Category Archives: Analysis

NCM-Screenvision Call Off Merger – Winners and Losers


Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand.

- Sun Tzu, The Art of War, I-26

The proposed merger between US cinema advertising majors National CineMedia (NCM) and Screenvision has been called off. NCM announced in a press release that it has agreed with Screenvision’s owner SV Holdco to terminate the merger agreement signed on 5 May 2014. The announcement comes four months after the US Department of Justice (DoJ) filed a suit with the aim of blocking the proposed USD $375 million merger.

The announcement must come as a major defeat for NCM, its management and its shareholders. The company seems to bury the lede by sub-heading the press release “National CineMedia Reaffirms 2015 Financial Outlook”, going on to trumpet the excellence of its advertising platforms along with a positive forecast for the box office in 2015.

While the trial initiated by the DoJ was scheduled for mid-April, NCM’s merger financing commitment was only set up to last until 1 April. NCM was said to be working with their banking group to extend those commitments in order to accommodate the litigation process. So while NCM may have been intent on taking the fight to trial, it may be that their bankers and financiers got cold feet, thus forcing today’s about face.

Despite calling off the merger, the North American cinema advertising market will not return to the status quo.  Certainly no new merger attempt will take place between NCM and Screenvision in their current configurations. Let’s take a quick look at some of the winners and losers coming out of this thwarted merger.

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Austrian Exhibitor Cineplexx Launched VoD Service


The boundaries between cinema and video-on-demand (VoD) in Europe are blurring further, with the parent company of Austria’s Cineplexx exhibitor announcing its Cineplexx2Go VoD service.

While VoD services are already offered by exhibitors such as UK’s Curzon Cinemas (Curzon on Demand) and Landmark’s Magnolia in the US, Cinemaxx is not an exclusively art-house but a major mainstream exhibitor in Central and Eastern Europe – similar to Pathe in Holland and SF in Sweden, who have similar VoD services – though like Curzon/Landmark its parent company also has a film distribution arm. It demonstrates that exhibitors see benefits in multi-platform distribution when it can increase customer loyalty, particularly when tied to ‘super tickets’ and loyalty schemes.

Owned by distributor Constantin Film, Cineplexx (not to be confused with Germany’s independently owned Cineplex) is the largest exhibitor in Austria, as well as having cinema in Italy (in German-speaking Südtirol), Croatia, Serbia, Slovenia, Montenegro, Macedonia and Albania with a total of 280 auditoriums across 36 multiplexes and six traditional cinemas.

The Cineplexx2Go service is powered by Italy’s Chili.SpA, with over 1,300 titles available to rent or buy on launch.

Titles available include “Gone Girl”, “Guardians of the Galaxy”, “The Judge”, “Boxtrolls”, “Boyhood” and “Teenage Mutant Ninja Turtles”, with prices set at 3.99 euro (for SD version) and 5.99 euro (for HD) to rent, while download-to-own costs 15.99 euro (SD) and 18.99 euro (HD). Older titles are cheaper, with “Ghostbusters” available for 2.99/4.99 euro to rent for a 48 hour period.

The service is available on smart TVs, gaming consoles, PCs, tablets, smartphones and even Kindles. The aim is for the Cinplexx2Go library to eventually hold over 6,000 titles.

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How Endemic Is Box Office Fraud In China?

 China cinema tickets

Is China’s cinema market larger than official figures suggest, due to box office fraud siphoning off 10% or more of its total value? Having looked last week at how micro-channel subsidies are inflating box office takings, it is time to look at box office spend that is collected but never reported.

Last year’s box office in China was reported to be CNY ¥29.64 billion (USD $4.82 billion), but the actual figure is now thought to be at least CNY ¥33 billion (USD $5.30 billion), according to reports in mainstream media. The difference between the two figures is accounted for by shrinkage that occurs when a ticket is sold to a film, but the cinema or employee does not log the sale or report it to the distributor or the relevant tax collecting authorities. The cinema or employee effectively takes 100% of the proceeds in violation of the rental terms of the film.

