The pandemic has hit U.S. theaters hard, wiping out about 90% of revenue in the first 12 months of COVID-19 precautions, compared to the previous 12 months. In January this year, industry tracking site The Numbers predicted 2022 box office receipts to be $6.8 billion, or 60% of what theaters saw in 2019.
And yet, having studied the marketing and economics of movie theaters for decades, we believe there is still money to be made in this industry. It just won’t happen without big changes. The slump in ticket sales in the age of the pandemic is a wake-up call, not the beginning of the end.
For decades, theater companies have been largely passive, accepting Hollywood’s products and terms. And it may not be their instinct to make the necessary strategic changes in this turbulent environment. Moreover, they may not have the financial means to do so.
This is where the studios come in. They have always been the most powerful entities in the film industry, and now they have the resources to experiment. In 2020, the Department of Justice lifted a 70-year restriction that was meant to prevent studios from dominating the entire industry. Studios can now own movie theaters.
They should seriously consider vertical integration, that is, the acquisition of existing cinema chains. Major movie studios have already realized the value of creating their own streaming services. They could also control their own physical distribution channels.
This risk could well be worth the investment of the studios. Cinemas resisted the introduction of television in the 1950s and home video in the 1980s. Through it all, consumers have shown that going to the cinema still offers a unique and shared experience – the kind of party integral part of civilization since our ancestors sat around a fire. In our research, people consistently report that for many movies, watching in a movie theater is more enjoyable than watching on a smaller screen.
But studios wouldn’t vertically integrate just out of kindness to moviegoers. Economics makes a lot of sense. Start with blockbuster movies, which make up the bulk of the studio’s revenue. Studios with both theaters and streaming services can design release and marketing strategies that maximize profits, without having to compromise with theater chain owners.
Additionally, studios would have access to detailed consumer data that would help them choose which projects to approve and develop projects to appeal to different consumer groups. At the macro level, this can help decide which content corresponds to specific locations. At the micro level, it would direct the schedule for a given theater during the week and day.
The US has far more movie screens than other major countries, so it’s reasonable to expect some will close, regardless of who owns the channels. Those who remain do not have to limit themselves to the projection of films. These theaters are virtually empty for much of the week, and they could use some of that downtime to present other events, such as concerts and plays.
If movie studios get into filmmaking, one would expect to see a new exhibition ecosystem emerge. Locally owned independent cinemas, run by owners who are passionate about movies and know local tastes, would serve markets that the big chains could not serve well. Some of these independent players will become channels, offering entertainment options to regional audiences or groups (such as rural communities). Other current owners who seem to view movie theaters as a real estate business may continue, perhaps as franchise owners. Meanwhile, outside entrepreneurs can discover new opportunities in this evolving ecosystem.
Such a bold vertical integration strategy is not without risk. The acquisition would be expensive. Historically, integration between various corporate cultures has been difficult, and the entertainment industry has had many failures in this regard. The very unsuccessful acquisition of Time Warner (including HBO) by AT&T is a recent example. As this example also indicates, once a merger has begun, there is no easy exit strategy.
Studio-owned theaters should find ways to show movies released by other studios, as no studio is likely to have a slate of movies to fill its theaters year-round. Studios should also achieve this integration, possibly through subsidiaries, in a way that is attractive to the creative community (actors, directors, etc.). They must continue to support films that are not meant to be blockbusters.
For studios, the greatest risk may come from do not vertical integration. If they don’t buy movie channels, streamers like Amazon and Netflix can. Such a move would give them even more control over the direct-to-consumer experience.
It is in the interests of moviegoers to keep cinemas alive and thriving. How this is done will depend on the creativity of the next generation of owners.
Jehoshua Eliashberg, Charles B. Weinberg and Berend Wierenga are Emeritus Professors of Marketing at the University of Pennsylvania, University of British Columbia and Erasmus University in the Netherlands.