Alternative Content in Cinemas: A Sprat to Catch a Mackerel?
Recently we’ve been building on our work in “alternative content” to develop a newsletter-cum-release schedule, which we’ve called Cinema Events. You may have noticed the ad to the right of your screen. It’s got off to a good start, though like local newspapers, the people who like it most seem to be those that are in it – in this case distributors of opera, ballet, concerts and sports to cinemas. We predict an upsurge in the quantity of events available as these distributors become more aware of each other’s content and start to licence more of it.
Equally interesting, it seems alternative content does not always subscribe to the model which saw multiplex cinemas sweep through the international market, in which, basically, all films played all theatres.
In some territories at least exhibitors aim for exclusive access to some streams of content. In France Pathé Live and Côté Diffusion appear to serve their parent theatre circuits with separate streams of product. Les Cinémas Gaumont Pathé and CGR do not show content from the other’s alternative content arm. In the United States NCM Fathom has formal exclusivity arrangements in place with both distributors of alternative content and with exhibitors. Thus BY Experience, distributor for the Metropolitan Opera, only distributes through NCM Fathom in the United States; only members of NCM’s network can book Fathom events – and they cannot book anyone else’s.
Everybody loves to offer exclusive products. But we wonder if there isn’t a danger that this approach could result in much alternative content being sidelined as essentially a promotional tool, rather than develop into a market in its own right. One of the reasons we started Cinema Events is because so many of these events are still under nearly everyone’s radar. Without big promotional budgets like the movie industry, it is sometimes hard even for cinema professionals to know what is going on. Imagine being a consumer.
3D Ticket Prices Outpaced by 2D, IMAX
For our recently published report, 3D Cinema 2011, we looked at changes in ticket prices in a number of key world cities since our previous report 18 months ago. The table below shows Saturday night ticket prices to a recently released Hollywood movie in a selected cinema in five major cities.
From it we can conclude a number of points.
Tickets in Mexico City were the cheapest, falling between $5 and $8 for standard 2D and 3D performances. The most consistently expensive city was Tokyo where ticket prices were between $23 and $29, although the most expensive tickets of all were found in Moscow where young thrill-seeking audiences are paying almost $30 for an IMAX 3D ticket.
With the exception of Tokyo, 2D ticket prices rose by more than the cost of 3D ticket between May 2010 and August 2011. It looks as though the widespread prediction that 2D ticket prices will catch up with 3D is coming true. In this scenario 3D was an experiment to test how much customers would pay for a ticket.
There are signs that the new point of differentiation is going to be IMAX. In Moscow and London IMAX ticket costs have soared – in Moscow IMAX ticket prices rose by 70% in local currency terms. This also goes some way to explaining the rash of exhibitors currently developing their own giant screen formats.
Price data below is shown in US$ for ease of comparison; however, percentage increases between the two dates are also shown based on local currency to eliminate the distorting effect of US$ weakness over the period.
Cinema Ticket Prices 2010-2011
Source: Dodona Research
Alternative Content: Four Facts and an Advertisement
Earlier this year we agreed with the alternative content consultant Melissa Keeping to work together on a report, Alternative Content, about the emerging business of showing opera, sport and other non-film material in cinemas. Melissa did numerous interviews, in person and on the telephone, with industry participants, while we trawled through financial reports and a variety of other sources. As everyone who reads the trade press (including the numerous blogs devoted to aspects of digital cinema) knows, there is a lot of activity in this area.
What was surprising is how small this market still is. In 2010 North American revenues were $88 million; in the UK, regarded as the second-largest market, they were $12 million. In both cases these revenues represent between 0.8% and 0.9% of box office. Another sign that this is a budding rather than fully-flowering market is the dominance of two big players. A single content provider, The Metropolitan Opera of New York, accounted for between 30% and 40% of alternative content box office worldwide between 2008 and 2010, while the biggest distributor, NCM Fathom captured the equivalent of 30% of worldwide box office in 2010 despite its operations being confined to North America.
Something else I wondered about was where the widely quoted view that alternative content could reach 5% of box office had come from. Then I remembered being on a panel at a Screen International conference (around 2006 I think because Christine Costello was there and she had just started More2Screen), and a questioner asking exactly that question: what share of box office might alternative content reach?
And I think that after a moment’s thought I answered 5% in that rabbit-in-the-headlights moment, but these type of events tend to blur into one another so I may be mistaken. In any case a 5% ceiling still seems to me about right. Think of it like this: to reach 5% of box office, an alternative content event is going to have to make it into the top 20 of the year’s box office, another into the top 40 and so on.
