Cineplex: Step Into a New Dimension
By: Sunny Bhandari & Insha Jesani
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Cineplex: A Lost Cause?
Catering to 70 million guests annually across the country, Cineplex is the leading movie theatre chain in Canada. With 165 theatres and a commanding 75 percent domestic market share, Cineplex saw immense success throughout the 2000s and early 2010s, with its share price nearly quadrupling between 2009 and 2017. Yet in recent years, the company has seen a rapid deterioration of its value proposition, profitability, and solvency. In light of these factors and the effects of the COVID-19 pandemic, Cineplex’s revenues plunged 75 percent in 2020.
One pervasive issue Cineplex has struggled to overcome—alongside many other theatre operators—is the rise of streaming services. Not only has the availability of on-demand digital content increased rapidly, but movie theatres’ negotiating power has also decayed as consolidation accelerated in the film and entertainment industry. Most notably, Disney’s acquisition of 20th Century Fox cemented its position as the largest studio in the world with over 51 percent of global box office sales in 2019. This has allowed Disney to steadily impose increasingly detrimental revenue-sharing terms on theatres’ box office sales. For example, Disney took a 65 percent share of revenues for the 2019 blockbuster film Avengers: Endgame. This lack of bargaining power worsened during the COVID-19 pandemic as theatrical exclusivity windows for major releases with Disney and Universal shortened from three months to as little as 17 days; a consequence of on-demand providers enticing consumers to their respective streaming platforms. In aggregate, Cineplex’s value proposition has been eroded, with little chance of recovery on the horizon.
Moviegoers themselves also see less value in the physical moviegoing experience. After COVID-19, 42 percent of consumers said they would rather view a new release at home than at a theatre, 23 percent said they are indifferent, and only 35 percent prefer the in-theatre experience. Among several reasons, consumers cite cost as the largest barrier to frequenting theatres. If theatres are viewed simply as a “place to watch a movie”, streaming services can provide the same value at a fraction of the cost. As a result, Cineplex and other theatres must either match the cost of streaming services—which is impractical given theatres’ margins—or become more than just a place to watch a movie. Otherwise, theatre revenues are likely to continue their downward trend, falling even further.
To address these issues, Cineplex needs an extremely low-cost strategy. The pandemic caused a collapse in cash flow, which led to additional debt issuances, the sale of its headquarters, and the closure of TimePlay. The company is now faced with addressing the long-term challenges of streaming while managing a severely deteriorated financial position in the short term.
Studios: Ride or Die
The responsibility of engaging with moviegoers does not solely rest on movie theatres themselves. Production companies such as Disney and Universal are constantly seeking new ways to engage with customers beyond the big screen. One such example is the Wizarding World at Universal Parks, a Harry Potter-themed park section that increased Universal’s attendance by 30 percent in 2010. Not only were consumers drawn into the park, but they were also more likely to purchase related merchandise as a result. Brad Globe, president of Warner Bros. Consumer Products, explained that there is nothing better that could have been done to keep the Harry Potter brand alive between releases. High-engagement, in-person interactions with consumers are coveted.
Similar to Harry Potter’s success at Universal, other Hollywood film studios also recognize the significance of growing franchise value. Disney’s Park and Attractions segment, which generates nearly double the revenue and 60 percent more profit than the company’s studio division, draws more attention to both existing and new releases. These initiatives further strengthen beloved franchises like Marvel and Star Wars. Even in cinemas, production companies should recognize that consumers strongly value the in-person experience. Studies have shown that the average consumer recalls more detail and is happier with their cinema experience in theatres compared to when using online media channels such as streaming sites.
Putting the Box in Box Office
Facing a precarious financial situation, Cineplex must find a solution that is highly cost-effective and quick to implement. Due to its dwindling cash balance, Cineplex cannot make significant investments into high-growth technologies. Its position in the value chain also means that Cineplex is not capable of capitalizing on content the way that HBO and Disney can. However, its unique position as a distributor allows for the creation of a D2C platform for intellectual property.
