The Economics of the Movie Theater Industry Will Be Interesting Over the Next 25 Years

Joshua,

Around here, and I expect elsewhere, theatres have started showing more than just movies. They do live events such as concerts, they display TV episodes of various shows (like 3 star trek episodes or Dr who). Some even host church services on sunday mornings. Many are showing "classic" films as well.

I'm referring to main line theaters like AMC and the like who are doing this, and in some instances copying chains like Alamo drafthouse (Summer of 1984 movies!), or the Angelika. In the DC area there has been an influx of "high end" theaters where tickets are 15-35 dollars. This is done for a number of reasons. Eliminate teens (some are 21+ due to alcohol), fancier seating, and food/alcohol in the theatre.

I fondly remember the Met Opera live broadcasts at a local theater I used to live next to.

I wonder how prevalent such repurposings are, however. They'd have to be in areas where the level of culture is high enough so that people will be attracted to these events even without the support of massive movie advertising budgets.

Metro DC has seen an influx in "high-end" everything. All the new apartments going up before I moved away in June were catering to people with money. One in particular had 1 bedrooms starting at 3,000/mo. My wife and I were speechless. I'm sure, however, that people will pay those prices or else developers wouldn't build them.

It is home to 7 out of 10 of the wealthiest counties in the nation. The amount of change since 2000 is pretty amazing.

Fairfax & Loudoun on the VA side are consistently the top 2 wealthiest counties year after year. It's rather remarkable.

Check out the AMC Dine In in downtown Disney in Flordia. That is the way to do it!:)

http://dinein.amctheatres.com/menu

I haven't been to a normal theater in years; I go to the Alamo Drafthouse instead. Tickets are about $10, and then you can get dinner at your seat for about $20 including a cocktail and a tip. The one by me is pretty nice, though most of the other ones in town were set up in old theaters so they have a sort of classic charm. They still have normal seats in lieu of the huge leather recliners of some of those 'high-class' theaters, which is nice because I honestly find those really uncomfortable and they're just too far separated from the normal movie-going experience.

They're famous for also not putting up with BS in their theaters:

https://www.youtube.com/watch?v=1L3eeC2lJZs

If you're ever around Austin, or one of the other areas where they've set up shop, give them a look. I don't think I'd still be going out to the movies if it weren't for the Drafthouse.

http://drafthouse.com/

Here in Vancouver, WA we have Cinetopia with wine tasting, intimate movie "parlors" with couches & foot rests. They also deliver food to your seat. One thing I have always wanted to have at a theater is bathrooms along the side that have one-way glass, so you can do your business and not miss the movie that you paid 15 bucks to see.

To me, this was a very idea-rich post. Thanks again for writing it. My comments on some things I think are interesting are below, would be thrilled to hear your thoughts on them (really, I'm just greedily provoke you into writing even more on the things you alluded to in your original post!):

1. The economic value chain/stack of industries: As both an entrepreneur and investor, where do you like to start a business or invest in existing businesses, in terms of where they sit on the value chain? Is it a different answer for either? Where do you see profits as usually lasting the longest before competition inevitably wears down even some of the strongest of moats? Are there any general principles you like to apply, or is it always an industry-specific analysis?

2. I love what you said about democratic experiences. I think that is why there has always been an American fascination with the few products that are truly democratic - there is basically only one of that product, and there is neither a truly crappy version or a superior version that is unaffordable to the masses - Coca Cola, Fender guitars, the iPhone (thanks to the distortion created by carrier subsidies). Whenever I visit New York City in particular the demographic diversity of the people waiting for halal food carts always astounds me. It's definitely NOT like that in Asia and especially China. Here the rich and the poor use TOTALLY different products and experience totally different things and may as well be different species for the most part.

3. Your analysis of the anonymous woman at the theater was interesting to me. Obviously we can't expect everyone complaining about things to be rational, but it always surprises me (especially on reddit, where you'd think the writing of text would cause things to be somewhat more lucid) how people often don't even consider a level 1 analysis of the motivation of the parties they are trying to persuade in making their arguments or complaints.

