

Certainly, no studio should underestimate the new owners track record of quiet success in previous investments. Financial players may seem to be sensitive to earnings volatility and looking for a quick return, but these new owners are much better placed financially to negotiate with studios and have no historical allegiance to the industry. Ultimately, the studios must consider the theaters long-term strategic role in the business to get the most out of this shift. Ignoring the new realities of the theater industry will leave studios sitting in the dark.



Derek Alderton is an associate principal in McKinsey s Los Angeles office, where Jeff Karish and Roy Price are consultants.

1Motion Picture Association of America.

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