Ever Wonder Why Popcorn At The Movies Is So Expensive?

on Wednesday, January 02, 2008  

     One of my New Year's Resolutions was to provide you all with more frequent, thorough analyses of the economics of the box office system, and today I answer a question that many moviegoers ask: Why are snacks at the movie-theater concessions stand so overpriced? You'll probably be surprised to know that it isn't just because theater-owners are greedy. To the contrary, they're simply trying to get by.
     In the 1940's, during the golden age of American cinema, seven big movie studios ran every single part of the film industry. Twentieth Century-Fox, Paramount, MGM, Universal, Columbia, Warner Brothers, and RKO Pictures not only produced films, but also owned and operated extensive distribution systems. The seven studios were the sole creators and distributors of all content, shooting films that would play in their own theaters. With no third party in the way, 100% of theater grosses went back to the respective studio, and ticket prices were kept low, at an average of about 40 cents. These low costs were a driving force behind the huge annual ticket sales of about 4.7 billion (over three times as many as today). Fueled by bargain prices and huge profits, the studio system was unbelievably effective.     All of this changed in 1949, when the studio system met its match in the Sherman Antitrust Act of 1890 (depicted above). Fearing that studios were gaining too much power, the Supreme Court case US vs. Paramount Pictures Inc. arose in 1948, and a ruling was made a year later that would forever end the power of the studio system. The Supreme Court granted exhibitors the right to play movies from any production company that the theater owner wanted. This decision had massive consequences.
     No longer would studios ever earn the enormous, untouched profits they once had, for deals suddenly had to be made with theater owners to govern who-got-what of the ticket revenue. For the first time, the theaters and the studios had to share profits, and a system was quickly devised to dictate how funds were split up among studios and distributors. It went (and still goes) like this:
     Except for a small operational fee paid to theaters, for the first two weeks that a movie was playing in theaters, 100% of ticket revenue went to the studio. In the third week, the studio would take about 90% of ticket revenue, while the theater would earn 10%. The fourth week, they'd split revenue 80/20, then the next week 70/30, then 60/40, until the level reached 50/50, where the division of money stayed until the end of the movie's run. (Keep in mind that these 10% incremental drops are merely examples. All theaters do give the studio 100% of the ticket revenue for two weeks, but the percentage drop in the subsequent weeks varies movie to movie until the 50/50 split. The 10% drops are reasonable figures, though.)     Back in the 1930's and 40's, this system made sense. 60% of Americans saw a movie every week, and the idea of a monster opening weekend simply didn't exist. Movies played in theaters for a long, long time, often for many months, or even over a year. Gone With The Wind opened in 1937, and played until 1939! The system of splitting ticket revenue was appropriate for the time being, and both the studios and the theaters were getting a fair share of revenue. However, times have changed. These days, theaters are not making nearly as much money. Movies open big and fall fast; a long movie run is three months, and theaters are not getting a big enough slice of the pie, as the studio typically takes in about 75-80% of all ticket revenue. Let's look at an example:
     Last year's Fantastic Four: Rise of the Silver Surfer earned $131 million, but $105 million of this was earned in the first two weeks alone. This means that the 3,963 theaters that played the film could only receive a tiny fraction of the small $26 million that Rise of the Silver Surfer would go on to make. However, since the picture was declining so quickly, after the second week (when distribution contracts are up), many theater owners dropped the picture because it could not give them enough profit, and they needed screens for other blockbuster openings. As you can see, on ticket revenue alone, a theater could never survive.
     Now we get to the answer of my original question. Since ticket revenue provides theaters were so little money, in order to turn out any kind of profit, movie theaters must sell their concessions for extremely high prices. When Fantastic Four: Rise of the Silver Surfer opened with $58 million in July 2007, theaters may not have gotten any money from ticket sales, but they did receive a good amount of money from sales of popcorn, soda, and candy to moviegoers who came to watch the movie. Theater owners truly need to charge such high concession prices in order to survive in todays marketplace.     All of this is not to say that ticket sales don't matter- they still do. This is the reason that ticket prices continue to go up. In order to earn any reasonable amount of money from tickets, theaters must charge higher prices. Of course, this causes less people to attend the movies, and though less people attend, the decrease in attendance is small enough that theaters will raise ticket prices even more. The movie industry relies on the seemingly never-ending demand for new movies in order to keep people coming to the theaters, and ticket inflation is a gradual, ongoing cycle that has gone on since 1949. However, I have to wonder how far Hollywood can stretch the public's pockets. Tickets are not selling like they used to, and the huge pricetag that comes with an outing to the movies is a major reason why. I worry that ticket sales (which actually increased .08% in 2007 because of the strength of the pictures released) will decline in the future if these prices continue to rise, but these prices will never drop unless the theater owners can create a new plan for ticket revenue. And without a new system, your popcorn is not getting cheaper any time soon.

If you'd like to know more about this or subjects like it, read Edward Jay Epstein's tremendously insightful look into the movie business, The Big Picture.

9 comments:

Anonymous said...

Pretty interesting. One thing though: I don't know what they teach you at UVA, but where I come from when demand goes down, price goes down. I'm not sure what movie theaters are raising prices because customers aren't showing up.

Grady Smith said...

I didn't mean to imply what you wrote. What I'm saying is that as ticket revenue becomes less profitable, theaters are raising ticket prices in order to earn a meaningful amount of money. Theaters rely on the derived demand that comes with new movies to continually raise prices, for though there is a small decrease in attendance, it's such a small decrease that it does not really negatively effect theaters. However, I think that as ticket prices continue to rise so quickly, the attendance drop-offs will be sharper.

Anonymous said...

That was a great read!! Thanks! I enjoy reading your analysis and observations. Just want to add a bit about the subject on ticket pricing. I'm not sure that the strategy of theatres/theaters continuing to raise ticket prices is the trend set for every theater owners. I do know that in my city, the theatre company Ciniplex cuts ticket price in half every Tuesday (all movies including ones which have been opened the previous Friday). It attracts alot of people in going to the movies. I really can't say whether raising or lowering price is what theatres owner will have to do to survive. In that example, that theatre had to lower its price every Tuesday to survive. Are there theaters in your area doing the same? Sometimes, location can be a factor, but there are so many other factors that could be included.

Alright, keep up the awesome work on this page! Hope others will get an opportunity to enjoy it as I have.

Grady Smith said...

That's a cool strategy that those Cineplex theaters use, but I'd bet that they get more revenue from concessions sales on those Tuesdays than they do from ticket sales. Since people aren't spending as much on tickets, they have more to spend on snacks. No theaters around me do that, but I sure wish they did!

Thanks for your nice comments and for reading The Box Office Junkie! I really appreciate all my readers like you!

Anonymous said...

Let's face it ticket prices would not be so high if actor's like Tom Cruise would not demand a pay of 30 million per movie. Is he worth that much?? I don't think so.

Anonymous said...

Sorry to burst your bubble, but I study the industry and have 2 years of contract data between theaters and movie distributors. The average rental fee paid on all movies in that time period was 52%. In the first week, the highest it ever is is 70%, and it goes down from there. So you're wrong when you say that theaters barely make any money on the tickets. They keep 48% of it on average.

Anonymous said...

I just happened to come across this and it was so interesting! I feel smarter already after knowing this, it really is interesting how money works with movies...well thanks again it was a nice article!

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