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The State of the Movie Industry in 2018

By Asit Sharma – Sep 19, 2018 at 1:42PM

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MoviePass had Cassandras foretelling its doom for months, but the struggling concept could still revolutionize a stagnant industry in a big way.

Last year, we covered the state of the movie industry, from the biggest producers to the then-fledgling MoviePass. This week on Industry Focus: Consumer Goods, we're checking back in. Host Vincent Shen and Motley Fool contributor Asit Sharma explain what hasn't changed at all, like the biggest names making up a huge amount of the industry; what's changed a little bit, like how much money the industry raised; and what's changed in a big way, like, well, MoviePass.

Tune in and find out what went so wrong for MoviePass, which competitors have taken up its model for better or worse, how services like this could change the industry, and more.

A full transcript follows the video.

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This video was recorded on Sept. 4, 2018.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen. We have another pre-recorded show for you. This one's going out on Tuesday, Sept. 18. Joining me via Skype in the full HQ studio is senior Motley Fool contributor, Asit Sharma. Hey, Asit! I missed you, man! How's everything?

Asit Sharma: Everything is great! Listeners, hisashiburi desune! I will hopefully remember to explain why I just said that, but I believe that's poor Japanese for, "It's been a while." I've been well. It's a great summer so far! I hope everyone out there is having a great summer. How about you, man? How's your summer going? 

Shen: Pretty good. I'm going on vacation soon to Spain. No complaints from me. That's why we're pre-recording these shows. It's my first time traveling, or at least, for part of the trip, it'll be my first time traveling with just my mom. That'll be a new experience. We tend to have different interests when it comes to traveling, but she doesn't get to go abroad as much, so I'm just going to try and make sure it's as fun as possible for her. 

Sharma: You are the best son!

Shen: I like to think so. 

Sharma: You will be after this trip. 

Shen: Yes, exactly. She's really excited. It's nice to see her get really pumped for the trip and a lot of eating, we both share that love. That makes it a little easier. I'm excited to have you back, especially since we're going to be updating and revisiting a topic. Maybe this will become an annual thing. We last discussed the movie industry and the box office around this time last year. We have updated results on tap from the box office. We're also going to talk about the growing popularity of some of these membership plans for moviegoers thanks to the rise of MoviePass, and how that could reshape the industry, in terms of attendance, and also the profitability for theater operators, and how that shakes out. Asit, why don't you start us off with some of the big picture box office results so far for 2018? From what I could see, it looks like we're going to be reversing the trend, at least relative to the down year that we had in 2017. 

Sharma: It looks like it, Vince. I always get caught up in this narrative of long-term decline of the movie business, and no one is going to the movies. But when I check the stats, they always seem to be positive, at least over the last 12 months or so. Year to date, this is per Box Office Mojo, which is the source we consulted last year, late summer -- total domestic box office gross receipts are $8.34 billion. That's up about 10% vs. 2017. 

Now, if you're like me, you always like to ask the skeptical question, "Yeah, but what about the price of tickets? Is that making up all the difference?" Average price per ticket this year is $9.27. That's only about 3.33% ticket inflation. Not so bad.

I'm going to pause for a moment and ask you to guess what the highest opening weekend was so far this year. 

Shen: I'm going to guess that it was a weekend I contributed to with my wife and three kids that we were babysitting, with Infinity War

Sharma: You're absolutely right, Vince! I think you pushed this movie over the hump in another competition that it has going with another great film, which is actually Black Panther, for title of highest-grossing film of the year. But, the honor of biggest opening weekend does, indeed, belong to Disney's (DIS -1.83%) Avengers: Infinity War. It had $258 million on its opening weekend. That beat out last year's biggest movie, which was The Last Jedi, which opened with a relatively smaller $220 million.

Top five movies so far this year. I'm going to read No. 1 through No. 3 first, because they are all by the same studio, Disney Films. Buena Vista is the actual movie house that these are listed under. Black Panther in the top spot at $700 million. Vince and family pushing Avengers: Infinity War to a close second with $679 million. Incredibles 2 has grossed $603 million. That's followed by Universal's Jurassic World, which has grossed $415 million, and Deadpool 2, which is a 21st Century Fox film, which made $319 million at the box office. 