1. It's interesting you ask this because the very same day you posted your question, Aaron and I had a conversation on exactly this topic as we course the next decade. The older we've both grown, the more we have determined that we want to be as close to the source of consumer demand as possible because it provides greater safety, adaptability, and long-term viability.

Think about The Walt Disney Company. It creates the content and owns the copyright. In the early days, it had to distribute through movie theater chains, which were a barrier between the customers and itself. As society changed, and the VCR arrived, it was able to sell through retailers such as Wal-Mart. As online platforms took over, it was able to sell through iTunes. No matter how customers wanted to consume the media, Disney could adapt because it owned the actual product.

I want to own the actual product. All else equal, I'd rather own Hershey's than the convenience store that sources Hershey's. The latter can still be a good investment (look at Wal-Mart under Sam Walton) if it has some monopoly on location or is brilliantly executed, but, again, all else equal, it's better to own the actual thing consumers want. If the demand is there, you can always find a way to sell it. One of the things that complicates the picture is if the distribution asset itself is really good (again, think Wal-Mart), the company can offer its own private label brands and end up becoming the source.

If I were going to sell everything and put it all on the line for some new venture a la Ray Kroc, I'd be looking for something that both owned the rights to the product we were selling so that it couldn't be taken from us and the distribution channel. In other words, I'd rather own something like See's Candies where we controlled both the product manufacturer (the factory) and the retailer (the company owned store) rather than a local candy shop that brought in different candy brands.

2. I think democratic experiences, along with the aftermath of World War II when you had this sort of great cultural "we're on the same team" effect happening, were a big reason the country was a lot more unified on everything from politics to economic strategy a couple of generations ago. In one of my older posts, I talked about the example a Harvard professor used in one of his books - the Maytag factory. Back then, the CEO and the janitor of Maytag lived in the same Midwestern town, worked in the same building, went to the same church, had their kids enrolled in the same Little League, shopped in the same grocery store, drove the same type of car (perhaps not model, but at least brand), drank the same Coca-Cola, attended the same movie theater, ate at the same diner, went to the same doctor and dentist, bought their clothes from the same store, used the same brand of toothpaste. People knew their neighbors. This had a lot of benefit, as well as many drawbacks (the small town dynamic can be great when it is positive, but ruthless when it turns against you or you're deemed and outsider). They probably even attended the same boot camp when they were drafted.

Everything has changed since then, even small things like shopping . Practically all Americans used to shop out of the Sears Roebuck catalog but if you pull the demographic data today, it's predominantly the working class, except for tools which still retain some cache among everyone. I went into Sears for the first time in a decade or so last year and was shocked to see the difference in quality between it and the stores where my family does its regular shopping. I'm used to browsing displays with $400 toasters, made of high-grade industrial components and meant to last most of your lifetime, yet here they were selling toasters for less than $10, made of cheap plastic, noisy springs, and a manual lever. It had been so long since I was exposed to that world that I had suffered from a phenomenon known as decimal creep. I couldn't actually believe it existed so I yelled for Aaron and we sat there looking through it in wonderment. It was like visiting a foreign country. This was really happening. This really existed. It was hard for us to believe.

I started doing calculations in my head. Best probable case scenario was this thing cost $3.75 in raw components to assemble and ship before Sears got its hands on it. Even with wildly efficient factories, there is no way a decent product could be made on that capital outlay. It can't be done. Yet, they were being sold. I can't imagine how any rational person would justify the purchase of one as opposed to waiting a few weeks or months, saving up for a better one and, in the meantime, making toast manually.

If this were 1950, I would have been made aware of the $10 toaster and the other guy would have seen the $400 toaster but now we don't even see the same products. We have no idea the other exists. I think there are a lot of social ramifications that arise from this divide.

The paradox is that, while I don't think this is a good thing, I can't imagine ever wanting to go back to how it was. I'm never going to want to give up the better quality and those who have now been accustomed to $10 toasters are going to think $400 toasters are absurd. How do you reconcile something like that? I've said it before but John Edwards was right. There are two different Americas with two different cultures. I don't know anybody my age who is divorced. I don't know anybody my age who smokes. I don't know anybody my age who lives with their parents. I don't know anybody my age who was laid off in the recession. I look at the data and this is not a normal experience but we're living in these demographic enclaves where we surround ourselves with other people like us.

