The Movie Industry
Charlie Fraioli, Shelly Grinshpun, and Sheryl Quock
Agenda
 Introduction
 Industry Analysis
 Pricing Strategies
 Recommendations
Introduction
Industry Analysis
Price Strategies
Recommendation
Why the Movie Industry?
 Rapid changing movie consumption in the
information age
 Unique Pricing Structures
 Pricing Phenomenon with uniform pricing in each
theater despite various levels of time, effort and
money invested per film
Introduction
Industry Analysis
Price Strategies
Recommendation
THE MOVIE INDUSTRY
 THREE DIFFERENT SECTORS EXIST WITHIN INDUSTRY:
1. Production
2. Distribution
3. Exhibition
Introduction
Industry Analysis
Price Strategies
Recommendation
THE MOVIE INDUSTRY
THREE DIFFERENT SECTORS EXIST WITHIN INDUSTRY:
1. Production
2. Distribution
3.Exhibition
Introduction
Industry Analysis
Price Strategies
Recommendation
THE EXHIBITION SECTOR
FIVE DISTRIBUTION CHANNELS WITHIN SECTOR:
1. Cinema
2. DVD/Blu-ray
3. Pay-per-view (PPV), video on demand(VOD), and
video streaming
4. Free-to-air TV
5. Subscription-based TV channels (cable/satellite TV)
Introduction
Industry Analysis
Price Strategies
Recommendation
THE EXHIBITION SECTOR
FIVE DISTRIBUTION CHANNELS WITHIN SECTOR:
1.Cinema
2. DVD/Blu-ray
3. Pay-per-view, Video On Demand (VOD), and
video streaming
4. Free-to-air TV
5. Subscription-based TV channels
Introduction
Industry Analysis
Price Strategies
Recommendation
Cost Structure
 Rent & Utilities: theaters
compete on the basis of
facility quality
 Industry company’s
largest single expense:
rental of films for
exhibition

This accounts for
32% of revenue
Introduction
Industry Analysis
Price Strategies
Recommendation
Consumer Demand
 Key drivers of demand:
1. Disposable income (affected by employment rates, taxes,
and the general state of the economy)
2. Leisure time
3. Marketing efforts of major motion picture studios
Introduction
Industry Analysis
Price Strategies
Recommendation
Consumers
 Median age: 32.4 (see chart below)
 Total HH income of +$75k (frequent moviegoers)
Introduction
Industry Analysis
Price Strategies
Recommendation
COMPETITION: MAJOR
COMPANIES
3 FIRMS ACCOUNT FOR 52.8% of market share:
1. Regal Entertainment Group – 21.2%
2. AMC – 18.7%
3. Cinemark – 12.9%
(Next highest in market share — Carmike Cinemas
Inc.— drops down to 4.5%)
Introduction
Industry Analysis
Price Strategies
Recommendation
COMPETITION: MARKET
CONCENTRATION
 CR4 = 57.3
 HHI
 Top four share 57.3%
 2,000 smaller firms share 42.7%
 HHI = 0.2122 + 0.1872 + 0.1292 + 0.0452 + 2000(0.000497142)
= 990.73
990.73 < 1000
INDUSTRY IS COMPETITIVE
Introduction
Industry Analysis
Price Strategies
Recommendation
COMPETITION: BARRIERS TO
ENTRY
High barriers to entry due to:
1. High fixed costs
 Equipment for running movies
 High quality facilities necessary to compete
2. Distribution channels
 Licensing agreements
3. Economies of scale
4. Brand identification
Introduction
Industry Analysis
Price Strategies
Recommendation
COMPETITION: EXIT BARRIERS
Not as strong as barriers to entry, but some to
consider:
1. Cost of ending licensing agreements
prematurely
2. Compensating employees
Introduction
Industry Analysis
Price Strategies
Recommendation
Internal Competition
 Movie theaters compete on the basis of:
1. Film offerings
2. Ticket prices
3. Auditorium quality
4. Concessions offerings
 Aside from these factors, most theaters offer the
same products
 Internal competition is high for this reason
Introduction
Industry Analysis
Price Strategies
Recommendation
External Competition
Competition from:
1. Piracy/illegal streaming
Source: IBISWORLD.COM
Introduction
Industry Analysis
Price Strategies
Recommendation
Government Regulation:
Piracy
 Illegal streaming can steal considerable amounts
of revenue from all distribution channels within
the movie industry
 When US government shut down illegal streaming
site Megaupload, the website was accused of
costing copyright holders more than $500 million in
lost revenues
 The government does not provide any assistance
to the movie theater industry in terms of tariffs or
subsidies
Introduction
Industry Analysis
Price Strategies
Recommendation
External Competition
Competition from:
1. Piracy/illegal streaming
2. Increase in popularity of all other distribution channels
Introduction
Industry Analysis
Price Strategies
Recommendation
External Competition
Introduction
Industry Analysis
Price Strategies
