Why Movie Theater Prices Are So High (and keep rising)

By "Kennelworthy," originally from The L&N Line

Believe it or not, this is not a reprinting of my previous post entitled "Why Movie Theaters Don't Care About You." There are some points in that post that are mentioned here... but now they are expounded upon. That post was a list of five reasons why you get bad service and bad attitudes at the theater. This post is much more about the financial side of things.

But yesterday I heard the 104.5 The Zone guys debating and discussing why movie theater prices are so high... and why they constantly go up. I didn't have time to call -- or even have my phone with me -- or I'd have enlightened them. As it is, I wrote this blog post and e-mailed it to them to help them gain understanding.

For anyone reading that isn't already familiar... here is my brief history, to give you some reason to trust what I'm about to say: I'm thirty years old, and spent a little under a decade managing movie theaters, most recently with Regal cinemas. I was the second in command at a mega-plex for three years, and then General Manager of a 10-screener. So I thought I'd take a moment and give you the straight scoop. I find that anytime I tell someone this sort of "insider" theater information about how projectors work or how the industry is run, they are surprised and fascinated. I hope you find it intriguing. I keep telling Chris he and I should collaborate on a book of stuff like this. If you get bored... I'm sorry. My goal isn't to bore you, but to explain how the money works in Hollywood. I hear complaints about movie pricing all the time, and perhaps this will help you understand one important thing: If the prices didn't go up, the theaters would die off, and you'd have nowhere to go to see a film on the big screen. Whether you know it or not... you need those prices to go up (I feel like Nicholson... "you want me on that wall... you need me on that wall."). Please note that whenever I refer to "Regal" in this post, it represents any theater chain.

The number one reason concession and ticket prices are so high at the theater is the staggeringly thin profit margin in the industry of film exhibition.

To start with, the studios take most of the box office -- but not all. Specifically, each and every single movie has its price set separately, with the studio asking for a certain percentage of the box office, and the exhibitor (Regal) haggling to lower that percentage. The theater chain will agree to play a certain movie at a certain price in exchange for a deal on a future movie, or some similar bargaining tactic. These negotiations carry on sometimes up until the day before a film's release, but usually are settled about a week before then. Typically, the average film has a percentage take for the studio around 95%. Lately -- over the last several years -- the studios have become bolder, asking for more and more of the box office take.

This means that virtually all the ticket sale money returns to the studio, so concessions are the only place left for an exhibition company to make money. Thus, the five dollar Cokes and six dollar popcorns. If they weren't charging that... there'd be no theaters... period. No question or debate about it.

But that's not the only reason prices are high. For instance, when Galaxy Quest (Star Trek spoof starring Tim Allen) was released, Dreamworks (the studio that produced and distributed that film) asked for a whopping 98% of the gross. Regal had had enough, and decided to stand their ground. They said no. Dreamworks essentially said, "Fine, we'll just play our movie in the other exhibitor's theaters and you won't get it." And that's what they did. And both sides were hurt. The opening weekend gross of Galaxy Quest (and the overall take for its run) were far below industry predictions. By the time of the next Dreamworks film that was released, they'd lowered their asking price back down to a more reasonable percentage (somewhere around 96%).

But Regal was also hurt badly. Galaxy Quest had been the number one movie that weekend, and only two other films opened nationwide the same day. So a full one third or more of the moviegoing public went to non-Regal theaters that weekend... and it cost Regal millions. And ticket and concession prices went up.

Another example is Rush Hour 2. New Line was the distributor here, and they asked for an unthinkable percentage (rumors in company circles put it at 99%). Regal said "No." And Regal took another huge hit. Only this time, the studio did not suffer. Rush Hour 2 set records for opening weekend take in its month of release, and went on to gross over $200 million dollars. The next big New Line film was one of the Lord of the Rings chapters, and Regal had no choice but to bow to the greedy whims of the studio, and accept the outrageous percentage. And prices went up.