What makes it worse is that sometimes these enclaves are hidden in plain site. I live in the same house I bought when I had just turned 26. The houses on my street range between an average of $300,000 and $500,000, so they're nothing special (albeit housing is stupidly cheap in Missouri; the same property is a place like New Jersey would be 50% to 100% higher if you lived in a good town). It looks like a perfectly boring, normal neighborhood, yet one of the neighbors collects cars and has a jaw-dropping collection he rotates through his garage including a six-figure Bentley hidden from site, another owns a manufacturing business worth somewhere between $30 and $60 million the last time I checked, another is a member of the top 1% from a financial business he owns. There is a retired widow living off her income and an older married couple who worked in the accounting industry. Nobody would have a clue if they were to drive through here. (Assortative grouping is a funny thing. This neighborhood is disproportionately made up of self-made business owners, mostly between 50-60 years old, yet a couple miles away is a neighborhood of much larger houses on more grandiose lawns inhabited by, on average, far younger doctors and executives working for other people. I don't get it. If I were going to build a significant estate, I'd want it hidden behind some gate on a drive nobody knew existed, not displayed openly for everyone to see. To each his own.)

I'm rambling now. The bottom line? I don't know where it's going to take us as a country and I worry about it. I was listening to a church musician play through a book of Methodist Christmas hymns a few nights ago on YouTube and I remember 25+ years ago when everybody in town went to the same little chapel for the Christmas play. It seems like all of that has fallen apart. I haven't a clue where that will take us but the thing about free markets and societies is they seem to adapt over time as pressures build and are resolved through the legislatures, courts, and culture. I'd love to see certain shared experiences, democratic, universal constants, arise, again, but I don't see how it's possible. I can't find a path between where we are now and that outcome. That doesn't mean it doesn't exist, only that I can't see it.

Forgive me for being all over the board in this response. I'm sort of typing out loud as I sit and think about your question.

3. I know. If I were in her position, my first approach would be something along the lines of, "We really want to see this movie but we don't have enough money. I know you offer discounted senior and student ticket prices and since we can't afford it otherwise, would you be willing to give us the same price you already offer those customers? It's not a sold out show so your attendance ratings go up, making you look better to corporate headquarters, and we still get to see the movie. Plus, we'll buy something from the concession stand so you'll be making sales there that you wouldn't, otherwise." The theater is better off because of it, the customer gets what they want, and nobody is angry. The worst they can do is say no and you're in the same position you are at the moment.

Thanks so much for your thoughtful reply as usual.

Wow, interesting response. It is particularly striking how we as people tend to cluster around other people like us. My much better half and myself are very similar, with similar backgrounds and experiences.

It's nice to think about Hershey, which according to WB has a moat. ( If you go to a store looking for Hershey bars but they don't have it, you go to another store, and don't get a Glotz bar of chocolate). HSY has been expensive for several years. If it drops though during the next recession/bear market, guess who will be buying it 😉

(Interesting enough, I do not believe WB has ever owned shares of HSY.. I wondering why that is)

There's a CineDine here in Omaha, where people get dinner in leather recliners while watching a movie. It's always packed with obese midwesterners eating a hamburger or two with fries and Coke. Movie theaters are now basically just restaurants where conversation is replaced with movie watching.

The way you describe it - "packed with obese midwesterners eating a hamburger or two with fries and a Coke" made me laugh because it sounds like Wall E. Then I just felt sad.

Very interesting post. I've given some thought to this topic over the years, but could never find any similar articles. I would like to point out my main observation that seems to go against one of this post's conclusions. Namely, that movies are too expensive (should be $3.56). I have no dog in this hunt. Just fascinated.

Circa 1985 as a youngster, I distinctly remember going to see first run movies for approximately five dollars. I've always been amazed that 25-30 years later, first run movie prices have only doubled. In a typical theater, forgetting fancy recliners and dinner that have only recently launched, you'll pay $10 to see the show. THIRTY YEARS later! In fact, my numbers roughly align with boxofficemojo's average numbers: http://www.boxofficemojo.com/about/adjuster.htm. It seems to me, using 1985 as a start point, that movies prices have actually only increased with inflation. In fact, adjusting $5 from 1985 for inflation gives $11.08. Perhaps the brunt of the increase actually happened between 1948 and 1985?

