Box Office Pricing Power Leads to a Record Year

It's no secret that the number of people watching movies at theaters has been declining for about a decade. This appears to have leveled off in 2013, with box office attendance coming in at about the same as 2012. Even so, die-hard film fans are more than willing to dish out more money for their favorite flicks, and the industry is able to raise prices and churn out record revenue numbers while retaining most of its core base.

According to the National Association of Theater Owners, ticket sales in the domestic market came in at approximately 1.36 billion for the year. That is in comparison to the record-breaking 1.57 billion tickets sold in 2002.Overall box office revenue is projected to end the year at about $10.9 billion, up from the record $10.8 billion last year. (Note: The cited numbers are not adjusted for inflation.)

Other elements that added to the theater experience are the serving of food, 3D films, larger and more comfortable chairs, alcohol, and IMAX theaters. Consumers in a number of markets have shown they are more than willing to pay more for a fuller experience.

NATO says that the average cost of a movie ticket in North America for 2013 was $8.05.

Blockbuster model
For better or worse, Hollywood is increasingly going the route of relying on big hits to generate revenue. A major reason for this is its major customers: movie theaters. One example is Cinemark Holdings (NYSE: CNK  ) .

In the case of Cinemark, the company would rather show a movie that can fill its theaters day after day than a movie that attracts a limited crowd. This is obvious, but the point is some content companies have built nice businesses offering niche films that are made at a relatively low cost. Among the best in that market is Lionsgate (NYSE: LGF  ) .

Those forces pull and push one another, as the overall industry works to find the sweet spot where everybody makes money.


Cinemark reported record revenue in the third quarter of 2013, generating $757.6 million for a gain of 19.6%. Adjusted EBITDA for the quarter came to $190.2 million, generating a solid EBITDA margin of 25.1%. This is why companies like Cinemark thrive with big film hits.

Lionsgate
Of course, Cinemark doesn't have the risks associated with producing content like Lionsgate has. This is why Lionsgate has built itself up by targeting niche markets with low-cost, low-risk films. Franchises like "Saw" and "Madea" are examples of this.

Even so, it has gradually moved toward creating larger hits. This can be seen specifically with its "Hunger Games" franchise, which ended up propelling it to the no. 5 position for domestic market share in 2013.

The good news is that the company still has the goal of "mitigating risk," using strategies such as pre-selling international rights in order to cover at least half of its production budget. In some cases, up to 75% of its production costs are covered by that strategy. While it continues to grow, it does so with one of the best risk-management policies among content companies.

Lionsgate will continue to do well over the next couple years, led by its powerful Hunger Games franchise. In 2014, The Hunger Games: Mockingjay, Part 1 will be released, followed by the The Hunger Games: Mockingjay, Part 2 in 2015.

Consequently, Lionsgate has now offered its first dividend in the history of the company. This indicates that the company has confidence in its future.

Twenty-First Century Fox's strategy
With its major "Avatar" franchise, Twenty-First Century Fox (NASDAQ: FOXA  ) is an example of a company that spends a lot of money for its hits. It is doing so again with X-Men: Days of Future Past, which will be released in 2014.

Costs of X-Men: Days of Future Past are probably far above $200 million, and it is quite possible that it will become the most expensive superhero film of all time. That wouldn't be surprising when considering that the production and marketing costs for Avatar were estimated to be about $500 million.

After the disappointment of X-Men: The Last Stand, which had production costs about $210 million, it is easy to see the risk involved with focusing on creating blockbusters. That is one of the reasons Twenty-First Century Fox had solid revenue growth in the latest quarter, climbing by 17.6%, but at the same time had its earnings per share drop.

Once Fox releases its new "Avatar" films, the company should generate big numbers for three years in a row. Both revenue and EPS should jump significantly with the films.

2014
That leads us to 2014, which has the potential to generate record numbers once again. This should propel the share prices of Cinemark and its competitors up. In addition to the 2014 film releases already mentioned, the year will also see the release of Transformers: Age of Extinction, The Amazing Spider-Man 2, Captain America: The Winter Soldier, and The Hobbit: There and Back Again.

There will be continual pressure from mobile devices on the industry as fewer people watch movies in theaters. Those that do like the big-screen cinematic experience are more than willing to pay for it, though. This is why it will be many years before we see this materially affect the industry. Even then, the addition of perks could continue to provide sustainable pricing power that overcomes fewer ticket buyers.

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