Media Predictions - TMT Trends 2008 – Part 2

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The movie theater becomes about more than just the movies

The movie theater - also known as the cinema in some countries - has enjoyed strong growth in recent years. Revenues, measured by box office sales, grew year-on-year from the mid-1990s to 2006, a year in which sales totaled $25 billion67. The outlook looks bright, with double-digit growth forecast68.

The robust state of the movie theater may make it the perfect time to consider how to re-invent a format which has seen relatively little innovation in the past 10 years.

There are a number of growing threats on the horizon. One is the potential for economic downturn. While in the last recession US movie theaters actually experienced growing sales69, the sector may not be able to bank on a repeat performance.

Another, arguably more ominous threat, is the growth of alternative sources of entertainment. In 2008, levels of PC ownership, broadband connectivity and game console penetration are all expected to increase. Additionally, large format, flat-panel television ownership is also likely to grow rapidly, as is the popularity of home-cinema surround sound. And the price of DVDs may well continue its steady decline. Even by the end of 2007, for the price of two movie tickets, a film buff could buy two movies on DVD - or the DVD player to play them on70.

The movie theater also faces competition from other entertainment venues, from sports stadiums to concert halls, all of which have received significant investment, and to some extent rising revenues, in recent years71. In the 2005 to 2006 season, soccer clubs in England alone invested 233 million ($476.5 millionii) in their stadiums72.

Technological advance is another catalyst for the reinvention of the movie theater in 2008, with the biggest change being the advent of digital film. This confers several advantages. Lower cost is one. Digital prints, stored on encrypted hard drives are cheaper to produce than the traditional film reel, which can cost up to 1,50073 ($3068iii), and don't need to be returned. Currently movie studios spend over $800 million a year in printing and distributing film reels to movie theaters74.

A more significant benefit of the digital movie theater may be in terms of flexibility. It may enable movie theaters to lose some of their homogeneity, attracting a larger and more varied, more loyal audience as a result. A single digital copy could contain various cuts of a film, each suitable for different customer type. The same digital file could contain a director's cut for movie buffs, a sub-titled version for the hard of hearing, an edit suitable for children or even a version with an intermission built in75. As digital copies, whether server based or hard-drive based, would take up less space than reels, individual theaters could build up their own secure libraries of films.

But the biggest change the transition to digital could make for movie theaters may have little to do with movie studios. In 2008, digitally equipped movie theaters could start screening events, ranging from sports fixtures to concerts. Historically major sports events and concerts took audiences away from the theater76.

Live relays could allow customers to flow back to the movie theater77. Digital movie theaters could become supplementary venues for events ranging from the Olympics to the opera78. Digital movie theaters may offer an experience as good as, or even better than actually being there. Hence, punters may be prepared to pay a premium to enjoy the Super Bowl in their home town, or Wimbledon without the rain.

The offer of different content may also require a redesign of a movie theater's ancillary facilities, such as catering. Opera fans may not care for hot dogs, but may be prepared to pay a premium for highend cuisine. Merchandising, from clothing to a DVD copy of the event just watched, may become a lucrative source of additional revenues.

With over seven billion tickets sold each year79, demand for the movies remains buoyant. But a move to digital may allow theaters to enjoy greater success by becoming more than just a venue to screen movies.

Bottom line

The movie theater's run of strong performance provides the ideal backdrop for change. The move to digital implies considerable capital investment, which is likely best accommodated while revenues are still strong. And digital cinema technology may now be sufficiently robust to be ready for mass market roll out80. Yet as of 2007, less than 5 percent of movie theaters around the world were digital81.

While planning for digital transition, theater owners should consider the need to invest in new skills. A digital movie theater is, for obvious reasons, more IT-centered than analog, and as migration accelerates, there may well be a scramble amongst competing firms to hire suitably skilled staff, including those with a good understanding of digital security. Companies should therefore make understanding the staffing requirements associated with digital a priority, and should start recruiting as soon as is practical.

Movie-theater owners may well need to work very closely together in order to start addressing new markets. Individual theaters, and even large chains, may lack the scale required to persuade sporting or music rights owners that big screen opportunity is substantial. But speaking with one voice, the world's 100,000 movie theaters82 may well be able make a persuasive case.

Time for music to get tangible again

Over the past 20 years the price of concert tickets has climbed steadily83. During the same period, however, the price of recorded music has fallen.

When the compact disc was first launched 26 years ago, it was initially priced at $30 in the United States84. In 2008, in the same market, newly released CDs on e-commerce sites will often be sold for under $15. Digital downloads of albums are likely to cost even less, priced just under $1285. Yet in 2008, dozens of artists and groups are likely to charge over $100 for their best seats. Several acts may gross over $100 million for their tours, following precedents set by a handful of artists and groups in 2006 and 200786.

Historically concert tours were designed to promote sales of albums. Now a single concert ticket can cost as much as, if not much more than, the act's entire CD back catalog.

Another trend, perhaps a corollary, to the declining price of the compact disc and the steadily dwindling revenues of the global recorded music business, has been the rise of the MP3 and the MP3 player.

The MP3 player has become particularly successful in recent years, selling well over 100 million units so far this decade87. However, its appeal may be greater than the average consumer's interest in digital music files. So while music fans have been happy to pay several hundred dollars for an MP3 player and a similar amount to see live music, the same fans have tended to spend relatively little - an average of some $20 - on purchasing digital downloads88. Indeed so far sales of digital music do not appear to be making up for the decline in traditional music sales89. This is in spite of the fact that the price of a new release album sold in the form of a digital download is generally lower than for the equivalent compact disc.

The reluctance to spend money on digital downloads may be because it is hard for consumers to value intangible products. Furthermore, customers have become used to the concept of free digital content from their experience of the Internet, which offers an array of free media, from news to music clips. The sole evidence of purchasing an MP3 may be just a solitary line of data on an MP3 player describing a song's vital statistics. In 2008 it is likely to remain as hard as ever to gift wrap an MP3 track.

It may be far easier for customers to value a song, and to pay more money for it, if it were physically 'wrapped', with the bigger the packaging, the greater the perceived value. Readers over the age of 30 will likely still remember the fragile but visually appealing music album. The benefit of cover art was, and still could be, that fans might be swayed to purchase a single or an album by the way it looks, as much as by how it sounds. In some cases the cover art could be more memorable, and some might argue, of more value to the customer, than the music contained inside.

2008 could be the year, however, in which music becomes tangible again. One trend that could allow this is the steadily falling price of digital memory, which could enable the commoditization of the MP3 player. The industry could evolve from...