It is also my observation that people generally considered movies affordable in the 80's and the don't today. Why is that? Would the lady you crossed paths with have been just as upset back then? Wouldn't someone who went to movies in 1948 be more outraged in 1985? Yet it still seemed affordable for the average family.

In the late 80's I got my first job for minimum wage at somewhere around $3.35/hr. Adjusted for inflation, the current minimum should be $6.11/hr. It is actually more that a dollar more. I'm not arguing the merits of high or lower minimum wage. Only pointing out that it seems to me both movie prices and minimum wage have roughly increased with inflation during my time frame.

As others have pointed out, movie theaters owners are innovative as well (MET broadcasts etc). My theory was that movie theaters keep prices low (yes low) by showing commercials. Back then, the only commercials we watched in a theater were for movies (a.k.a. previews).

At the same time, I recall (without proof) the typical middle class family car like the Pontiac Bonneville or Toyota Pickup being priced between $5-7K. Those prices have more than quadrupled. College costs are skyrocketing of course. Obviously, the inflation rate is some sort of average. I can think of things that increased in price much faster. I can think of things that increased on par (movies, minimum wage). I struggle to find things below the average, besides your standard savings account of course.

The main difference I feel between 1985 is that going to a movie would cost me $5 then and $40 now because I am paying for spouse and kids. We stay away from the overpriced concessions for multiple reasons.

TV's and computers are much cheaper now, as are most appliances and household goods, tools.

"complained that they would have to wait an hour to see a cheaper version." Being poor will never be fun, but just about when I was going to feel bad for this woman, I remembered that I've waited far longer than that when I was light in the wallet. I took a 27 hour bus trip from Boston to college in Blacksburg, Virginia because I couldn't afford a plane ticket when I was a student. I did this for 3 semesters during winter breaks, back when Greyhound did their 26 bucks to anywhere deals.

I don't understand how anyone could feel bad for the woman. It seems that if she doesn't like the product or service being offered then she doesn't have to buy it.

"I don't understand how anyone could feel bad for the woman" Empathy?

I feel a little bad for her because she appears ignorant and most likely poor. We also don't know her situation at all, and I feel that caring about someone is a better default feeling towards a stranger.

We have no idea what happened to her that day (or that week, or that year, or anytime really).

We have no idea why she doesn't have enough or isn't willing to pay that much.

We all know wealth has the potential to be significantly affected by circumstance and luck, things that can totally be out of our control. For example health or a loved ones health.

I dislike the "you don't need to buy it" mentality. I don't think life is that simple, at all. I think it's crazy NOT to care about strangers, with you knowing nothing about 99.99999% of their life. I'm willing to bet most (if not all) of the most horrific things that have happened in humanity were the result of individuals not caring about anything but their own lives. We share this world whether you like it or not. Saying you don't care about other people is FALSE, because you WILL when you realize civilization is a complicated balancing act, that you are very much apart of. Unless you have some other planet that you can go to that we don't know about.

http://guardianlv.com/2014/06/elon-musk-says-humans-will-be-on-mars-in-2026/

Joshua I know you've talked about technological advancement and how it has affected our economy extensively in the past (and how it will continue to affect our economy) but I didn't know how big of a fundamental change it would be until I watched this, https://www.youtube.com/watch?v=7Pq-S557XQU. I'm both excited and afraid for the future at the same time. On one hand I can't wait for all the amazing advancements automation will bring, but on the other hand I'm fearful our society won't adapt quickly enough and millions of people will be thrust into poverty (which will eventually cause serious societal conflicts). Anyway, I just wanted to share and hopefully start another discussion on the topic.

Are we stronger than compounding?

Is there any chance we could get a new blog entry on Star Wars: The Force Awaken? I would like to hear your thoughts on how blockbusters will affect the movie cinema industry and perhaps a revision of Disney's stock?