I want to do a bit of quick math here. Last year, we were discussing through date, I think that was mid-August, that the top five films had made up about 25% of total box office receipts. This year, we've got about three more weeks of comparison. The top five have made up about a third of total receipts. The top 10 films have accounted for 45% of the total box office so far in 2018. 

Vince, I'm going to ask you to guess how much Disney made up of the total box office take this year. How much of that is due to Disney?

Shen: I looked at this, but only in the context of the top 10 films, in terms of the Disney contribution. For total receipts, I'm going to guess somewhere around 30%. 

Sharma: That's why they pay you the big money. That's why I get the second biggest money. Disney made up 32% of total box office receipts so far this year. That's about $2.7 billion year to date. I just wanted to remind listeners, if you're wondering outside of films I named, what else makes up that total, movies like Ant Man and the Wasp, Solo: A Star Wars Story, A Wrinkle in Time, and Coco.

I just want to take a second. Vince, I've read that Solo was a big flop this year. We still haven't seen it. In fact, it's so late now that it's only in the dollar theaters. Hopefully my family can still make it before the summer completely ends. But, this film actually grossed $214 million. It was the, eighth-highest grossing domestic film to date. Were you aware of that?

Shen: I think everything, when you look at it like that, in terms of, $220 million sounds phenomenal, but relative to the budget and expectation, that's where you then get this narrative, this angle that the movie was a big flop. In the end, the Star Wars titles, this was supposed to be a cash cow, guaranteed hit for Disney. Relative to the other reboot movies that Disney has released under the Star Wars franchise -- and that includes the spin-offs like Rogue One, too -- it has been a relative underperformer.

Sharma: True that. The number cruncher in me is not overly impressed, but thinks it's a pretty decent performance. The film critic in me, though, we'll have to wait for that. I think, with any Star Wars film, the expectations are so high. It pushes the studio into this precarious balance between monetizing these films to the utmost, but maybe having too much familiarity. Familiarity breeds contempt in the movie industry, as we know. We'll have to see. Next year, we're slated for the next installment in the primary Star Wars movies. Onto movie houses. 

Shen: The only thing I'd like to add, just with this context, in terms of the dominance that these big studios have, especially with Walt Disney, the fact that it made up half of the top 10 highest grossing films in the U.S. That's $2.4 billion ticket sales for just five films and 66% of the total pie for the top 10 list. That certainly helps to explain why their studio entertainment segment revenue for that business is up 20% year over year for the company through the first half of the year. 

The only other thing I want to mention before we move on is, it still continues to surprise me how concentrated the box office is, with the mega blockbusters. I spot checked some of the annual results going back to 1980, top 10 films for the industry, each year. They consistently count for around 35-45% of annual sales each year. Looking at the volume of releases among the top six studios -- that's Disney, Warner Brothers, Fox, Paramount, Sony, Universal -- they're releasing fewer movies. From 1995 to 2000, for example, they were averaging about 110 releases per year. In the past five years, closer to 85. On the flip side, studios outside that top six, they're seeing their volume increase. 

Another long-term trend -- I think you mentioned this earlier this episode -- it's something that we've talked about before, is the ongoing decline of ticket sales. Box office revenue does go up each year, not because of studios and theaters are selling more seats, but because they're successfully raising the price of each ticket. You think about the wide variety of formats that are available now, including IMAX, then it was 3D, IMAX 3D, and now they have stuff like 4DX, and also the reserved seating, the reclining chairs, all of those things helping to boost ticket prices. At least in the D.C. area, I was looking up a 4DX ticket at a major theater. It makes a trip to the movies cost as much as $22 per person, which is pretty absurd, in my opinion. The experience that 4DX is supposed to add, I haven't tried it yet, but my brother says it's pretty cool. Maybe not $22 cool, but we'll see. 

But based on the annualized estimate for this year, 2018 could actually deliver the strongest year of ticket volume growth in almost 30 years. I think a big driver of that is the changing nature of theater attendance and some of the revenue models for the operators. That's what we'll cover next.

