The Motley Fool's Industry Focus: Consumer Goods podcast ends a day at the movies with a discussion of the growing impact of "other" revenue on cinema chains' bottom lines, as well as ongoing experiments with subscription-model ticket sales. Click below to learn how cinema house companies have tweaked their profitability and what they've learned from the spectacular fall of the MoviePass subscription service.
A full transcript follows the video.
This video was recorded on Sept. 4, 2018.
Vincent Shen: 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 (NYSE:CNK), 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?
Asit 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 (NYSE:AMC). 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.
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 Twitter. The Motley Fool has a disclosure policy.