The price of a ticket at the theater is not set by the studio... they don't care about the price of an individual ticket. They want a percentage of the take. So Regal (or a similar company) looks at that and says, "Well, if we raise the ticket prices a quarter for every theater, then the overall pie will be larger. Our 1% of that larger pie will therefore be larger than if we kept the same price." And that's why ticket prices go up.

When the concession prices go up, it's survival. Believe me, exhibition companies have some of the best minds working for them, developing mathematical models for how many customers they'll lose based on the size of a price increase. Add in inflation, and a yearly rise to the concession prices makes absolute sense. But they don't raise them too much at one time, so as to keep as much of their customer base as possible. If they didn't do it at all, they'd go out of business -- which almost happened for all the major exhibitors a few years back.

Regal, Carmike, AMC, United Artist Theaters, Edwards Theaters, and countless others all went through dangerous bankruptcies due to a lack of profit and overextension. In fact, Regal was rescued by Philip Anshultz, the billionaire who owns the Staples Center, The Colorado Avalanche, Quest Communications, and many more companies. He bought Regal's debt, thus becoming their master. Then he did the same for Edwards and United Artist, and rolled all three companies into the Regal banner -- which is why Regal is now the largest exhibitor in the world... by a long shot. Regal owns more screens than their next five competitors combined. But Anshultz swallowed a huge loss to do that. Granted, he's made a fortune buying mismanaged companies and turning them around... but his chances of doing that in the theater business is slim.

The entire movie industry is headed for a colossal doom, based on their system. As studios ask for more and more of the box office, theaters will have to keep raising concession and ticket prices. Eventually, Joe Customer will be unwilling to buy a $20 box of Snickers. At some point, something has to give... and it might have already started.

The industry is at an all time low, and they are way off the pace of recent years in attendance and revenue (you may have read about this in Variety and The New York Times). Not even Star Wars Episode III could turn things around. People, for whatever reason, have stopped going to the movies. The studios will tell you that the public is fickle... that the numbers from last year can't be trusted because of unexpected hits like The Passion of the Christ. Exhibitors will tell you that the product (the films) aren't good enough. They're probably both of them right. But there's a greater underlying cause to this year's drop in attendance.

The reality is that the film exhibition machine has fatal errors that are starting to catch up. And emerging outside factors aren't helping.

The technology is now cheap enough that most movie fans can afford a home theater system. Big screens, surround sound, and even theater seating are popping up in homes left and right. DVDs are selling like hotcakes... and everyone's buying (begging the question... have you ever seen a run on pancakes? Was there some Depression era shortage on pancakes of which I am not aware?). The quality of a film showing in your living room is now virtually as good as the one in the theater. And the window of a film's release to DVD is shrinking, making it easier for Joe Customer to merely wait a few months and rent that movie to watch at home instead of going to the theater.

Then there's the crowd problem. The introduction of cell phones has made the movie experience nearly intolerable. Everyone claims to hate people who talk on them during movies (or who fail to turn off the ringers) and yet you can't go to a single showing without seeing that behavior. Theaters are trying to build new sites with roofs that impede cell signals, but already lawmakers and legislators are blocking that action with government rules touting individual liberties (I guess the government view is that people have a right to talk rudely on their cell phones wherever they like).

Theaters are trying to recoup some costs wherever they can. If you've been to a Regal Cinema in the last two years, you've seen a 20 minute digital presentation prior to the previews that Regal calls The Twenty. It's humorously called "advertainment" inside the corporate walls... but we all know it's advertising. New TV shows, candy, beverages, websites... .you name it... they're advertising. And Regal is able to stay afloat with the extra revenue stream. But the public doesn't really like this development. In fact, it's one of the other reasons less people are going to the theater. Customers don't want to be treated like hostages, forced to sit through ads before their film.