Recommendation
Distribution Timeline
Sources: iTunes.com, xfinity.com, NATO, Technicolor, Redbox.com
Introduction
Industry Analysis
Price Strategies
Recommendation
Comparing 2007 to 2015:
VOD, PPV, and DVD/Blu-ray
Release Dates
Introduction
Industry Analysis
Price Strategies
Recommendation
Changing the Timeline
 Timeline of distribution is changing
 Example: Netflix will release “Crouching Tiger,
Hidden Dragon: The Green Legend” in 2015 on
the same day as its theatrical release
 Subscription streaming services on the rise: in
2014 HBO, CBS, and Lionsgate all announced
online subscription streaming services
Introduction
Industry Analysis
Price Strategies
Recommendation
Industry Summary
 Landscape for industry is changing rapidly with
the growth of other distribution channels for
movies
 Highly competitive
 Both internal and external competition is high
Introduction
Industry Analysis
Price Strategies
Recommendation
Main Pricing Strategies
Second Degree Price Discrimination
Third Degree Price Discrimination
Tacit Collusion
Concession Markups & Bundling
The Uniform Pricing Puzzle
Introduction
Industry Analysis
Price Strategies
Recommendation
Pricing Data
 Collected pricing data from 28 Regal Cinemas
locations across 27 different states
 Controlled for theater size (14 auditoriums)
 Analysis demonstrates how the movie theater
industry utilizes:
 Second degree price
discrimination
 Third degree price
discrimination
 Tacit collusion
Introduction
Industry Analysis
Price Strategies
Recommendation
Second Degree Price
Discrimination
 Versioning
 By time
 Discounted matinee rates in the afternoon
 By quality
 RealD 3D
 Premium Auditoriums
 IMAX
One of Regal Cinemas’ RPX Premium Auditoriums
Introduction
Industry Analysis
Price Strategies
Recommendation
Average Adult Ticket Price for Different Movie Versions
$18.00
Price of Movie Tickets ($)
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Matinee
Standard
3D Matinee
3D
RPX
IMAX
Movie Version
Introduction
Industry Analysis
Price Strategies
Recommendation
Versioning
 Discounts for less crowded times
 Average matinee discount = 19.27%
 Premiums for additional features/better quality
 Average 3D premium = 32.09%
 Average RPX premium = 42.58%
 Average IMAX premium = 47.26%
Introduction
Industry Analysis
Price Strategies
Recommendation
Third Degree Price
Discrimination
 Groups of moviegoers are
segmented by:
 Age
 Adults, Seniors, and Children
 Student or Military discounts
 Geography
 Ticket prices vary by
location
Introduction
Industry Analysis
Price Strategies
Recommendation
Average Movie Ticket Price by Age
$18
Range of
prices over
the 28
theaters
Price of Movie Tickets ($)
$16
$14
$12
$10
$8
$6
$4
$2
$0
Adult
1
Senior (60+)
Child (3-11)
Age Category
Introduction
Industry Analysis
Price Strategies
Recommendation
Price Discrimination by Age
 Average senior discount = 25.5%
 Average child discount = 26.7%
 Senior prices were equal to child prices at 19 of 28
locations.
 Only one location offered student and military
discounts.
Introduction
Industry Analysis
Price Strategies
Recommendation
Geographic Price Discrimination for Movie Tickets
$18
Adult
$16
Price of Movie Tickets ($)
$14
Senior (60+)
Child (3-11)
$12
$10
$8
$6
$4
$2
$0
Location
Introduction
Industry Analysis
Price Strategies
Recommendation
Movie Ticket Prices vs. Housing Costs
$18
Adult Tickets
Linear (Adult Tickets)
Price of Movie Tickets ($)
$16
$14
R² = 0.5102
$12
$10
$8
$6
$4
$2
$0
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
Median Monthly Rent by Zip Code ($)
Introduction
Industry Analysis
Price Strategies
Recommendation
$2,000
Competitive Analysis
 Collected data on the number of local
competitors for each of the 28 Regal theaters.
 Collected proximity and price data on 4 Regal
Cinemas and 8 AMC Cinemas in the New York
Metro Area.
 Data analysis indicated that tacit collusion may
be occurring.
Introduction
Industry Analysis
Price Strategies
Recommendation
Movie Ticket Prices vs. Number of Local Competitors
$18
Adult Tickets
Linear (Adult Tickets)
$16
Price of Movie Tickets ($)
$14
R² = 0.0676
$12
$10
$8
$6
$4
$2
$0
0
5
10
15
20
25
30
Number of Local Competitors
Introduction
Industry Analysis
Price Strategies
Recommendation
35
Average Difference in Price of Movie Tickets ($)
Difference in Adult Movie Ticket Prices Between Nearby Competitors
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
0 to 5 mi.
