Caution Ahead on 3-D Tix Inflation

By Robert Marich
   March 29, 2010 – Everyone is parsing box office data trying to divine if audiences will accept $3 surcharges on 3-D cinema showings, and so far the indications are yes.
   I’d caution that only “so far.” There’s a historical precedent in the first generation of megaplex theaters that looms as a cautionary tales about projecting early trends too far into the future.
  But first, let’s look at today. DreamWorks How to Train Your Dragon opened slightly below expectations this weekend, but with 3-D cinema tickets selling at a robust clip. “Theaters showing Dragon with a digital 3D screen averaged 65% higher box office than those with only 2-D, while Imax 3-D screens averaged  almost four times as much as 2-D,” says a Los Angeles Times article.
   That’s encouraging for slapping a $3 premium on 3-D tickets versus 2-D, but looking into cinema history raises some caution flags.
   Fifteen years ago, the movie theater business was encouraged by economic performance of new-generation megaplex theaters with 18, 20, 22 or 24 screens. These jumbo screen counts became the high water benchmark in industry for a single theater. However, when box office went into one of its normal cyclical slides – box-office went down in 2005 and was nearly flat in 2003 – these megaplexes provide uneconomical because screens #18 and up were losing money.
   The result is new build theaters today tend not to incorporate more than 18 screens in one location, no matter how promising the location. Now a megaplex is 14-18 screens.
   My point is that when the novelty of 3-D wears off slight (it won’t go away completely) and we hit a patch where movie ticket sales are slow, theaters will likely regret being aggressive now in jacking up ticket pricing in “good times.” Theaters make 90% gross margins on their food/beverage sales, so to prosper they need people buying tickets. High prices could cut into admissions when the crop of movies is weak.
   A Wall Street Journal analysis came to the same conclusion. Under the headline “Theater Chains Pricing For Slow Growth,” the article notes the Cinemark circuit enjoyed robust admissions growth with moderate ticket price hikes recently, while the more aggressive Regal logged smaller admission gains with higher ticket inflation.
   Another cautionary tale is that home video consumers are sticking with standard DVDs longer than expected, making sales of next-generation Blu-ray DVDs go slow. Of course, theaters  can play the same film in a mix of 3-D and 2-D auditoriums, so perhaps they can sidestep any occurrence of consumers sticking with the “old” format.
   In general, strength of cinema in the out-of-home entertainment arena is that it is affordable at around $9 a person in big cities for two hours of entertainment. The cinema business loses that attribute the more it jacks up ticket prices. Proponents of higher ticket prices cite sporting events and concerts – with much higher tickets—as benchmarks.
   But in the recession, baseball tickets in New York City priced at sky-high rates were unsold. And I doubt consumers equate the value of a recorded movie with an in-person appearance of a music superstar.
   The movie business needs to tread carefully and not be too quick to proclaim short term results as long-term realities.
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