Movie Theater Economics

Posted on 18. Jan, 2006 by in Saving & Investing

Edward Jay Epstein, author of The Big Picture: The New Logic of Money and Power in HollywoodThe Big Picture : The New Logic of Money and Power in Hollywood spills the popcorn on the economics of movie theaters since their separation from movie studios in 1948. This Popcorn Palace Economy, he says, is divided into three sections of money-making buttery goodness.

  1. Fast-Food Business: This is an extremely profitable operation in which the theaters do not split the proceeds with the studios (as they do with ticket sales). Popcorn, for example, yields more than 90 cents of profit on every dollar of popcorn sold. This means that your $4 bucket of popcorn costs the theaters about $.40 to make. But the popcorn’s main purpose is to make customers thirsty for sodas. One theater chain executive went so far as to describe the cup holder mounted on each seat as “the most important technological innovation since sound.” He also credited the extra salt added into the buttery topping on popcorn as the “secret” to extending the popcorn-soda-popcorn cycle throughout the movie. For this type of business, theater owners don’t benefit from movies with gripping or complex plots, since that would keep potential popcorn customers in their seats. “We are really in the business of people moving,” Thomas W. Stephenson Jr., who then headed Hollywood Theaters, told Edward. “The more people we move past the popcorn, the more money we make.”
  2. Movie Exhibition Business: Here the theaters are partners with the studios. Although every deal is different, the theaters and the studios generally wind up splitting the take from the box office roughly 50-50. But, unlike the popcorn bonanza, the theaters’ operating expenses eat up a large part of their exhibition share. The way they can squeeze out more profits from this business is to cut expenses to the bare minimum — not changing dull projector bulbs and using one projectionist for more than one movie (which is why it takes 10 minutes for your out-of-focus movie to be adjusted). To prevent the costly mishap of the film breaking and burning in the projector while the projectionist is gone, projectionists slightly expand the gap between the gate that supports the film and the lamp, even though this puts a film slightly out of focus. This is often considered an acceptable trade-off to the financially pressed chains. “I’ve never heard a teenager complain about PQ [picture quality],” one movie chain executive said. “If they find it too dark, they still have the concession stand.”
  3. Advertising Business: Simply put, they sell on-screen ads. And some advertisers are paying more than $50,000 per screen annually, especially to theaters willing to pump up the volume to near ear-shattering level so that seated customers will pay attention. Since there are virtually no costs involved in showing ads, the proceeds go directly to the theater chains’ bottom lines. But to fit paid advertising into the gap between showings, multiplexes have to cut down on the length of the studios’ coming attractions (which are free advertising), a decision that hardly pleases studios. (Often, getting the coming attractions shown involves the studios “leveraging our goodwill,” as one studio executive explained. The studios will threaten to hold back a popcorn movie, such as the new Harry Potter or Star Wars sequels, unless the chain agrees to play a full reel of trailers.)

2 Responses to “Movie Theater Economics”

  1. Wesley

    11. Feb, 2008

    Hi,
    My name is wesley. I found this information really valuble as I’m doing my senior project on the economic standpoint of the theater. Don’t worry all credit will be given. But the information was REALLY useful to my paper so thank you for posting!
    Wesley

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