Will "Bubble" Bust Cinemas?

On Jan. 27, well-known Hollywood director Steven Soderbergh and billionaires Todd Wagner and Mark Cuban will release the movie Bubble almost simultaneously to DVD, cable TV, and movie theaters. Is this the paradigm shift that kills the already-suffering movie theater industry?

In the late 1990s, the building boom that brought communities an abundance of multiscreen theaters ended badly. The number of screens grew more quickly than attendance, ultimately driving names like United Artists Theatres, Edwards Theatres, and Regal Cinemas to bankruptcy court. Today, those three names share a common owner: Regal Entertainment (NYSE: RGC  ) , the world's largest motion-picture exhibitor.

Regal's formation led many to predict that concentrated ownership of theaters would give owners significant clout in dealing with movie studios. That hasn't happened. In fact, the theaters are losing clout. The total domestic box-office gross fell to $8.8 billion last year, the first sub-$9 billion year since 2002.

An Associated Press/America Online poll last June showed that 75% of respondents preferred to view a movie in their own home. Why not? Best Buy (NYSE: BBY  ) has been growing like crazy on the back of exploding home-theater sales. Meanwhile, Netflix (Nasdaq: NFLX  ) charges consumers a flat monthly fee for DVD rentals by mail, thus sparing them the hassle and expense of buying new discs or driving to a local rental company like Blockbuster (NYSE: BBI  ) .

It may be coincidence, but the theater operators are making some bold moves. In December, CarmikeCinemas (Nasdaq: CKEC  ) , the third-largest theater owner with 2,469 screens, announced that it was going to install up to 2,300 Digital Cinema projection systems between January 2006 and October 2007. Besides giving Carmike the ability to show movies with crystal-clear quality every time (since there is no film wear and tear), it also provides a mechanism for 3-D movies (something your home theater probably isn't equipped to do) and other non-film events (possibly including the viewing of a local sold-out concert or sports event).

Movie studios like Disney (NYSE: DIS  ) and Sony's (NYSE: SNE  ) Columbia and Tri-Star divisions will welcome the digital projectors, which allow them to avoid the significant cost of creating and handling cumbersome celluloid prints that must be moved to local cinemas. To the extent that these technologies offer an improved theater experience (for customers and the studios) and are adopted across the broader swath of theater providers, they should keep the major studios from bolting to near-simultaneous multi-platform releases. After all, studios don't need to change business practices and risk revenue disruptions, especially when the theater owners are providing them with a way to save money.

The low-budget movie Bubble has the financial support to realistically explore a new movie distribution paradigm. The only theaters that show the movie, though, will be those owned jointly by its two billionaire backers. The major theater chains are not interested.

Bubble won't burst your local theater franchise just yet. The reality, though, is that the gap between a movie's theatrical release and its arrival on cable and DVD is narrowing. If the theaters' investments in digital projection and other content work well, they might be able to hold onto what appears to be a declining customer base. If not, even more people may stop asking "What's playing at the movies?" in favor of "What's new at home tonight?"

Netflixand Best Buy areMotley Fool Stock Advisorrecommendations.For more superstar stocks from David and Tom Gardner, sign up today for a 30-day free trial.

Fool contributorW.D. Crotty owns shares in Disney and frequently visits the local Carmike Cinema to escape life's realities.Clickhereto see The Motley Fool's disclosure policy.


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