China Film Distribution and Exhibition Association and the China Film Producers Association have jointly been issuing bulletins that highlight cinema found out and fined for using ticketing software that allows them to divert takings. In 2014 this amounted to 15 cinemas in February, 11 in May and 17 in December. Yet media commentators in China said that it may have only been the tip of the proverbial iceberg.

The then government media body SARFT [now SAPPRFT] began cracking down in ernest on the practice of fraudulent box office in 2005 with the issuing of a “Cinema Ticketing Management System Computer Software Technical Specifications,” that was aimed at ensuring accurate reporting of box office takings. This was followed in 2013 with both a ”Cinema Ticketing Management System Technical Requirements and Methods of Measurement” specification, which was then followed by an “On The Strengthening of Management Practices Movie Ticket Movie Market System Usage Notification.” Yet new cases of fraud continue to be discovered.

The central government has a strong interest in ensuring accurate box office reporting in order to collect tax on tickets sold, thus the effort to stamp out box office fraud. Yet even the introduction of multiple specifications, requirements and notifications has not eliminated the problem.

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Global Box Office 2014: Asia Comes to West’s Rescue

MPAA global growth

The Motion Picture Association of America (MPAA) has released its 2014 Theatrical Market Statistics report, providing an overview of global box office and trends. Overall box office grew year-on-year by just 1% but to a record USD $36.4 billion. However, the underlying trends point to a surging Asia coming to the rescue of the stagnating North American and plateauing European markets.

In 2014 box office in North America (US and Canada) was down by 5% to USD $10.4 billion, with admissions down even more by 6% to 1.27 billion. Ticket price rise was just 1% (or USD $0.04), which was below the rate of inflation, possibly abetted by 3D box office being down 2% from the previous year to 14% of the total box office. Significantly, films released by MPAA members (i.e. the big Hollywood studios) increased for the first time in five years to 136 titles, though non-MPAA films were also up.

In interesting demographic trends the proportion of tickets sold to older patrons (40-49 and 50-59 year olds) were at an all time high, while tickets bought by those 60+ year olds (13%) were the highest they’ve been since 2011. But while there is a distinct ‘greying’ of the North american cinema population, MPAA still notes that demographics remained stable for 2013 to 2014, with “12-17, 18-24 year olds and Hispanics especially continuing to oversample in tickets sold versus their proportion of the population.” However, there was a troubling collapse in movie going by the youngest demographics.

While the situation in Europe was not quite as bad, overall box office fell by 3% for the Europe, Middle East & Africa (EMEA) market as a whole. This was mainly down to a decline in major markets such as Germany (-7%) and the UK (-5%), that were not significantly enough offset by slight growth in territories such as France and growth attributable to many new screens in Eastern Europe, Turkey and the Gulf & Middle East.

Despite this slump, EMEA came out slightly ahead of North America with USD $10.6 billion versus USD $10.4 billion. This means that EMEA has outperformed or equalled the North American market for three of the last five years. With strong growth in Eastern Europe and the Middle East in the coming years, North America could see itself permanently relegated to third place in the global box office ranking in the future, though the currently weakening euro will not help.

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Though Major Exhibitors Still Boycott Simultaneous VOD Releases From Netflix, the Oscars Willingly Accept Them

Beasts of No Nation

Idris Elba in “Beasts of No Nation”

On Monday of last week, Deadline broke the news that Netflix was making another move into feature films by acquiring “Beasts Of No Nation” for a reported USD $12 million. This was followed the trade publication Variety which published three stories on the same subject in quick succession, the headlines for which could have been written before the news they detailed had actually occurred or been made public.

The first headline read, “Netflix Makes Another Bigscreen Splash With ‘Beasts of No Nation’” and laid out the information presented by Deadline less than an hour earlier, while adding their own take about how the acquisition was meant to “bolster its awards season status” (more on that in a moment).

The second and third headlines on the subject could have been predicted by anyone following the film industry over the last few years and came within 24 hours. By Tuesday morning Variety told us “Netflix Releasing ‘Beasts of No Nation’ Simultaneously in Theaters and Streaming Service” and by that afternoon was able to inform us “Major Theater Chains to Boycott Netflix’s ‘Beasts of No Nation’“.

