Goodbye Cineplex, Hello Cineworld
The burgeoning demand of the home streaming industry has come at the expense of traditional theaters. From 2002 to 2018, the number of North American movie tickets sold annually declined by a staggering 21.3% to 1,234 million, while Netflix subscribers rose by 636% to 158 million since 2011. As Canada’s largest theater chain, Cineplex Entertainment saw a significant deterioration in business performance. To save the business from disappointing attendance and profits, Cineplex diversified product offerings by doubling down on premium VIP and 4DX experiences. Unfortunately, efforts did not translate to results and by 2018, theater attendance had dropped to 69.3 million from a high of 77 million in 2015. In this critical time of struggle enters Cineworld Group PLC.
Cineworld Group PLC is the world’s second largest theater chain boasting 9518 screens. The UK-based cinema chain grows through strategic acquisitions and completed the $3.6 billion takeover of Regal Entertainment Group in December 2017. To continue broadening its geographic coverage, Cineworld has proposed to pay $2.8 billion in an all-cash deal and $34 per share for Cineplex’s stock, representing a premium of 42% over the latest closing price. The deal also stipulates that Cineworld would take on Cineplex’s debt. While the acquisition still rests on shareholder and regulatory approval, both parties expect closure by the first half of 2020.
The change in ownership comes with a plan that will materially transform the Canadian movie-going experience. In the upcoming months, Cineworld intends to roll out a movie subscription service for all Cineplex locations, allowing Canadian subscribers unlimited screenings for a monthly payment. Viewers can upgrade to IMAX and 3D for an additional fee and the movie pass comes with concession discounts as well as advance screenings.
At first glance, it may appear counterintuitive that Cineplex would agree to such an offering. After all, if attendance increases disproportionately to movie ticket sales, would it not drive up costs and compress profit margins? Yet the unlimited movie pass is not a new concept. Cineworld has been offering movie subscription services in the UK for over a decade now, and in the US just seven months following the acquisition of Regal Cinemas. Therefore, the all-you-can-watch movie pass must have gained traction. What explains the seemingly paradoxical phenomenon?
The movie subscription service accomplishes two goals: it improves overall sales and enables theaters to more directly compete with home streaming services. While the unlimited pass likely lowers movie ticket sales, the true value comes from additional concession spending and screening upgrades. With the monthly movie fee as an upfront payment, subscribers come to view the amount as a sunk cost and consequently perceive the act of watching movies as costless. No longer paying for movie tickets, subscribers feel richer and decidedly allocate a greater allowance for food and viewing upgrades. Furthermore, the unlimited pass motivates movie-goers to go the theaters more often to get their money’s worth, which fuels supplementary purchases. By offering monthly subscriptions, Cineplex creates incentives for theater visits and promotes additional spending, ultimately boosting sales.
The subscription business model also creates an ecosystem for attracting and retaining customers, narrowing the gap between traditional theaters and home streaming services. Cineworld’s subscription model mirrors the home streaming subscription model through its offer of unlimited viewings at an affordable cost. In the United States, Regal Cinemas charges between $18.00 to $23.50 per month for the movie pass. While the competitive pricing and nature of the subscription model lock in existing cinema fans, the greatest potential lies in the occasional movie-goers. Enticed by the value proposition of unlimited movies, this group of customers will convert to frequent goers and develop a deeper appreciation for the in-theater experience compared to home streaming. Cineplex will not only observe higher spend per customer but also draw in new customers, increasing the overall customer lifetime value.
The recent success of home streaming services does not mean the end for traditional theaters. To respond to the shifting landscape, traditional theaters must actively partake in the next era of global entertainment marked by price sensitive consumers who value convenience. Theatres must communicate their unique capability to offer the “cinema experience” – the large screen, superior audio and visual – that cannot be substituted by home streaming. Cineworld’s acquisition of Cineplex and the unlimited movie pass serve as prime examples of acceptance of and adaptation to the new age. The acquisition gives Cineplex hope to not only improve sales but also to reverse a declining market share by competing with home streaming services. Joining forces with other companies further encourages mutual advancement. Cineplex can leverage Cineworld’s management and best practices, and Cineworld can benefit from Cineplex’s presence in Canada to improve its competitive position. Since both operate within the same sector, the companies can reduce cost by streamlining processes. While traditional theaters must let go of their former days as the dominant market players, the evolution of the entertainment industry presents exciting opportunities for businesses to accelerate innovation and deliver greater value to society.