On this episode of Industry Focus: Consumer Goods, the team looks at theater operators and how they have upgraded the viewing experience with better seating, renovated properties, and more substantial food and drink menus.
And despite the banner year Walt Disney (DIS +0.83%) recently enjoyed, they discuss how a coming vacancy in the executive suite could have major long-term repercussions for the company.
A full transcript follows the video.
This podcast was recorded on Jan. 3, 2017.
Vincent Shen: I did want to spend a little bit of time talking also about the theater operators themselves. AMC (AMC 2.69%) has definitely been the busiest of the bunch for 2016. They acquired both Carmike Cinemas and Odeon & UCI, which is the biggest European theater operator, all in 2016. I think just within three or four months of each other. After closing them, AMC will be the largest theater operator in the world. They'll have 900 theaters, 10,000 screens. The Carmike deal cost about $1.1 billion. This is mostly a domestic operation. It's going to complement AMC's existing market penetration in the U.S., whereas Odeon, the largest operator in Europe, a similar purchase price, about $1.2 billion. That gives AMC a strong position in markets like the U.K., Spain, Italy, Austria, and Portugal.
With the first three quarters of results available that I have here for 2016, the company reported record revenue for both their admissions and food and beverage. So, getting a little bit to what you had talked about previously, in terms of making that theater experience as welcoming as possible. People are paying more for each ticket, obviously an effect of some of the formats, like IMAX and 3D. But they're also buying more at the concession stand. The average ticket is now, like, $4.80 in terms of food and beverages and snacks. And with the amenities, in terms of theater renovations, reclining seating, seat reservations -- do you feel like that's just going to be the way they can constantly keep the price up?
Dan Kline: They have to up the movie experience. That's going to mean things like beer and wine service in theaters, you're going to see more AMC theaters that actually have food beyond nachos and chicken fingers. You're going to see higher-end candy. You're seeing coffee bars like Starbucks, or Starbucks, but in a lot of cases, faux Starbucks coffee bars. And if I'm going to spend the money -- $16 to see Assassin's Creed, which, I cannot tell you how terrible that was -- it'd better have a good snack and a comfortable chair. This theater had reclining chairs. It had reserved seating. And reserved seating is nice because you don't have to get there a half hour early and sit through all the terrible commercials they're playing for you. So, I see this as a time for theaters as, they're going to have to lose some screens, they're going to have to build some megascreens to deliver that experience, they're going to have to build some tiny screens to show arthouse stuff.
And you're also starting to see some of the theaters branch way beyond movies. In Boston, you can watch a lot of home Red Sox games in movie theaters. You're seeing operas and concerts and one-off events, UFC, other things, in theaters. It's, really, you have this real estate, and there's only a certain level of movie, maybe 10 or 15 movies a year, that might get people out of the house, so you need to make that experience great. Then, maybe, on a Saturday at a matinee price, I'm going to go see, I don't know, the Harry Potter movie or something I don't really want to see, but I know I'm going to get some great snacks and a beer, or whatever it might be.
Shen: Yeah. Takeaways, then, for our investors who are listening, for the handful of companies that we've discussed, a few things I wanted to point out. For Disney, as the king of the box office, as we've described it, keep in mind, the Studio Entertainment segment makes up about 17% of their revenue and operating income. But, on that note, for its most recent fiscal year, which ended back in October, on the 1st, Disney Studio Entertainment revenue was up 20%, operating income up 37%. That's the highest growth shown, by far, of the four major segments of the company. The main thing that I'm looking at for Disney is, each box office win translates, for them, to new characters, new heroes, new toys, new TV shows, new rides for the parks. I think the fact that the company is able to deliver one blockbuster after another is a really important signal to any shareholder that management definitely has its fingers on the pulse in terms of what its target customers and movie viewers want.
And I would also add, for its top three films of 2016, which happened to also top the overall box office, all three titles were the product of acquisitions. Finding Dory from Pixar, Rogue One from Lucasfilm, and Captain America: Civil War, of course, from Marvel. I think it's no coincidence that CEO Bob Iger held the reigns for all three of those deals when he acquired those properties. His leadership abilities have come up again and again on the show. What happens, then -- something else to watch, if you're an investor -- when he officially retires in 2018, I think the new leadership will have a pretty well-oiled machine for most parts of the business, but there's still the issue, for ESPN, for example, and the influence that it holds in the changing landscape of cable and television. We've also, Dan and I, discussed that on this show.
Kline: Here's the thing. Disney is a cash machine. And I'm not 100% sure -- I don't buy that Iger is going to retire in 2018. I don't see why you would change captains on that ship. Disney, and Comcast to a lesser extent, can take a property like Star Wars and get everything out of it. So, not only are there Star Wars licensing, I believe I read a Vanity Fair article this morning that said that Force Awakens made $500 million in licensing fees for Disney in the first year. So, not only is there that army that gets you toys, and Star Wars sheets, and lunch boxes, and all that stuff, but they also threw together some Star Wars events at the theme parks that draw people while they're building Star Wars Land, which is probably going to be the next major theme park driver in both Florida and California. And, they're advertising a one-day Disney Star Wars cruise in Florida, where I live. Basically, if there's anything Star Wars -- I mean, I'm literally wearing Star Wars boxers shorts while I do this show -- if there's anything Star Wars, Disney can exploit it. Comcast can do the same thing with its theme parks and licensing, maybe not as well.
And absolutely, ESPN is going to keep taking haircuts. But as rights deals come up, they can push that back to the sports. They don't have to pay $1 billion for NFL rights. They could go to the NFL and say, "Hey, it's a changing market." And if they lose some rights, that's probably not going to change very much. So, you're going to see some economy change in the next few years. But for the film economy, it's a machine. They're going to have five or six guaranteed hits every year. If they can find another Frozen, another animated property that can spin off and become a bunch of movies, it's only going to get better for Disney, because I don't see Star Wars, or Marvel, or Pixar petering out anytime soon.