We've covered some of the high-level box office results, some of the trends that we've seen with the different studios, and the dominance of a single one, those results for this year. Now, I want to talk about MoviePass. A lot of moviegoers will say that this rising star burned out a little too quickly, but its influence on the industry will hopefully be more permanent, at least from a consumer perspective.

I was a MoviePass subscriber until this past week, actually. I've since been disappointed by the trajectory that the service took, in terms of some of the changes that they've made to the features and things along those lines. But, Asit, why don't you start us off and walk us through the saga a little bit, since MoviePass really took off late last year?

Sharma: MoviePass is a great idea in search of deep pockets. It found those deep pockets in a company called Helios and Matheson Analytics, an analytics company with skimpy pockets, but which thought that combining its expertise in analyzing data with a subscription service like MoviePass, together, these two companies could deliver valuable information to movie houses, production studios, cinema chains. They joined up forces late last year. Since then, we've been able to see MoviePass's economics in the financials of Helios and Matheson Analytics. And they've been atrocious. The company has had to curtail its subscription model on successive occasions. I believe the latest iteration is a plan which lets moviegoers see three movies in a month for $9.95. That's down from an unlimited selection of movies. In addition to that, you can only choose from six titles daily, which is also down from an unlimited amount of titles. Now, you can purchase additional tickets in each 30-day period at a $5 discount. 

However, even this reduced model, I believe, is very unsustainable. The reason is that MoviePass has to pay the price of the ticket to the theater chains. Its business model, its business plan, was to make money in two stages. One, it would ramp up subscribers -- which it did, into the millions. I believe the latest figure that we have available to us was 3.2 million subscribers. Once it had this huge subscription base, the company would then try to sell data analytics to the entities I mentioned before. It would arrange for private screenings, it would promote movies through its app. All of these alternative revenue streams have, in some way, materialized, but in an accounting sense, they're not material. They have not made an impact to the bottom line. 

If you visualize this, after the first time a customer sees a movie during a month, MoviePass is actually at a neutral. In fact, it hasn't covered a single cent of its overhead expenses. It's just covered the first ticket that it then has to hand over to the movie house. After that, it gets in the red each time you see a movie. 

The parent company, Helios and Matheson, has sustained enormous losses in a short amount of time. Its cash burn in the first six months of this year was $219 million. It recorded revenue of $122 million for the subscription services of MoviePass, while at the same time, its cost of revenue came in at $313 million. This is a bad idea from an economic standpoint, to run such a service through a third party. However, it might make sense for cinema chains to replicate that model. They already have the revenue and expenses on their own P&L.

I'm curious, Vince -- I know we were chatting before the show -- given that overview, you have some experience with MoviePass. I think you have a relative who also has a very interesting experience with MoviePass.

Shen: I'm going to do this in three stages. Austin, I want to call you in on this. You mentioned that you're still currently a MoviePass subscriber, but you've been in it for, what, six months?

Austin Morgan: Yeah, about six months. 

Shen: And you've seen how many movies in that time?

Morgan: I've seen probably about one movie a month. 

Shen: OK, one movie a month, you're paying $9?

Morgan: It's like $8.99, yeah.

Shen: OK, so you're playing about $9. The thing is, theaters in this area, usually around $12-13 bucks. MoviePass is footing that full bill to the theater operators.

Morgan: Correct.

Shen: So, even on that one movie, they're already losing a couple of bucks. Let's be generous, and we'll play it by the average ticket price in the country. You said around $9.25, right, Asit?

Sharma: That's correct. 

Shen: One movie a month, $9.25. You're paying about $9. That seems like it could potentially be sustainable if we forget about all the overhead and the fixed costs. Let's just not worry about that stuff, right? This is a lean company, they can do this. They have an app, that's it. I recently ended my membership. I was a member for about 11 months. In that time, I counted through my history on the app, I saw about 27 movies. I would consider myself probably being on the higher end of volume. Most people don't have the time or, maybe, necessarily, even the interest to see as many as two, three movies a month. 

