How do Shorter Film Showings Affect Theaters?

DreamWorks CEO Jeffery Katzenberg was quite detailed in predicting change throughout the movie industry, but how might these changes affect theaters?

May 10, 2014 at 8:39PM

Thanks to visionaries like Steve Jobs, Jeff Bezos, Reed Hastings, and Larry Page, the way we view, interact, and process data has changed and this includes all of the major industries within technology and entertainment. Today, it's a mobile world, yet the one industry that remains unchanged is very much the movie industry. According to DreamWorks Animation (NASDAQ:DWA) CEO Jeffrey Katzenberg, this could spell trouble, especially for the likes of Carmike Cinemas (NASDAQ:CKEC), Regal Entertainment (NYSE:RGC), and AMC Entertainment Holdings (NYSE:AMC).

A Beverly Hills confession
At the Milken Global Conference in Beverly Hills, DreamWorks CEO Jeffrey Katzenberg made headlines when he predicted that a three-week theatrical window would exist in the future. According to the CEO, the entire business of movies is going to change, and we will see a new era when movies play for just three weeks at theaters for $15. Then, cable providers will have a turn for $4.99 followed by streaming for $1.99.

As a result of this foreseen change, Katzenberg's company is making large investments and increasing its focus on the digital and TV space, which movie titans have often neglected in favor of box-office hauls. Obviously, if DreamWorks is ahead of the curve in seeing this transition then this could bode well for shareholders. For traditional movie theater companies, this change might even be better news.

Does a 3 week term have that much impact?
According to Katzenberg, 98% of movies make 95% of their revenue in the first three weeks after their launches. Therefore, this logic suggests that movie theaters might actually benefit from such an industrywide change, in three different ways.

Most theaters have large screens for new movie releases and as those films die down the theaters move them to smaller screens, which rarely sell out. By limiting films to only three weeks, consumers might feel a sense of urgency to get to the theaters, and this should also keep theaters packed with new movies and lead to higher concession sales.

Also, this could lead to shorter wait times for blockbuster movies. The Avengers 2 is a great example of this as it is not due out for another year, and then will follow the next Superman installment, followed by Justice League in, perhaps, 2018. We could also throw a 2016 release date for Avatar 2 into the equation, far past the original showings. The studios film most of these movies in a matter of months, but they often take 12 months or longer to make it onto film. Hence, fewer movies at the theaters equals more capacity for them, which might consequently allow films to make it to the theaters in less time.

Lastly, ticket prices will be higher. If 95% of revenue is generated by 98% of films in three weeks anyway, then a $15 ticket price will nearly double the current $7.96 average ticket price. Once more, this means more money in the pockets of everyone involved.

So which companies benefit?
While Katzenberg insinuates the need to prepare for such changes, it really appears that they could be great for the industry and theaters in general.

Carmike is a company that saw its revenue per screen increase 6.6% in 2013 and its attendance rise 2.4%. Looking ahead, expectations call for it to grow revenue 12% this year, and at 20 times next year's earnings, it might be an interesting stock to watch.

Like Carmike, Regal has seen its admissions and concessions rise. Also like Carmike, Regal is beefing up its total number of screens. However, at 14 times forward earnings and with similar growth, Regal might actually be a better bet than Carmike.

With that said, AMC hasn't shared the good fortunes of Carmike and Regal. Its admissions revenue did rise 3.6% last year but this mainly resulted from price increases, as the company has faced slowing traffic. AMC is a very large company, which became a public company late last year, but does not have the growth of its peers. Thus, at 15 times earnings, investors might find more upside in Carmike, and especially Regal.

Final thoughts
For the first time in a long time, it now appears that the movie industry will undergo some major changes, which might actually benefit theaters. With that said, it's possible that such changes won't occur, but Katzenberg's theories make sense.

Therefore, as with all industries, certain investments within them are better than others. In this particular scenario, Regal looks to be cheap and growing fast, and is strengthening its position in theaters. Hopefully, these changes mean more packed theaters, and if so, Regal is well positioned to reap the rewards.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation and Imax. The Motley Fool owns shares of Imax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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