5 to 10 mi.
10 to 15 mi.
Distance Between Two Competing Theaters (miles)
Introduction
Industry Analysis
Price Strategies
Recommendation
Tacit Collusion
 Markets with lots of movie theaters do not display
price cutting behavior
 Competitors in close proximity have low
variability in ticket prices
 The three largest firms have nearly identical
criteria for age segmentation:
Child Age Group
3 to 11
2 to 12
1 to 11
Senior Age Group
60+
60+
62+
Introduction
Industry Analysis
Price Strategies
Recommendation
Concession History
 Used to be a monopoly of 8 studios/distributors
 Directly and indirectly owned theaters
 Controlled ticket admissions, show times, types of
films
 Forced independent theaters into block booking
 1984 US V.S. Paramount - end of collusion
Introduction
Industry Analysis
Price Strategies
Recommendation
Consequences
 prohibition against price-fixing, joint ownership,
major franchises and block licensing
 End of Block Booking
 higher selectivity
 higher production cost
 led to less movies made per year,
 Higher licensing rate charged to theaters
 Studios forced to sell theaters led to an increase
in rent for movie theaters
Introduction
Industry Analysis
Price Strategies
Recommendation
Concessions
Over 40 % of total theater profit is Concession
Introduction
Industry Analysis
Price Strategies
Recommendation
Admission Ticket Sales
How much do theaters get from ticket sales?
 1st week- between10%-25%
 2nd week-25%-45%
 3rd week-45%-55%
 After 4th week- up to 80%
Introduction
Industry Analysis
Price Strategies
Recommendation
Why are the Markups High?
 By placing a premium on concessions prices for
tickets can be lower
 This allows price sensitive consumers to see films
 Research shows that there are proportionally
higher sales during low attendance periodindicating the existence of people who are die
hard movie goers and have WTP for expensive
popcorn
 Fun Fact: Research shows that people who
purchase tickets online tend to buy more snacks
Introduction
Industry Analysis
Price Strategies
Recommendation
Why are the Markups High?
Price
Sold for
Large
Tub of
Popcorn
Cost of large
Popcorn
bag
Cost of
Popcorn Tub
Cost to
make of
large
Popcorn
$8.00
$0.22-$0.35
$0.85-$1.00
$0.08
A tub’s worth of popcorn could carry around an 800% markup!
Introduction
Industry Analysis
Price Strategies
Recommendation
Bundling
 Prices still high and almost the same as buying a la
carte
 Prices depends on Theater Chain
 Examples:
 Regal For 2 medium drinks & large popcorn
 $18.50 for bundle, same price as a la carte
 AMC For large drink and large popcorn
 $13.75 for both a la carte and bundle
 Muvico For 2 medium drinks and large popcorn
 $16.50 for bundle and $17.50 for a la carte
Introduction
Industry Analysis
Price Strategies
Recommendation
Uniform Pricing Puzzle
Two Characteristics of Movie Industry
 Movie Puzzle-price uniformity across movies that
run at the same time
 Showtime Puzzle-refers to the lack of price
differentiation between weekdays and
weekends or across seasons (Exceptions are
Matinees)
Introduction
Industry Analysis
Price Strategies
Recommendation
Why Does it Occur?
 Demand Uncertainty
 Variable Pricing can be complicated
 Distributors can refuse to license to theaters that
have variable pricing
 Fairness
Introduction
Industry Analysis
Price Strategies
Recommendation
Opportunity for Variable
Pricing
 Opportunity to have variable pricing based on
popularity
 Research shows sequels do about as well as originals
 Correlation between Revenue and Production Cost
 Success of film typically determined by sales on the
first weekend
 Allows for price adjustments that Monday
Variable Pricing
Pros
Cons
 Boost Independent
Films (Non
Blockbusters)
 Pressure from
distributor
 Encourage Early
Purchase of Ticket
 Potentially boost
Concession sales
 Raising prices would
anger consumersreduce # of price
sensitive consumers
 As prices go down
more people will be
WTP for tickets
 Lowering prices might
seem like an indicator
of quality
Introduction
Industry Analysis
Price Strategies
Recommendation
Recommendations
 Investments
 Negative
 Protection Window Shrinking
 High Entry Barriers
 High Fixed Costs
 New Technology
Introduction
Industry Analysis
Price Strategies
Recommendation
Recommendations
 Pricing Strategies
 Continue 2nd and 3rd degree price discrimination
 Long Term- Variable Pricing
 Fluctuating Prices on Per Movie Basis Based on:
 Popularity
 Performance over time
 Disclaimer: Price Variability would only work in an
ideal situation. Distributors still have power to prevent
changes from occurring
Introduction
Industry Analysis
Price Strategies
Recommendation
Thank You!
 Questions?