I'm going to bring in somebody who's absolutely an outlier, who's my brother. He also recently ended his MoviePass subscription to sign up with a competing service, which we'll talk about. I told him to give me a final tally before the show. He saw over 80 movies over about a 10-month period. When you're seeing eight movies in a month, and D.C. ticket prices being around $12 each -- and that's low, frankly -- costing the company essentially $1,000, but only collecting about $100 in revenue, in terms of that monthly subscription. You can see why the company had some of the challenges with cash flow, why there have been all these changes to their service, the features that they offer, and why they have essentially gone from not quite unlimited but close to it, one movie per day each month; from any of the movies out there that are available to now just three a month with a surcharge for additional viewings.

Not everybody, obviously, is like my brother, seeing that many movies. I think he's probably in the top 1%. But there's definitely a challenge when even somebody who's not going as frequently, like our producer, Austin -- the system isn't sustainable. 

Sharma: I hope the CFO of Helios and Matheson isn't listening to this podcast. You just identified a major source of their cash burn. 

Shen: [laughs] Exactly. 

Sharma: Your brother.

Shen: Exactly. So, we looked at the theater operators and what they're offering. There's been some consolidation. One of the theater chains that we talked about on this similar show last year is no longer in the running as a public company in terms of the stocks. First, with Cinemark (CNK 1.36%), one of the two large remaining chains, it has an offering called Movie Club. This launched last year. $8.99 per month. What you get is one 2D ticket that rolls over if it's unused. You can build those rollover tickets if you don't go that often. Plus, 20% off concessions, and there's no online fees for when you buy those tickets. Then, you can get up to two additional add-on tickets for $8.99 each.

In my opinion, I don't know about you, Asit, in terms of what you think, but that's not even close to the value that competing services offer, especially if you consider the gold standard of what MoviePass originally offered, getting one ticket per day. I feel like it's only a matter of time until Cinemark has to step up their game. What do you think? 

Sharma: Yeah, I agree. It's a toe in the water. The thing about Cinemark that we should recognize is that it's a little bit smaller than the biggest company in the world, which is AMC (AMCX -3.40%). AMC has about $2.8 billion of revenue in the first six months of this year, vs. Cinemark's $1.6 billion. It's a little smaller, but it's more profitable. It has a lot less debt than AMC does. It tends to run a tidier shop in that sense. They're a little more circumspect on jumping into new ideas like this. Having said that, I think that they probably are going to be forced to sweeten their deal when we'll look at AMC's offer, their subscription service, in just a second.

I did want to point out about both of these companies, though, to this point of finding other sources for revenue, what's interesting to me is, if you look at Cinemark's profit and loss statement, as well as AMC's, they are both ramping up the Other section of their revenue. You might think I'm referring to Concessions revenue. I'm actually not. That's the second category after Tickets. This Other revenue, as defined by Cinemark, "includes screen advertising, transactional fees, and other ancillary revenues, such as vendor marketing promotions and meeting rentals located in the company's theaters." That's very fascinating to me. Cinemark increased its Other revenues about 90% year over year in this first six-month period of this year to around $140 million. Similarly, AMC increased its Other revenue by about 52% in the first six months of this year. These companies are actively looking for new ways to support their business model, other than relying on concessions. 

I think the subscription model plays into that, especially, as Vince points out, if you can increase volume, if you can increase the frequency of customers coming in, then you have a chance to throw these other services, and let's not forget concessions, better concessions, at them. What are your thoughts, Vince? 

Shen: I think anybody who's gone to see a movie recently has noticed a change, in terms of the pre-feature film experience. You go in, you get a good seat, assuming you don't have to have a reserved seat. Let's say 20-30 minutes in advance. You see the advertising start rolling through, all the pre-movie commercials and things that they do. You can see how that has manifested itself, in terms of the additional revenue that these companies are generating. It's definitely impressive to see that 90% growth for Cinemark, about 50% growth for AMC. It's definitely something I'm sure these management teams are very happy about. It might be a small piece of the revenue pie for the time being, but I'm sure that's something they're going to be pushing forward on. 

We go on to competing services. Now, we look at AMC's case. They've traded up about 30% year to date. They have what they call their A-List membership. This is actually something worth writing home about. This is, by the way, what my brother transitioned to, in terms of his preferred moviegoing subscription service. For $20 per month, you get three movies per week in any format and the ability to reserve your tickets in advance. It might not be original MoviePass good, but three total movies per month, I imagine that's got to cover something like 98% of most moviegoing consumers. And when you're at the scale and position that AMC is in within the industry, they are just much more able to negotiate with the studios and take any hits from those lower average receipts per ticket and make up for that in what we've talked about, in terms of concessions and those other revenue streams. 