Identical headlines are likely to appear every time Netflix purchases another feature length film it plans to distribute. The title of the movie is all that need be altered. We had seen similar headlines in the same sequential order last October when Netflix announced their intention to distribute the sequel to the martial arts classic “Crouching Tiger, Hidden Dragon” this August day-and-date in cinemas and through its subscription video-on-demand streaming service.

This latest Netflix pickup is from the much-in-demand director Cary Fukunaga fresh off an Emmy win for his work on the first season of HBO’s “True Detective”. Based on Uzodinma Iweala’s critically acclaimed debut novel of the same name, its story centers around a boy forced to become a child soldier in an unnamed African country. The film stars Idres Elba as a guerrilla leader who turns the boy into his protégé through a dehumanizing process meant to train him as a soldier.

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How Subsidies Distorted China’s “Record” February Box Office

China box office micro-channel Dragon Blade

Much has been written about how China’s cinema box office ‘overtook’ that of the United States this past February. While we have already covered how much of this is down to skewed arithmetic, often without proper context, it now seems that this “record” may require a large asterisk.

Major subsidies by mobile micro-channel ticket providers means that total box office spend over the Chinese Lunar New Year (also known as Spring Festival) period was over-stated by as much as half a billion yuan (USD $80 million), amounting to over one eighth of total earnings, thus easily wiping out the USD $10 million difference between US and Chinese box office in February.

The question of China’s total box office earnings last month hinges on whether we mean “box office” to be what people paid for their tickets or what cinemas earned from the sale of the same tickets. In most countries the two are more or less the same[1], but in China there is a significant difference due to the role played by third-party micro-channel smartphone ticketing services (the mobile e-commerce platforms commonly known as “electricity suppliers” in Chinese).

Micro-channel mobile ticketing providers such as Gewara, Cat’s Eye (Maoyan) and many others are locked in a fierce price war, offering cinema tickets for as little as CNY ¥9.90 (USD $1.58) or CNY ¥19.90 (USD $3.18), to win customers. These companies buy tickets in bulk and at a slight discount ahead of time directly from the cinemas, who thus have assurances of sold seats.  They then turn around and sell these tickets at a subsidised price to savvy smartphone-owning cinema goers. In addition to a low price, these providers offer assured seat selection and convenience.

China’s Lunar New Year season this past February was a particularly busy time for these micro-channel cinema ticket providers. On New Year’s Day Cat’s Eye sales alone reached CNY ¥100 million (USD $15.95 million), while Public Comment sold 6.5 million individual tickets. The battles on screen in this holiday’s blockbuster “Dragon Blade” were nothing compared to the war going on between the different third party ticket providers.

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UK’s Odeon For Sale Again – Third Time the Charm?

Odeon for Sale

Private equity group Terra Firma has announced that UK/European cinema chain Odeon & UCI Cinema Group (Odeon for short) is for sale. The merged exhibition operation failed to attract bidders willing to match the asking price in both 2011 and 2013 but Terra Firma’s chair Guy Hands is hoping that third time will prove the charm. Yet prospects for potential buyers are distinctly uncertain and Terra Firma has admitted that it may end up seeking a stock market listing instead.

Hands is quoted in a Reuters exclusive as saying:

“We will look to begin the process to sell Odeon towards the end of the year,” said Hands yesterday. “We are likely to appoint banks by May. Possible buyers could include US cinema groups or South American cinema firms, and private equity groups from Europe, the US, and China.”

The blunderbuss approach of targeting pretty much every potential buyer on the planet, while hedging your bets by reserving the right to do an IPO, could be faulted as demonstrating a lack of finesse or coherent sale strategy. It is also not clear what Terra Firma has to gain by announcing its intentions (emphasis on plural) this far in advance of even appointing a bank, unless it thinks it can instigate a feeding frenzy of suitors and bidders.

