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Once upon a
time, attending the local movie theater was an experience
that most Americans shared on a regular basis. For example,
in 1929, the year of the first Academy Awards, an average
of ninety-five million people--about four-fifths of the
ambulatory population--went to movies every week. There
were more than twenty-three thousand theater, many of palatial
size, like the six-thousand-two-hundred-seat Roxy in New
York. In those days, the major studios made virtually all
the movies that people saw (over seven hundred feature films
in 1929). The stars, directors, writers, and other talent
were under exclusive contract, and, in addition, the studios
owned the theatrical circuits where first-run movies played.
This regime, which allowed the major studios to exert total
control over movies, from script to screen, came to be known,
and feared, as "the studio system"; it more or less ended
in 1950, when the United States Supreme Court upheld antitrust
decrees ordering several of the major Hollywood studios
to divest themselves of their theater chains.
Today, in a world with television, video,
the Internet, and other home diversions, weekly average
movie attendance is about twenty-seven million, or slightly
less than ten per cent of the population. As a result of
this diminishment, many larger theater either closed or
divided themselves into smaller auditoriums under one roof.
(There are only a third as many theater sites today as there
were in 1929, but there are more screens--over thirty thousand.)
These multiplexes afforded theater owners significant economies
of scale. They could also show a greater variety of films,
tailored to different, if smaller, audiences. And as smaller
theater closed the chains expanded; today, the fifteen largest
North American chains own approximately two-thirds of all
the screens. These large chains, and their centralized film
bookers, are the principal gatekeepers for the American
film industry. They are responsible for determining what
movies most Americans see.
Earlier this year, to learn how the chains
exercise this responsibility, I accompanied Thomas W. Stephenson,
Jr., who heads Hollywood Theater, to Sho West, the annual
event (this year at Bally's Las Vegas) in which movie distribution
and exhibition executives meet over four days to discuss
plans for releasing and marketing upcoming films. Stephenson,
who collects abstract art as well as multiplexes, had an
eighteen-year career in investing and investment banking
before he entered the movie business, three years ago, by
founding his Dallas-based chain. It now has seventy-seven
theater and four hundred and seventy-four screens in six
Midwest and Southwest states. With just a trace of a Southern
drawl, he told me, "Our plan is to build about a hundred
screens a year for the next five years," in other words,
to become one of the major players in the movie industry.
On the way to Las Vegas, Stephenson,
an energetic, peppery-haired man in his early forties, gave
me a quick course in the economics of his business. Of the
fifty million dollars customers paid for tickets last year,
he said, Hollywood Theater kept only twenty-three million;
most of the rest went to the distributors. But, he continued,
since it cost $31.2 million to pay the operating costs of
the theater, his company would have lost $8.2 million if
it were limited to the movie-exhibition business. Like all
theater owners, though, he has a second business: snack
foods, in which the profit margin is well over eighty per
cent. Last year, Hollywood Theater made a profit of $22.4
million on the sale of $26.7 million from its concession
stands. "Every element in the lobby," Stephenson told me,
is designed to focus the attention of the customer on its
menu boards."
Stephenson was willing to let me tag
along to meetings in Las Vegas on the condition that I not
directly quote or identify those with whom he met. When
we arrived, he decided to skip the reception hosted by independent
distributors. "I personally enjoy watching many of the low-
budget films that come from independents," he said, "but
they are not a significant part of our business." In fact,
according to Stephenson, ninety-eight per cent of the admission
revenues of his theater in 1997 came from principal Hollywood
studios----Sony, Disney, Fox, Universal, Paramount, and
Warner Bros. These companies supplied his multiplexes not
only with films but with the essential marketing campaigns
that accompany them. (Occasionally, to be sure, independent
films do succeed in winning a mass audience, as, for example,
--The Full Monty-- did; but, as Stephenson put it, "We don't
count on them.")
The organization of the marketing campaigns
begins months before the release date, use the most sophisticated
methods available to target demographic groups, and intensify
their activity in the final week, often with saturation
television advertising, in order to capture "impulse" moviegoers.
Stephenson and other theater owners rely on them to muster,
if not to create, the audience for a film's crucial opening
weekend. The campaigns require massive resources. The major
studios spent, on average, $19.2 million in 1997 to advertise
each of their films, a sum that would be considerably higher
if it included the advertising provided by fast-food restaurants,
toy companies, and other retailers in promotional tie-in
arrangements that can amount to many times what the studio
itself budgets. Rather than attend the large reception,
therefore, on our first night we dined with the representative
of Coca-Cola, a company that exclusively "pours" the soft
drinks in over seventy per cent of American movie theater,
including Stephenson's. Soft drinks are an important part
of the movie business. All the seats in Stephenson's new
theater, and most other multiplexes, are now equipped with
their own cup holders, a feature that theater executives
consider one of the most ground-breaking innovations in
movie-theater history. With cup holders, customers can not
only handle drinks more easily in combination with other
snacks but can store their drinks while returning to the
concession stand for more food. Hollywood Theaters, which
now offers an oversized plastic cup with unlimited refills,
sold slightly in excess of eleven million dollars-- worth
of Coca-Cola products in 1997, of which well over eight
million was profit.
Although most of ShoWest's official functions
take place in convention halls and hospitality suites, much
unofficial business was done in the sprawling coffee shop.
It was there early the next morning, that I joined Stephenson
for a breakfast meeting with an analyst from J. C. Bradford
& Co., an investment firm. Acquisitions were in the air;
Kohlberg Kravis Roberts had just bought and consolidated
two of the largest theater chains. Stephenson, as he made
clear at the outset, planned to partake in this industry
consolidation by acquiring state-of-the-art multiplexes.
Since he planned to finance this aggressive expansion by
selling part of the his company to public or private investors,
he needed the services of investment bankers who, in turn,
needed a --story,-- or convincing rationale, to raise the
money.
Stephenson's story centered on stadium
seating, in which every row of seats is elevated about fourteen
inches above the row preceding it, allowing all customers
to have an unimpeded view of the screen. While the seats
take up more space, Stephenson said, "Our focus groups show
that people now seek out theater with stadium seating and
will drive as far as twenty miles to find one that has it."
Attendance increased between thirty and fifty-two per cent
where he had installed such seating. Stephenson would repeat
this story to four other investment bankers at similar kaffeeklatsches
over the next two days.
A little later, Stephenson moved to a
different table to meet with two of the top executives of
another major chain. He had told me beforehand that he wanted
to buy five of their multiplexes and sell them an equivalent
number in different locations, or "zones." In the movie
business, the country is divided into zones which contain
anywhere from a few thousand to a few hundred thousand people;
the major distributors license their films to only one theater
owner in each zone. Just over two-thirds of Stephenson's
theater are in such exclusive zones, and he wanted to increase
this number.
These talks ended inconclusively, and
in the late morning I accompanied Stephenson to the convention
hall, where we took assigned seats in the grandstands. Stephenson,
along with thirty-six hundred other attendees, was there
to see the first major studio presentation, Sony's --product
reel. Sony's top executives sat on a dais, as if addressing
a shareholders' meeting. Jeff Blake, the president of Sony's
distribution arm, said that last year Sony films had brought
a new record gross into American theaters: $1.2billion.
Indeed, Sony accounted for nearly one out of every four
dollars spent on movie tickets in 1997.
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