I found this article by Edward J. Epstein who wrote a book on the economics of the movie business:
Once upon a time, movie studios and movie theaters were in the same business. The studios made films for theater chains that they either owned or controlled, and they harvested almost all their revenue from ticket sales. Then, in 1948, the government forced the studios to divest themselves of the theaters. Nowadays, the two are in very different businesses. Theater chains, in fact, are in three different businesses.
First, they are in the fast-food business, selling popcorn, soda, and other snacks. This is an extremely profitable operation in which the theaters do not split the proceeds with the studios (as they do with ticket sales). Popcorn, for example, because of the immense amount of popped bulk produced from a relatively small amount of kernels—the ratio is as high as 60:1—yields more than 90 cents of profit on every dollar of popcorn sold. It also serves to make customers thirsty for sodas, another high-margin product (supplied to most theater chains by Coca-Cola, which makes lucrative deals with theater owners in return for their exclusive “pouring” of its products). One theater chain executive went so far as to describe the cup holder mounted on each seat, which allows customers to park their soda while returning to the concession stand for more popcorn, as “the most important technological innovation since sound.” He also credited the extra salt added into the buttery topping on popcorn as the “secret” to extending the popcorn-soda-popcorn cycle throughout the movie. For this type of business, theater owners don’t benefit from movies with gripping or complex plots, since that would keep potential popcorn customers in their seats. “We are really in the business of people moving,” Thomas W. Stephenson Jr., who then headed Hollywood Theaters, told me. “The more people we move past the popcorn, the more money we make.”
Second, theater chains are in the movie exhibition business. Here they are partners with the studios. Although every deal is different, the theaters and the studios generally wind up splitting the take from the box office roughly 50-50. But, unlike the popcorn bonanza, the theaters’ expenses eat up a large part of their exhibition share. They pay all the costs necessary to maintain the auditoriums, which includes ushers, cleaning staffs, projectionists to keep the movies in focus, and the regular replacement of projector bulbs that cost more than $1,000 each. The way they can squeeze out more profits from this business is to cut expenses to the bare minimum. Not uncommonly, theater owners delay changing projector bulbs even if they do not produce the specified level of brightness on screen. Or, rather than using a separate projectionist for each film, multiplexes use one projectionist to service up to eight movies, an economy of scale that saves seven salaries. While these projectionists are able to change reels for one film while other movies go unattended, this practice runs the risk that the other films might momentarily snag in the projector and get burnt by the lamp. To prevent such costly mishaps, projectionists slightly expand the gap between the gate that supports the film and the lamp, even though this puts a film slightly out of focus. This is often considered an acceptable trade-off to the financially pressed chains. “I’ve never heard a teenager complain about PQ [picture quality],” one movie chain executive said. “If they find it too dark, they still have the concession stand.”
Third, the theaters are in the advertising business. They sell on-screen ads. And some advertisers are paying more than $50,000 per screen annually, especially to theaters willing to pump up the volume to near ear-shattering level so that seated customers will pay attention. Since there are virtually no costs involved in showing ads, the proceeds go directly to the theater chains’ bottom lines. But to fit paid advertising into the gap between showings, multiplexes have to cut down on the length of the studios’ coming attractions (which are free advertising), a decision that hardly pleases studios. (Often, getting the coming attractions shown involves the studios “leveraging our goodwill,” as one studio executive explained. The studios will threaten to hold back a popcorn movie, such as the new Harry Potter or Star Wars sequels, unless the chain agrees to play a full reel of trailers.)
To keep their people-moving enterprise going, theater owners prefer movies whose length does not exceed 128 minutes. If a movie runs longer than that, and the theater owners do not want to sacrifice their on-screen advertising time, they will reduce the number of their evening audience “turns” or showings from three to two, which means that 33 percent fewer people pass their popcorn stands. Even so, if a long movie promises to bring in a big enough audience—a promise King Kong made but did not deliver—the theaters will play it. Indeed, the ultimate test for the popcorn economy is: Will a movie attract enough consumers of buckets of popcorn and soda to justify turning over multiple screens to it? Theater owners know that the popcorn audience is mainly teens. And, since the observation of teen test audiences over many years has demonstrated that they prefer action to dialogue, expect a salty, supersize portion of amusement-park movies this year.
June 18, 2010 at 11:21 pm
I stand by my policy