« Set Points | Main | Who is that actor? »

Time Magazine and the Movies

June 22, 2005 09:34 PM

0415312612.01._PE11_SCMZZZZZZZ_.jpg

I gave a long telephone interview today to Time Magazine on the pending merger of AMC Entertainment and Loews Entertainment. Both are major theater chains and the combined theaters of the merged entity would be 450 theaters. Not so much compared to the more than 5000 theaters in the US, but one that has a lot of major city coverage. I did the interview to test what effect it would have on the sales of my book, Hollywood Economics. Today its sales rank is 223,380. I'll check back after the interview appears. I plan to turn down future interviews; they usually are not worth my time.

As to the merger. Neither company is publically traded so it is hard to know how the market evaluated the news of the pending merger. In most mergers, one or both companies suffer a stock value decline. This is probably due to the high transactions cost of putting the merger together; fees are incredibly high and this has to take a toll on the value of the merged entity. But, the answer I gave is that nobody knows if or how the merger will pay off. It could go either way, though the evidence in the movie/entertainment business is that mergers and acquisitions do not increase value.

The industry has written off many billions in the past decade or so. SONY wrote off 5 or so billion in its acquisition of Columbia, the ABC-Disney merger saw a stockholder value loss of, I forget, but it was many billions. And then there is the Time/Warner AOL merger that helped to produce a loss of stockholder value in excess of 30 billion. Finally, there was the French sewer company, Vivendi. Its claim to fame was political power within France because of connections to municipal policiticians throughout the country through Vivendi's interests in water systems. Through this influence it gained access to capital and political support in media. Mercier, as a graduate of one of the prestigious Ecole's, leveraged this small base into a world wide media company, in part through the acquisition of Universal here in the US.

This was an empire no own understood unless they knew of the sewage connection, which was also The French Connection but this time starring Mercier instead of Gene Hackman. To my class I explained it thus: there are economies of scale in taking French sewage and pumping it directly onto the movie scene. This French empire lost many billions, if any body can even do the calculation.

So, mergers do not have a rosy future in Hollywood and I could go on for a long time talking about the failures.

The AMC/Loews merger may have some logic, but not much. The merged company gets a bit more regional diversification of theater revenues, which might reduce risk a bit. On the other hand, regional knowledge is essential to making the right booking decisions on films, so they must retain this local knowledge to make the merger work. Thus, no consolidation of booking is likely.

Nor can they gain better film rental rates because of their combined market clot. This is because theatrical engagements must be totally hands off in terms of favoring one or another theater or chain. This is a legacy of the Paramount Antitrust Decrees that prevent alliances, favorable treatment of theater chains, block booking and many other practices that might gain some favor of a chain over an independent theater.

So, where are the gains of the merger? I don't know. Unless they know something that is not at all apparent, then it seems like a wash with no stockholder value created along the way. The argument given in the newspaper to the extent that theater grosses are down now doesn't make much sense. Whether revenue is up or down, the merger has to make sense on its own terms and the case doesn't look very strong in favor. And theatrical gross revenue is notoriously volatile since it is so strongly influenced by a few big hits. There haven't been any lately that are big enough to lift industry revenues in the way that Batman or Titanic did some years back.

There is a small argument to be made in favor of the merger. The Paramount Decrees were intended to favor a less concentrated movie industry and did this by restricting vertical integration and limiting the kinds of contracts that could be used. So some mergers are ways around contracting restrictions and would not exist if freedom of contract existed. If companies cannot contract to gain efficiencies then they often merge to do the same thing through administrative means. This is one of the great ironies of the Paramount Decrees, they seem to have encouraged a lot more horizontal integration than would exist if contracts were not so narrowly restricted amongst companies.

· The Movie Business

Comments

Posted by: Flower Online [TypeKey Profile Page] at September 12, 2006 7:44 AM

Mark Cuban, maverick billionaire, sketches ideas on how the current movie revenue schemes should evolve:

http://www.blogmaverick.com/entry/1234000127044892/

"The 3rd option is one that movie producers might not like, but needs to happen. Theater owners need to share in the backend of DVD sales and rentals. If the goal is to expand the revenue pie for every film, then as key partners in this effort, theater owners should benefit as well. DVD revenues have already surpassed box office receipts by 2x or more, but at the same time, the number of DVD sales and rental per movie release is dropping versus previous years. Rather than stonewalling each other, everyone will make more money if producers and theater groups work together to increase the pie.

...

Of course all of this is easier said then done. I don’t expect the major studios to jump up and down to do this. Nor do I expect Regal or any major theatrical group to take the lead.

I do expect 2929 Entertainment and HDNet Films to take the lead. We will tailor the movies we develop to fit Landmark Theaters customer base. We will work with theater ownership groups, retailers and rental outlets who want to try this experiment to develop programs that expand the pie and create more cash flow for everyone.
...
"

Perhaps Cuban should not be so pessimistic about the large chains. AMC-Loews will be owned by four major private equity groups, which tend to be aggressive about maximizing their returns. Surely, the increased, combined market share will increase their leverage in negotiating new revenue sharing models with the studios and distributors.

Posted by: Ming at June 23, 2005 1:09 PM

Post a comment

Thanks for signing in, . Now you can comment. (sign out)

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)


Remember me?