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Charging a Premium for Movies, at a Cost

Would you go to the movies more if tickets cost less?

Mars Needs Moms Movie
Walt Disney Pictures
Mars Needs Moms Movie

“Yes, absolutely,” said Sarah Galvin. “We go twice a month, we’d go every single weekend.”

Ms. Galvin had shown up to see “Captain America: The First Avenger,” in 3-D, at the AMC Santa Monica 7 theater here on Wednesday.

She had a little one in tow, in superhero costume. Adult tickets were $15.75, children’s, $12.75. “It costs so much,” Ms. Galvin said.

After years of grumbling about steadily rising ticket prices, consumers achieved the nearly unthinkable earlier this year: they forced a momentary drop in the average cost of a movie ticket, to $7.86 in the first quarter, down from $8.01 in the fourth quarter of last year, partly by opting out of costly 3-D tickets for movies like “Mars Needs Moms,” and watching films in cheaper 2-D.

But prices started rising again this summer. In a conference call with investors on Thursday, executives of the Regal Entertainment Group, the nation’s largest theater chain, predicted the usual average price increase of 3 percent or more across the industry by year’s end.

If so, it will be the 17th consecutive annual increase in a business whose prices have outpaced the effect of general inflation by more than half since 1999. Theater attendance has fallen by about 10 percent in that period, or even more when measured as a share of the growing population.

Executives from Hollywood’s major studios are generally reluctant to discuss prices. But with domestic box office down 5.55 percent—to $6.42 billion from $6.80 billion—from last year at this time, according to Hollywood.com, even some of the best-compensated players are beginning to wonder whether exhibitors and studios are pushing their luck with consumers.

At the Comic-Con International fantasy convention in San Diego last month, Steven Spielberg and Peter Jackson, two of Hollywood’s most prominent directors, voiced a strong hope that ticket prices for 3-D films would ultimately fall into line with the lower charge for 2-D movies. Consumers are being charged an extra $5 to see a movie only to find out it is “as bad as the one you saw in 2-D,” Mr. Jackson said.

Their plea brought a sharp response last week from Jeffrey Katzenberg, the DreamWorks Animation chief executive, who has been an advocate of 3-D and the increased price that comes with it.

“They’re not getting complaints at the box office about pricing, it’s just not happening,” said Mr. Katzenberg, who spoke by telephone on Thursday. Mr. Katzenberg said his own company’s recent experience with “Kung Fu Panda 2,” which took in about 45 percent of $161 million in domestic ticket sales from the higher priced 3-D tickets, showed that a substantial number of consumers would still pay a premium for good films.

“Whatever Peter and Steven are talking to, maybe they’re following their instincts,” Mr. Katzenberg said of the Spielberg-Jackson pricing critique. “But there’s actually no factual data.”

Asked whether 3-D pricing had been too aggressive, David Passman, the chief executive of Carmike Cinemas, said by e-mail: “Perhaps in some markets, but generally, no.”

Historically, the big theater chains like Regal, , Cinemark Theatresand Carmike or their predecessors have been reluctant to raise ticket prices because their profit margins were higher on the sale of popcorn and other concessions than from tickets. Thus, they had an interest in raising the number of attendees, rather than maximizing film revenue that would be shared with studios. (The studios and exhibitors typically split the proceeds from each ticket sale, although the exhibitors alone set the price to consumers.) Patrick Corcoran, the director of media and research for the National Association of Theatre Owners, points out that a ticket purchased for the average price of $1.65 in 1971 would cost $9.20 today—higher than the actual industry average, if adjusted according to the general inflation rate.

More recently, though, theater chains turned to price increases, and especially to premium prices for 3-D and big-screen formats like Imax, for added cash that sometimes has been used to pay large dividends to shareholders or to pay down debt.

Cinemark Holdings , though generally more restrained than some of its peers when it comes to pricing, raised its quarterly dividend 17 percent, to 21 cents a share from 18 cents, an amount that nearly equaled its earnings in the first quarter. Meanwhile, Carmike, which operates many small-town theaters with relatively low ticket prices, has paid down a substantial $100 million in debt in just over three years.

Regal , of which Philip Anschutz is a major shareholder, has an average ticket price of about $8.75, nearly 9 percent higher than the industry average of $8.06. And, like Cinemark, it recently raised its quarterly dividend to 21 cents from 18 cents, after declaring a special dividend of $1.40 a share, or $216 million, in December.

Speaking privately to avoid conflict with their business partners, some studio executives contend that such payouts are draining the chains of money that could be used to upgrade or replace theaters that are charging higher prices but offering a less-than-premium experience, beyond the investment in the digital projectors required for 3-D.

Theater owners say otherwise. “The dividend payments were not at the expense of reinvestment,” Amy E. Miles, Regal’s chief executive, said in an e-mail on Friday. Movie-going remains relatively inexpensive, and two-thirds of Regal’s customers continue to pay $10 or less for a ticket, Ms. Miles added.

Mr. Corcoran said the theater owners association did not compile publicly available statistics on the average surcharge for 3-D tickets. But the average add-on appears to be about $3, rather than the $5 sometimes seen at big-city theaters. Of a $3 surcharge, the theater owner and the studio would each receive about $1.50, but each would typically pay about 50 cents to a technology provider like RealD—the theater owner for licensing, the studio for glasses.

From its share, the studio must cover the incremental cost of making a 3-D film, while the theater owner’s remaining stake moves more directly to the bottom line, since technology firms like RealD cover the cost of maintaining their equipment.

The industrywide average ticket price—which factors in low-price small-town theaters, second-run houses and discount sales through outlets like Costco—can appear impossibly low to urban dwellers, who are accustomed to paying far more at theaters in cities like Los Angeles, Chicago and New York, where real estate is expensive and zoning laws can require, for instance, a lobby as large as the auditorium, to avoid lines on the street.

In some markets, too, pricing changes have caused surprising distortions. In Santa Monica, for instance, the price of a regular adult ticket at AMC Loews Broadway 4 theater, also owned by AMC, has risen by 47 percent since 2001, to $11.75 from $8—only a little more than the 41 percent increase in the average ticket price for the same years. But children’s tickets rose 67 percent for the period, to $8.75 from $5.25, while senior tickets are up 95 percent, to $10.75 from $5.50. Add 3-D, and a child’s ticket goes to $12.75, while a senior pays $14.75, two to three times the cost of a ticket 10 years ago.

At AMC, whose average price tops the industry average, the added cash contributed since December to $263.1 million in dividends, which the privately held firm’s parent used to pay down debt, according to a recent company filing with the Securities and Exchange Commission. AMC executives declined to be interviewed, citing restrictions on their ability to speak publicly pending a planned stock offering.

Plans for new theater construction in Santa Monica have been held back by a regulatory review and the need to resolve zoning issues.

Though generally well tended, the Santa Monica 7 theater is showing its age. Here and there, the wallpaper is cracked or a piece of trim is missing, and the basement level, where “Captain America” was showing on Wednesday in a large 3-D auditorium, had a distinctly musty smell.

As for Ms. Galvin, she just wished the tickets were a little cheaper.

“I’d bring my husband,” she said.

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