And the lawmakers are flexing their unnecessary muscles on this issue too. There have already been bills introduced in certain state legislatures like Michigan that would force movie theaters to advertise the "actual" start time of a film. Typically if the newspaper tells you a movie starts at 7pm... that's actually the start of the ads... or the previews. The movie itself won't start until 7:15. But if this law passes, forcing theaters to publish the actual film's start time... then customers will skip the ads. Then the advertising companies will pull their dollars from Regal, and put them into some other, more viable area such as television where there is still a captive audience. Advertising the "actual" start time sounds like a great idea to customers, but if that law passes... it will kill the industry, leaving a gaping hole and nowhere for customers to see a film on the silver screen.

And Regal (and the like) will again be forced to get creative on making money.

And they're trying everything you can think of, from renting out their theaters as conference rooms to playing Rolling Stones concerts at select screens. But it's not working. One revenue stream that is working is beverage marketing. You know how everything at a Regal Cinemas theater has Coke written all over it? The concession stand, the drink cups, the popcorn bags, the tickets? That's a marketing deal with Coke. In fact, Regal gets all the syrup for Coke products for free (making the soda mark up even more egregious, no?)... but then on top of that, Coke pays Regal millions every year to plaster the beverage logo on everything. It's all about name recognition. But even with this added revenue... the theaters are struggling.

The only area that consistently brings any profit at all is concessions. And here's the kicker... this is what will really blow your mind: Less than 10% of movie customers even bother buying concessions. And this adds in all sorts of wrinkles to the problem. Have you ever heard someone tell a story about a bad experience at the movies and end it by saying, "I just don't feel like they care about me as a customer at all?" Well they don't. See my previous post linked to at the start of this one. Every manager in every theater knows that the bread and butter of the company is concessions. But they also know that very few customers are buying those concessions. So if you have a problem with your movie -- say the sound goes out -- they're not nearly as motivated to help you as they should be... because you probably didn't buy concessions, which means they didn't really get any of your money. Sure, they'll apologize and try to compensate you... but not with much feeling... believe me, I know.

Theaters aren't threatened by customers who say "I'll take my business elsewhere" because the average customer isn't buying concessions. If all the money from the ticket is going back to the studio... who cares if you go buy that ticket at another theater? It won't affect Regal if you buy tickets at Carmike... because Sony will still get all the money. This is also why a theater will always pressure you to take passes over your money back. If you take your money back, then you can go someplace else (maybe not even a theater) to spend it. You're taking away their 1% of the box. But if you take a pass stamped with the Regal logo... you'll come back to Regal for sure (because you can't use it anywhere else). And because you'll feel like that movie is free (hey, you used a pass to get in, not a dollar bill, right?) then you'll be more inclined to open your wallet at the concession stand. But no matter what that manager says to you... if they're offering you a pass it is company policy that if you don't want a pass they have to give you your money back.

As more and more customers have a bad experience with shoddy customer service and apathetic managers... the industry slowly starts losing steam. It's just more reason to wait for the DVD. And if you think the customers hate companies like Regal for their penny-pinching ways... you should work for them for a few years. They pay crap. They used to pay managers like me a bonus every year based on how much concession sales my theater did. A few years back they changed how bonuses were calculated, with the end result being far weaker bonus checks -- another revenue stream for Regal!

I personally think the entire industry is going to die. Within my lifetime the movie theater as we know it will disappear. DVD, On Demand, home theater systems, and high prices will drive the customers away. The thin profit margin for the exhibitors will become so thin as to be nonexistent. And the studios will still be making money off all those other distribution channels like home video and cable. It's inevitable. And also tremendously sad, I think. The movie theaters will die, like the drive-in before them. All in the name of money.

So there you go. There's my little doctoral thesis on why movie prices are so high. I'm not trying to be a "theater apologist" as much as I'm trying to say, "This is just how it is." I hope you didn't fall asleep reading it. I probably could have just written one sentence about studios taking most of the box office, but that would be no fun (and I wouldn't get to waste an hour at work!). Plus, you wouldn't get the full learning experience. I hope this helps a little in understanding why the prices keep going up, even if it doesn't make it easier to take.