Lowest summer attendance in U.S. movie theaters since 2005

In addition to the problems caused by the decline in DVD sales, you can now add bad news in movie theaters. According to Hollywood.com, U.S. theatrical attendance hit its lowest point since 2005, even though theatrical revenues hit a new record ($4.35 billion.) Why did revenues increase even though attendance dropped? The reason is that average ticket prices have been rising for years, and the introduction of 3D has pushed prices even higher.

If revenues are up even though the number of customers declined, that can't be bad news, can it? Actually, it can. Ticket prices can't continue to escalate at the rate they have indefinitely, especially given the slow and tenuous financial recovery. To spike revenues, movie studios are converting movies originally shot in 2D to 3D, with generally poor results. Revenues for these converted titles have been dropping throughout the year, and if the studios aren't careful, they may kill off the willingness of moviegoers to pay more for 3D before the new format even has a chance to take hold.

If theaters can't raise prices and attendance continues to decline, the inevitable outcome will be decreased theatrical revenues. DVD sales and revenues are also declining, even though the "loss leader" discounting of new DVD titles by the big-box retailers (Wal-Mart, Target and Best Buy) is largely a thing of the past. Blu-Ray hasn't taken up the slack in DVD sales and is unlikely to do so in the future. The market is shifting to DVD rentals, video on demand and digital downloads, but these channels bring in much less revenue than DVD sales.

It's the combination of all these trends, not any one trend in particular, that is (or should be) grounds for extreme concern in the movie industry. Some say that the industry has always had down years and has always rebounded--first radio, then television threatened to kill off movies but failed--but studios have become addicted to the "crack" of DVD sales and increased ticket prices. Movies like "Avatar" and the "Transformers" series couldn't have been produced without these revenues. Studios will have no choice but to either maintain budgets and release fewer films (increasing their exposure to risk of failure) or decrease budgets and produce the same number of films. This will decrease the potential for breakout blockbuster hits, which could result in even lower revenues. Neither outcome is appealing, and there's no solution on the horizon.