There is no asking price at this stage, but the figure of GBP £1 billion (USD $1.55 billion or EUR €1.36 billion) has been mentioned, which is less than the failed asking price of GBP £1.2 billion in 2011. The exhibitor has not reported income and profit for the 2014 financial year, but the 2013 figures reported last April saw profits before interest, tax and other charges decline 24% to GBP £69.2 million (USD $107.5 million) while sales shrank by 5% to GBP £706.7 million (USD $1.1 million).

A detailed valuation analysis of Odeon’s worth is beyond the scope of this article and the sort of things banks get paid big bucks to do. For a handy overview of the key metrics and tools for evaluation of (US) cinema exhibition operations we refer those interested to the Fulcrum Inquiries Valuation Guide: Movie Theaters. As a recent guide, Australia’s Hoyt’s was sold last year on undisclosed terms to a Chinese investor but had earlier been valued at AUS $900 million (GBP £473.9 million or USD $731 million) on the basis of revenue of AUS $550 million and profit of earnings before interest, tax, depreciation and amortisation of slightly more than AUS $80 million.

Using Hoyt’s as a model – not unreasonable, since the chain share many characteristics with Odeon – gives a valuation of somewhere between GBP £778 million to GBP £1.156 billion, which gives an average of GBP £967 million. Hands would be more than keen to round that up to a cool one billion pound sterling. But is Odeon worth it and who would buy it?

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AMC’s Premium Recliner Seating Plans Revealed

AMC recliner seats

A week after Regal announced that it plans to convert 25% of its screens to luxury seating, AMC has provided details about its plans for reseating. While the Chinese-owned exhibitor is not committing to a particular screen percentage target, the ambition is great for the cinema chain that in many ways kickstarted luxury reseating trend amongst the major exhibitors. AMC also continues to stress that reseating is only a part of its overall enhanced guest experience.

While attendance and box office was down for AMC in the forth quarter of 2014 (by 4.3% and 4.5% respectively), as well as for the year as a whole in line with the rest of the industry, the exhibitor managed to eek out an overall increase thanks to better concessions spend. AMC’s food and beverage (F&B) revenues per customer increased by 13.5% to $4.46 in the last quarter of 2014, a record high for the company.

Speaking at the Q$ 2014 earnings call (transcript by Seeking Alpha), CEO Gerry Lopez reminded the analysts listening in that when the reseating initiative was started three years ago it was not universally well received. “I don’t think I can use over an open line some of the adjectives and some of the names that we were called for this notion of taking two-thirds of the seats out of an auditorium,” he said. Yet today, “we’re seeing the same things that you are seeing which is everybody’s announcing them and everybody is doing them.”

At the end of the 2014 calendar year AMC had refitted or installed luxury recliner seats in 598 screens across 53 theatres, which represents an increase of 51% on the previous year. The reseated theatres are said to have delivered an increase in admissions of 13.8% on a per screen basis, compared to an average industry decline of 4.3%, in the last quarter of 2014.

Looking at the year as a whole, AMC claims that reseats delivered a 25.3% increase, compared to an industry slump of 5.6%. Taken together reseats thus delivered an 18 and 31 point outperformance for the quarter and the year.

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Regal To Convert Quarter of All Screens To Luxury Seating

Regal premium seat

Regal premium seats in Avalon, Alpharetta (photo credit: Jonathan Phillips)

The world’s largest exhibitor Regal has announced plans to convert 25% of all its screens to luxury seating. The move mirrors similar efforts by other large chains such as AMC and Marcus Theatres, and is an attempt to extract more revenue from patrons as cinema attendance declines in the United States.

The announcement came during Regal’s Q4 2014 earnings conference call when CEO Amy E. Miles gave an overview of plans for capital investments “to enhance the customer experience in 2015,” covering several areas including seating, concessions/F&B and more.

Regal installation of luxury recliner seats has been going on for some time, but was said to have gained ‘significant momentum’ in the last quarter of 2014. Significantly, a large enough installed base of luxury seating now exist to make meaningful year-on-year comparison in terms of revenue generated from premium seating.

