Published on 13/04/2016 by Punchmedia

Film Industry a Box Office Smash

The film industry enjoyed a record $US38.3 billion ($50.6 billion) in global ticket sales last year, driven by blockbuster movies and the growing international box office. The worldwide film market increased 5 per cent in 2015 thanks to billion-dollar films including Jurassic World, Star Wars: The Force Awakens and Avengers: Age of Ultron, according to a report released on Tuesday by the Motion Picture Association of America. MPAA head Christopher Dodd said the numbers are a sign of continuing strength for the movie business, which is increasingly generating its revenue from overseas. In the United States and Canada, ticket sales increased 7.5 per cent, to $US11.1 billion. Internationally, the box office grew about 5 per cent, to $US27.2 billion. Overseas growth was largely driven by a more than 50 per cent bump from China, as well as marked increases in countries including Britain and Argentina. The Box Office industry in Australia has faced difficult trading conditions over the past five years due to intensifying competition from other sources of entertainment. Consumer investment in home entertainment and the increasing prevalence of video piracy have strengthened competition for cinema operators and put downward pressure on demand. Despite this however, industry revenue is projected to reach $1.57 billion which includes forecast growth of 2.8% through 2015-16.

Video Downloads

Cinema operators face significant competition from downloading of films, both legally and illegally, which has been driven by increasing internet penetration. The number of internet connections in Australia has risen steadily over the past five years, and the internet has provided consumers with other sources of entertainment. For example, television broadcaster SBS offers a back catalogue of more than 400 domestic and foreign films that can be viewed through its SBS On-Demand service. In addition to legal streaming websites such as YouTube and Channel Ten's Tenplay, the illegal downloading of video content has constrained demand for cinemas. Video torrent and streaming websites enable Australians to illegally download films for the price of their internet service, making it impossible for cinema operators to compete with this source of entertainment based on price. According to a report published by UMR Research in 2012, about 21.0% of Australians engage in illegal downloading of films, television shows, music, games or books. Video piracy and streaming have weakened demand for industry products and services.

Home Entertainment

Improvements to home entertainment equipment over the past five years have also put downward pressure on demand for cinemas. The uptake of digital television has increased over the past five years, with the last broadcast of analog television occurring in some states over this period. More channels have increased the audiovisual content available to view at home, and this has further increased competition for cinemas. Meanwhile, television screens available for purchase have become larger and their quality has increased.

Digital Investment

Over the past five years, cinema operators have converted screens, sound systems and projectors to digital. While this has posed a significant cost to industry operators, the move has been imperative to keep up with films being distributed in digital format. According to data from Screen Australia, the number of digital cinema screens in Australia has increased at a compound annual growth rate of 44.5% over the five years through 2014, to 1,160. In 2009, digital screens accounted for 9.3% of the total number of screens, and in 2014 that proportion increased to 56.8%. As digital screens are less labour-intensive than film formats, the introduction of digital projection has altered the industry's cost structure. Furthermore, the average wage has remained relatively stable as general increases in wages across the economy have been offset by decreased demand for skilled projectionists that command higher wages. The first film using new 3D technology, Avatar, was released in Australia at the end of 2009, with cinemas requiring new equipment to screen it. The installation of 3D screens has continued over the past five years, offering cinemagoers a new experience. This has allowed cinemas to charge higher prices for tickets to 3D films compared with the traditional 2D format.

Diversification

The industry has diversified over the past five years, spanning from popular cinemas that screen blockbusters to cinemas that specialise in arthouse and foreign films and film festivals. The proportion of screens operated by independent cinemas and arthouse chains Palace and Dendy has increased over the past five years. This is partly attributable to a rise in content from overseas and independent distributors, leading to increased demand for curated content. Furthermore, arthouse films can be difficult to source online, which boosts demand for this type of cinema experience. At the other end of the market, the major companies have invested in providing cinemagoers with a luxury experience through the Gold Class (Village), Gold Lounge (Reading) and La Premiere (Hoyts) brands, among others. Industry operators have renovated cinemas to provide more comfortable sofa-like seating and provide food and beverage services to the seat. For example, Village has focused on expanding its premium offerings, opening new Gold Class and Vmax sites over the past five years. As patrons switch from traditional cinemas to Gold Class and Vmax, which have higher spend per patron, profit has increased for the company's Australian Cinema Exhibition division. Cinema operators have also concentrated on expanding their food and beverage offerings over the past five years. Over the past five years, some cinemas have started to screen live transmissions of arts and sports events. For example, Cinema Nova in Melbourne has screened operas from the Met in New York and the Paris Opera, among other arts and cultural events. Other events screened include stadium concerts and sports matches. Cinemas that have been unable to adapt to the diversifying market have exited the industry.

Industry Structure

The industry has consolidated over the past five years, with the number of enterprises declining at a faster rate than establishments. This has caused industry employment to drop over the period. Increased competition from other sources of entertainment has put downward pressure on profit, causing non-profitable operators to exit the industry. The constraint on industry profit caused by intensifying competition has been offset by these exits and higher spends per patron, causing profitability to increase slightly over the past five years.  

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Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

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