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Published: October 23, 2009
If you're tired of paying $10 for a movie, it
may be time to do something about it.
My motto: If you can't beat 'em, invest in 'em.
Though some say no one goes to the movies any more, the theater
business is making plenty of money. The U.S. domestic box office
has held steady during the downturn and Nielsen data shows
revenue is up +4.6%. The numbers aren't an aberration:
Box-office revenue has grown about +5% annually during the past
15 years.
The rationale is simple: A night at the movies is still cheaper
than a sporting event, theme park or a weekend getaway. The
numbers show that moviegoers are willing to shell out for a
movie ticket, popcorn and a little escapism during the
recession.
This is encouraging news on its own, but there are better things
in store for the movie business besides a resilient consumer
base: A breath-taking technological development. If all goes
according to plan, this catalyst will be a game-changer for the
theater business.
The catalyst is 3-D movie technology. It has the ability to
juice per-screen revenue by +250% to +300%. In their limited run
so far, 3-D movies have been a hit, grossing more than $1.2
billion at the box office.
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Theaters must make a significant up-front
investment to enable them to show 3-D movies. They must buy
digital projectors, special screens and more bells and whistles
that can add up to $100,000 a screen. The industry was caught
off-guard during the credit crunch and was unable to secure
financing to upgrade enough screens to support a release
entirely in 3-D.
When audiences are willing to pay
$15 for a 3-D movie instead of the
$7-$9 for a typical feature, a
theater that can’t show 3-D films is
losing potential revenue. The United
States has fewer than 3,000 3-D
screens, and theaters often have to
bump a 3-D picture off the screen
when a new 3-D movie is released.
Thanks to a loosening credit market,
that’s changing. Theaters are on
track to install another 5,000 3-D
capable screens by 2010.
Not only does 3-D technology
interest theater owners, it also has
broad appeal to movie studios. They
hope 3-D movies will bolster returns
and fend off competition from other
media like cable television, Blu-Ray
movies and on-demand programming.
Disney's (NYSE: DIS) Pixar
studios, along with DreamWorks
Animation (Nasdaq: DWA), have
committed to releasing all of their
films in 3-D, but the big test for
the technology's appeal will come in
December. Filmmaker James Cameron's
“Avatar,” a sprawling $300 million
sci-fi epic meant to showcase the
wonders of the technology, should
have enough 3-D screens ready for it
to be the first wide release 3-D
film.
If the movie appeals to a larger
audience (most 3-D releases up to
this point have been
family-oriented) and at least breaks
even, expect more 3-D movies geared
for all audiences. Many studios are
re-mastering older movies for a 3-D
release: “Toy Story” and “Toy Story
2” already have done so, and a 3-D
re-release for the “Star Wars”
movies is also in the works.
Given the high cost of converting
theaters, it will be a while before
the full 3-D transition is complete.
Movie studios are partnering with
theater operators to shoulder some
of the cost, but it will be at least
a year before the conversion process
meets up with demand.
Nearly half of the mark-up for 3-D
tickets goes to theater operators.
When the conversion is complete, the
increased take from the box office
will go straight to the bottom line
for theater operators.
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All of the theater chains in the table above are compelling
investments, but one stands out: Cinemark Holdings (NYSE:
CNK).
Regal Entertainment (NYSE: RGC) has more theaters and
revenue, but Cinemark has more growth potential. Revenue has
grown +22.5% in the past two years. Regal's grew +3.3%.
About 20% of Cinemark's revenue comes from outside the United
States. Regal doesn't operate any theaters outside of North
America. While the U.S. box office struggled to hold ground last
year, Latin America's take grew faster than anywhere in the
world. Cinemark operates 128 theaters in the region with more
than 1,000 screens, mostly in Brazil and Mexico. The company
will likely expand further into this market as it grows.
Cinemark has about 1,500 3-D screens, and many more on the way.
The cost to convert a screen to show 3-D may be steep, but the
average revenue per screen for the company is $106,000 a year --
and 3-D sales can only add to that cash flow.
Cinemark's average ticket price is $5.55, compared with the
national average of about $7, so the company has room to raise
prices. With 3-D screens, prices can be raised even more. And
while investors wait for a full 3-D rollout, they can enjoy the
company's 6.5% dividend yield in the meantime. -- Brad Briggs
Staff Writer
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