Converted screens were said to be producing box office revenue growth in excess of over 40% for the first six weeks of 2015. While some of that can perhaps be attributed to the surprise success of “American Sniper”, one film alone cannot shift all converted screens. Overall box office was said to ‘only’ be up by around 10% in the same time period.

The success of the first wave of premium seating has led Regal to accelerate its conversion program, with 40 multiplex sites representing 500 screens scheduled to have their seats swapped out in the coming year. Ultimately Regal expects to outfit at least 25% of their screens with luxury seating.

Miles also discussed the “ low-cost, low-risk investment” to upgrade food and beverage offerings to offer greater food menu options and alcoholic beverages. Though not mentioned in the conference call, the latter may be “low risk” but still requires approval or local regulations to be amended and relaxed, which requires political action at the county or district level. This means that cinemas can only ‘convert’ to alcohol serving once they have local permission to do so, while the pace of rolling out luxury seating is Regal’s decision in conjuncture with the landlord. The “enhanced menu” will be rolled out to a further 65 locations in 2015, while Regal will offer some type of alcoholic beverage in around 80 properties.

Regal’s CFO David Ownby expanded on what the capex would entail in 2015 (transcript of the con. call by Seeking Alpha). “In light of the customer-focused initiatives Amy outlined earlier in the call, we expect our 2015 capital expenditures, net of asset sales and landlord allowances, to be between $135 million and $145 million.”

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EAO Releases European 2014 Cinema Statistics – Up, But Not Much

EAO Cinema Figures Europe 2014

A week after cinema trade body UNIC released its provisional European Cinema going figures for 2014, the European Audiovisual Observatory (EAO) has released its preliminary cinema figures at the Berlin Film Festival.

The figures show an overall slight upward trend for the EU as a whole, breaking a long pattern of decline, but only slightly and primarily thanks to strong box office in three major territories. Most west European territories reported a decline.

The Observatory estimates that total admissions in the European Union increased marginally by 0.6% to 911 million tickets sold, around 5.4 million more than in 2013 (906 million). The small increase was primarily ensured by a strong year-on-year performance in France and Spain which kept EU admissions from continuing their downward trend of recent years.

As in 2013, two thirds of EU markets experienced a decline in cinema attendance, while admission levels increased in only nine out of the 27 EU territories for which provisional data were available. The year-on-year increase was most pronounced in France (+14.8 million, +7.7%) and Spain (+10.5 million, +13.6%) with cinema attendance in both markets recovering from exceptionally weak results in 2013.

Although both UNIC and EAO figures are provisional, they come to similar conclusions, positing a 0.7% and 0.6% increase respectively for EU countries. UNIC sources its data from UNIC members while EAO data has been “collected with the collaboration of the EFARN (European Film Agency Research Network)” mostly from national film institutes and public audiovisual bodies.

UNIC represents exhibitors and trade bodies in 36 territories, but only published provisional data for 24. It did not yet have data for Belgium, Bulgaria, Cyprus, Greece, Hungary, Iceland, Malta (EAO also not), Montenegro, Macedonia, Romania or Slovenia, for which EAO has provisional data. Neither UNIC nor EAO covers Serbia, Bosnia, Belarus, Ukraine or Moldova. The omission of several Central and Eastern European territories from the UNIC figures misses out on some of the larger growth markets, as noted by EAO:

Apart from France and Spain, year-on-year growth in cinema attendance was only achieved in six Central and Eastern European member states, led by Poland (+11.2%), the Slovak Republic (+10.8%), Romania (+10.5%), Hungary (+8.4%) and the Czech Republic (+4.5%) as well as Belgium (+0.8%).

There were also some minor discrepancies between UNIC and EAO data for some contries reported by both, notably Germany, though this had to do with FFA only releasing its data on 9 February. For Sweden, for example, UNIC has +0.8% growth in BO but -1.7% decline in admissions, whereas EAO has +0.5% BO and -1.9% admissions. There is also a larger discrepancy when it comes to Russia’s BO and admissions, which UNIC sees as stronger than EOA does.

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