Tuesday, October 28, 2014

Regal Entertainment: "Exploring options" in a new world

Yesterday, Regal Entertainment, the largest movie theater chain in the U.S., announced that it's exploring "strategic alternatives," including selling the company. Regal has long been the top buyer of theater chains around the country--it now owns 574 theaters with 7,349 screens. However, when there's a run of unpopular movies, as happened this summer, Regal and other theater operators suffer; the company's revenues and profits from the summer quarter fell sharply year-over-year.

Regal's decision to explore a sale is being driven by several trends:
  • Industry revenues from theatrical exhibition have increased modestly over the last decade, but the number of tickets sold has been in a long decline. Theaters and movie studios have maintained their revenues by increasing ticket prices, in part by showing 3D movies at higher prices and by installing IMAX and similar panoramic projection systems. No one really knows at what point higher prices will lead to diminishing returns, but many people in the industry are afraid that ticket prices are close to that "tipping point" already.
  • Netflix's recent moves to fund and distribute its own movies are sending shock waves through the industry. Regal and the other three of the four largest U.S. theater chains announced that they would refuse to show any movies distributed by Netflix. However, that didn't stop companies like The Weinstein Company and IMAX, or actor Adam Sandler and his Happy Madison production company, from signing up to produce and distribute movies with Netflix. "Direct-to-home" movies have long been a staple of the home video business, but those titles are usually either not good enough or appeal to too small of a niche audience for theatrical distribution. That's going to change with Netflix, and likely other companies, pumping money into producing theatrical-quality movies for the OTT streaming audience.
  • As I've written before, High Dynamic Range video, which is under development by several companies, will provide in-home viewers with a picture that's superior to anything other than IMAX. Currently, the only way to view HDR is with a modified HDTV or Ultra HDTV. In order to view HDR in a movie theater, it's likely that entirely new projectors or huge flat-panel displays will be required, which will require major capital investments less than a decade after theaters replaced their film projectors with digital models.
  • Many Chinese and Japanese investors, including Alibaba and Softbank, are exploring investments in the U.S. entertainment industry. AMC Theaters, the second-largest U.S. theater chain, was purchased by China's Dalian Wanda Group last year for $2.6 billion.
Put those four trends together, and it's likely that this is the right time for the big theater chains to consider selling. Ticket prices are about as high as they can go without dragging down top-line revenues, non-theatrical competition hasn't yet made a dent in theatrical revenues, the major capital investments to support HDR are still a few years away, and there's a lot of foreign money looking for a home in the movie business. 
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