That’s all a long way off. In the immediate future growth will come from the spread of satellite dishes on cinema roofs; after that there are a host of insights generated from experience so far, in this surprisingly complicated market, waiting to be implemented. They will drive further growth. Everything is still to play for in what turned out to be a fascinating area.
Is the German Cinema Market Coming Good At Last? And Is CinemaxX the Cheapest Exhibition Stock in Europe?
Since reunification Germany’s cinema market has had a floor of around 125 million admissions a year. Given that last year’s 126.6 million admissions barely crept above this level – and those for the first half of 2011 are reported to be just 2.2% higher than the corresponding period in 2010 – it might seem odd to see anything very positive going on in this market.
In fact there is. Germany’s screen count is falling, slowly and steadily. The last five years have seen 4% of screens go, and this holds out the promise of at least an improvement in profitability. As noted in our recent Cinemagoing North West Europe report: “ The key to this almost certainly lies in getting the balance between the numbers of cinemas and the audience right – that is, in eliminating the over-screening that is such a bugbear in this market. This would allow the best operators to embark on much-needed consolidation strategies and spread improvements in marketing and operating strategies across the industry, and perhaps finally find the answer to the question of why Germans do not go to the cinema.”
Taking even a little bit of excess capacity out of the market can have a marked impact on profits. Cinemaxx, the second-largest circuit, saw its pre-tax profits climb to €17.6 million in 2010, from a loss of €4.4 million only two years before, despite higher industry-wide admissions in the earlier year.
Indeed, CinemaxX is starting to look as though it might be a good investment. At it’s share price of €3.30, almost three times the level of two years ago, the company’s Enterprise Value, including net debt of €73 million, comes out at €160 million, just 4.25 times its EBITDA of €37.5 million, while diluted earnings per share of €1.05 give a historic P/E of 3.15. Following further progress in the first half of 2011, CinemaxX stock seems relatively inexpensive despite the absence of a dividend.
Compare Belgium’s Kinepolis Group: at around €54, the shares trade on a multiple of EBITDA to Enterprise Value of about 6.8 times, though as previously noted in this blog, land and buildings valued at €197 million owned by the company form a significant proportion of its enterprise value of €434 million. Excluding these assets the company’s EV/EBITDA multiple falls to around 3.7 times, although executing the series of transactions (sale and leaseback of the property, return of cash to shareholders) needed to realise this hidden value would not yield such a precise result, nor is it likely to happen under the current management, whose strategy is explicitly based on owning the properties from which it trades.
Kinepolis arguably offers slightly better value, though not the continuing recovery prospects of CinemaxX. Britain’s Cineworld, a pure cinema operating company which owns no property, on an EV/EBITDA multiple of 6.3 times at a share price of £1.90 looks unequivocally more expensive. The dividend yield of over 5% offered by the company may be a factor. But a lack of cross-border traffic in investment in these small cinema exhibitors also seems a candidate for explaining why valuations vary so widely. And of course the problems of the Euro may also be relevant.
Italy and Spain Catching Up in Consolidation Stakes
The multiplex business is eminently scalable: refreshments, staff roles and training, not to mention film product, are all duplicated from site to site. Today’s ongoing migration to digital projection may increase this scalability with the promise of centralising some projection functions. There are substantial benefits to building large circuits with centralised offices and enhanced buying power that can conduct large scale marketing campaigns.
Following on from my last post, Coming Soon: the World’s First 10,000 Screen Circuit?, it’s interesting to look at levels of concentration in the major Continental European markets in 2010.
Top 3 Circuits: % Share of Screens
It is notable that Italy and Spain lag Germany and France in terms of the share of screens operated by the top three circuits in each country. Which neatly contextualises the spate of recent consolidation activity in these territories: Cineworld’s purchase of Cinesur (Cineworld’s Spanish Venture: Buy When There’s Blood In The Streets?); Odeon UCI’s acquisition of UGC’s Spanish cinemas and two sites from Coliseo; its purchases of the UGC and Vis Pathe circuits in Italy and, most recently, 51 screens from Giometti in a deal due to close this month. It is Spain and Italy which have offered the greatest opportunity to buy choice assets which can be combined to form larger, more profitable circuits. By our calculations, it looks as though the top three Italian circuits will control a minimum of 20% of Italian screens by the end of 2011, the top three in Spain a quarter of all screens in Spain – nearly the current level in France and Germany.
