Arnold Kling  

Key Operating Ratio

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Why are movie theaters gravitating toward large multiplexes? The Washington Post writes,

With 16, 18 or 24 screens, the traffic in and out is constant and the popcorn sales never stop -- yet the staffing costs are only incrementally greater than for an eight- or 10-screen theater.

This suggests to me that the key operating ratio is revenue per employee. This is a bit of a surprise. If you had asked me before, I would have guessed that getting the most revenue per seat in a movie theater would be important. Fill the seats, make a profit. But apparently that is wrong.

On the demand side of the equation, people probably are less interested in patronizing a small local theater nowadays. If they want to watch a movie close to home, they can go to Blockbuster or turn on cable.

The article also points out that a blockbuster movie may last only two or three weeks. I remember around 1970 in Clayton, Missouri that instead of saying "Is the Pope Catholic?" we would say "Is 'Love Story' playing at the Shady Oak?"

For Discussion. Why is the length of time a blockbuster movie stays in the theater getting so much shorter?

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CATEGORIES: Business Economics

COMMENTS (7 to date)
rvman writes:

On time in theatre: One, movies used to be in theatres longer than the lag between theatre debut and DVD debut is today, and used to go to dollar theatres instead of DVD a year out. two, more "A" movies are coming out of more studios, so the lag from big movie release to big movie release is smaller. Now the only folks who put down $10 to go to the movies are the ones who want to see the movie either first, or in big screen - hence the concurrent focus on "effects" movies. The rest of us can wait until they come out on video, and plop down our $3 rental fee. Three, on a random saturday in 1930 or 1950, the movie showing downtown was the only real entertainment, AND was the best source of AC. What was actually up on the screen was far less critical. Now, everyone has AC, everyone has access to 100 channels of TV, including 15 showing relatively recent movies, so having new options constantly is critical for drawing the audience.

Re: Revenue per employee. Compare the number of seats in your average cineplex theatre with an older theatre. We may have 16 screens, but we don't have 16 times as many seats. I imagine the equipment - stereos, projectors, etc. - were far more expensive as a share of the cost of doing business in, say, 1970 or 1985 than now. So we have more, smaller, theatres than then. The cost of labor hasn't dropped, so it makes sense to have a few cineplexes with a lot of screens, rather than a lot of 1-8 screen theatres, or the historical few one screen theatres which dominated when labor was cheap and capital dear.

Bernard Yomtov writes:

It looks to me like revenue/sq ft would be the critical ratio. How do space-related costs like rent, utilities, cleaning, etc. relate to personnel costs?

One advantage of the cineplex is that less space, on a percentage basis, is occupied by lobby, ticket booth, etc., so there is room for more seats. Also since, as you point out, the concession stand has less idle time, it produces more revenue per square foot than in a single-screen theater.

Bruce Bartlett writes:

Couple of observations:

As we all know, teenagers are the biggest moviegoers. They like big multiplexes for two reasons. They can buy a ticket to a PG film and easily sneak into an R-rated film. Also, it is easy to see multiple movies on one ticket, which the theaters probably don't mind as long as they are buying lots of popcorn.

A key piece of unknown information is the way theaters and distributors carve up the ticket dollar. It may be that this has changed in recent years in some way to make movieplexes more viable. Also, technology and union rules may have changed to make it easier for one projectionist to handle more than one movie at a time.

Somewhere I once read that a standard payout arrangement was that studios got a high percentage of the first week's gross, with a declining scale the longer a film ran. Having many screens allows theaters to get the most out of films with modest, but steady interest. In other words, a theater owner may be making more profit from a half-full showing of a film that's been out a few weeks than a packed house for a blockbuster that just opened.

Jay McCarthy writes:

Why are movies spending less time in theatres?

Movies nowadays are merely advertisements for the DVDs. The movie producers need the theatre to create a bang and get awards, but can make more money by putting out the DVD sooner.

I'm interested on what effect this will have on the time between the end of a theatre run and the start of DVD sales. Perhaps with technology improvements there will be a way to buy the DVD for a greater price to buy it as soon as the movie is out.


Jordan writes:


I think you are right on there. I just went to a movie the other day and it cost $7.75 per ticket. When more and more people are spending thousands of dollars on home entertainment systems (and the increasing quality thereof, e.g. HDTV which is incredible), where you can enjoy a movie in the comfort of your own home, and avoid paying the absurd prices at the concession stands, it only seems natural that the trend will be toward more and more movie consumption being done at home. This is perhaps part of the pressure on theaters to compete, which pushes them towards megaplexes. If I were in the movie distributing business, I'd be looking very hard at distribution routes directly via broadband internet (with companies like NetFlix) and DVD. One day perhaps the release date of a movie will be the day it's available for download from or whatever.

A hit movie back in the '60s or early '70s might play as long as six months or a year. The general pattern for releasing movies at that time was to "platform" them -- you'd release first in a few theaters in a few big cities, and then slowly move the picture into new theaters across the country.

Always, though, there were little movies and indie movies -- exploitation films -- that'd get distributed differently. Sometimes the film's owner would own only a handful of prints. He might come to a town with his print and then "four-wall" the movie -- blitzkrieg the town with all kinds of advertising, and put the movie in as many free theaters as he could. Once he'd scarfed up all the business he could in a short time (before word of mouth got around), he'd take it to the next town.

With "Jaws" and "Star Wars," the studios discovered how to do this for themselves, and movie distribution has never been the same. The studios now make and market movies in essentially the same way exploitation moviemakers used to: often working from the ad campaign backwards, and "four-walling" the film on its release, except countrywide. The number of prints that's made for an expensive movie is phenomenal these days -- haven't I heard of some movies going out in 3000 prints? On the other hand, films that aren't expected to be successes might go straight to DVD, or might open in only a few theaters in order to fulfill contractual things -- they might need to qualify as "American theatrical releases" in order to live up to foreign-release contractual demands, for example.

What's been ultra-hard on theater owners is that that there's a percentage scale. The studios take by far most of the money from ticket sales during the movie's first few weeks; only then does the theater start to make money from ticket sales. But the effect of releasing movies everywhere with a blitzkrieg ad campaign is that more and more of a movie's tickets get sold during the first weekend or two. Business typically dies off very fast thereafter.

So what do the theater owners do? They make their money from popcorn, literally. During those first couple of weeks, they're making money from the snack stand. Which I assume is one reason why multiplexes have proliferated: one snack stand might serve a half-dozen theaters, and thereby save a lot of money.

Previous commenters are right about DVDs -- theatrical releases for many movies are now ways of preparing the audience for the DVD release.

Yosef writes:

I'm trying to find out the average yearly operating costs for running a movie theater and I can't seem to find that information anywhere- thought I'd try here.
-Thank you in advance

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