2015 was a record-setting year for box office sales in the United States, bouncing back from a dismal 2014. Helped by titles like Disney's (NYSE:DIS) Star Wars: The Force Awakens, gross box office sales surpassed $11 billion for the first time in history.
But while theaters like AMC Entertainment (NYSE:AMC) and Regal Entertainment (NYSE:RGC) racked up sales at the box office, attendance numbers were some of the lowest in the last two decades. Just two of the past 20 years saw ticket sales lower than the number of tickets sold in 2015 (2011 and 2014). That puts pressure on concession sales, which are the real profit driver for theaters, as consumers prefer to stay home and watch movies on Netflix (NASDAQ:NFLX).
The root causes of lower attendance
There are a number of factors contributing to the lower theater attendance, which is particularly notable over the last couple years. Disney, for example, has shifted from releasing dozens of movies every year to just a handful of potential blockbusters. In 2015, it released only 11 films, compared to the 44 it released in 2000. But overall, film production throughout the industry has actually increased.
The biggest cause of declining theater attendance seems to be the rise of home entertainment options. From video on demand to Netflix and Hulu, there are plenty of options that allow a family to stay home and catch quality video entertainment. Netflix's domestic subscriber base has rocketed over the last two years from 31 million to 43 million. That's faster absolute growth than the previous two-year period, when Netflix added 10 million streamers.
The theaters' response
The response from producers and theaters has been to boost the price and value of a movie ticket. Things like 3D and IMAX screenings, or more comfortable seating, have increased the value of going to the theater. As a result, the average price per ticket increased 2% year over year, and 30% over the last decade. Still, the price increase isn't as steep as it once was, paling in comparison to the 50% growth in average ticket prices over the previous decade.
Ticket prices are becoming increasingly difficult to raise after reaching an average of $8.34 in 2015. The basic tier of Netflix costs just $10 per month, and you can subscribe for $8 per month for a single-stream option. While Netflix and other streaming services have raised their prices over the last couple of years, they've also (like theaters and studios) increased the value they provide with things like original content, more top-tier licensed content, and higher video quality.
What's more, higher ticket prices also make movie-goers more reluctant to spend extra money on concessions -- one of the biggest profit drivers for theaters. Indeed, operating income at both AMC and Regal has been relatively flat over the last couple years.
The studios' response
The movie studios benefit from greater box office revenues regardless of how they're achieved. But maximizing profit per film requires a successful home video release as well.
With Netflix dominating home video entertainment, studios have used different approaches to compete. Disney, for example, launched its own streaming service called DisneyLife in the U.K. last year, with plans for global expansion later on down the road. It also owns a share of Hulu, which licenses fewer movies than competitors, but still has a good selection.
Ultimately, the big money is in licensing content to Netflix. The streaming service plans to spend $5 billion on content in 2016, including an existing deal with Disney to license its new film releases. Neither company released details on the terms of that agreement, but estimates put the value at around $300 million per year.
The decision to license films to Netflix may be having a negative impact on box office volumes, but as long as studios can keep raising their prices there's not much to worry about.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. 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.