For AMC specifically, though, Asit, are we seeing any momentum from A-List start to come through in their results this year?

Sharma: Well, we know that they have, in a short amount of time, enlisted 260,000 paid subscribers. That is a very fast rate for a service which essentially launched in late June. It exceeds the rate that MoviePass grew at. Potentially, it's not going to be a big leap for the company to convert more subscribers like your brother from the dying MoviePass to its own coffers. We know that it's got the wherewithal to bring on these subscribers. 

Something very interesting in this, I think this may come to an age differential here. For me, it sounds like an interesting proposition, but I know for younger people -- I have teenage sons; Vince, you have a younger brother and cousins -- millennials are actually looking for experiences rather than acquiring things. I'm hearing words that I have not heard ever this year from my teenagers, like a "bougie" cinema hall. I'm referring to a place called Alamo, which many of our listeners may be familiar with. I have yet to go. I want to. A word like "luxe," which is another way to refer to a cool experience that you pay a little more for. 

I think there's a lot of value in that. I think it's, No. 1, above and beyond the economics. It's a great way to live life, to spend on experiences. And if you pay a little more for a fun experience, something that enriches you, all the better if both the person providing the service and the person who's receiving the experience both derive some value. 

I see where AMC can capitalize on this hunger or thirst for better experience. It has screenings at half-off for members. It's got advance reservation, some premium items that you get by using the app. To me, this is a good business proposition. At the very beginning of this episode, I talked about MoviePass being a good idea in search of deep pockets. Well, AMC has the pockets. I do always ping them a little bit because they have a lot of debt on their books, but they're much more financially viable and stable than a tiny entity like Helios and Matheson.

What are your thoughts on the viability and strength of this service going forward? 

Shen: Well, it certainly helps, in this case, to not be the first mover. That first mover was in a third-party position, like you said, and ultimately had something that was just too good to be true. Whereas with A-List, they've address a lot of the pain points that I think they saw in the feedback, probably just watching that Twitter feed for MoviePass and seeing all these people complaining about not being able to reserve seats in advance, not being able to see other formats without paying a premium. They're taking care of that because of the fact that they're operating these movie houses.

I'll say that, this is just one data point, but for somebody at that high volume level, my brother's actually older, he is very, very pleased and more than happy to pay double what he was paying previously, in terms of that monthly membership fee. He's very happy with the consistent, much smoother experience. No more instances where you're showing up to the theater and realize that, for some reason, the app's not working and you're going home or you're going to have to just suck it up, essentially, and pay for the ticket out of pocket. 

With that, I'm going to close out our discussion. Any final thoughts from you, Asit, in terms of the trajectory for this business? Definitely bullish, in terms of what it could potentially mean, growing attendance, and what that means for concessions and those other revenue streams. But, any other thoughts? 

Sharma: Really quick thoughts. We mentioned Regal Entertainment, can't invest in that anymore. It was acquired by the British Cineworld. AMC has done pretty well year to date. I believe it's upwards of 30%. Commensurately, Cinemark is also up this year, I think about 12% or so. Don't quote me on those figures, listeners. They'll have changed anyway by the time you hear this episode.

The bottom line is, both of these companies are responding to the increase in box office and their own ability to capitalize once they get the traffic in. They remain interesting companies to keep on your watch screen. I am really eager next year to return, look at concessions a year from now and this Other revenue category that we talked about to see how profitability might have changed.

Shen: Yeah, and also, the evolutions to these subscription moviegoing services and any competing offerings that jump out. And also, checking to see if MoviePass is still around, and what shape or form it has taken at that point. Thanks for joining us, Asit!

Sharma: Thanks a lot! This was great fun!

Shen: Fools, thanks for listening! People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Fool on!

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends IMAX, Twitter, and Walt Disney. The Motley Fool recommends AMC Networks. The Motley Fool has a disclosure policy.

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