To maintain its position as the leading film and entertainment destination in Canada, Cineplex should convert showrooms in locations with excess capacity into leasable entertainment spaces for film studios called “Immersion Rooms.” Studios can use the space for a wide array of marketing and engagement formats, allowing distributors to provide a higher-engagement, themed moviegoing experience to customers. Along with commonplace examples such as merchandise stores or mascots from movies, the integration of Immersion Rooms with movies lends itself to highly creative marketing initiatives. For example, the space could be set up as a VR suite to let guests experience flying a spacecraft through an asteroid field prior to or after viewing a science fiction film. Alternatively, after watching a horror movie, guests might be directed into the adjacent space where a themed haunted house is set up, prompting them to confront the horrors they just witnessed on-screen.
Such a strategy would be of minimal cost to Cineplex, while simultaneously being highly flexible to any studio’s needs. While converting theatres will have a cost, it pales in comparison to the investment required for film production and digital distribution. Since theatres will likely remain under capacity even after reopening, there is little to no opportunity cost attached to conversion as well. For the consumer, this would supplant and surpass the level of interactivity previously offered by TimePlay, and provide a moviegoing experience truly differentiated from streaming.
For supplying the space, Cineplex would receive rental income, and any merchandise sales would be split between the two parties. This contract structure re-aligns production companies’ and Cineplex’s incentives—both benefit from selling content-related merchandise while providing a more immersive moviegoing experience.
A Blockbuster for Studios
Film studios also stand to benefit greatly from partnering with Cineplex. Cineplex’s offering would provide studios with a creative and cost-efficient way to amplify engagement for moviegoers, fuelling demand for the many ancillary offerings that studios depend on for a large portion of their revenues—merchandise, theme parks, and their respective streaming services. Despite the successful launch of streaming services by multiple production studios, box office releases remain a major component of film marketing. Studios continue to rely on in-person viewing to drive brand engagement, particularly for franchises with strong fan bases such as The Avengers and Star Wars. In December 2020, Disney announced over 40 films slated for traditional theatrical exclusive release post-COVID, indicating the importance of tentpole box office releases even in a world where most consumers have become accustomed to digital releases viewed at home. Studios with nascent D2C strategies such as Paramount will benefit from Immersions Rooms even more. Unlike Universal and Disney, Paramount does not have high-engagement attractions for its IP. Thus, the studio is missing out on a crucial touchpoint with consumers for beloved franchises like Mission Impossible and Star Trek. With these spaces, Cineplex gives production companies an avenue to create a riveting theatrical experience that is differentiated from streaming.
Scripting a Partnership
Cineplex should first establish a partnership with a major studio that has the financial capabilities to build out these branded, content-specific Immersion Room experiences. The most opportune partner for the Immersion Rooms is Paramount due to its lack of existing high-engagement, in-person attractions and competitive pressure from Disney and Universal. While Paramount used to operate its own theme parks, it sold them to Cedar Fair in 2006 due to poor performance and future plans to build theme parks are at least several years away. Its vast inventory of intellectual property could be used to create arcade games, merchandise, and interactive experiences with greater flexibility and lower cost than traditional theme parks. Cineplex could introduce the idea as an opportunity to expand Paramount’s content flywheel to enable high-engagement interactive experiences with all theatre attendees. Ultimately, these interactive experiences would develop the company’s D2C strategy and consequently reinforce its existing intellectual property (IP) through increased brand engagement.
The Pre-Screen
While COVID-19 restrictions last, Cineplex should select one theatre to experiment with the Immersion Room. Cineplex’s only cost would be emptying out a showroom and allowing the production partner to fill it with content-specific experiences like games or merchandise. When the first Immersion Room is complete and pandemic-related restrictions are loosened, Cineplex should open the room to movie-goers. To provide convincing data for future partnerships, Cineplex can run A/B tests on consumer engagement and the perceived quality of the Immersion Room experience. The company should survey consumers to confirm that they have a stronger level of engagement with content that goes beyond the simple experience of viewing.
Rolling the Credits
Immersion Rooms are easily scalable across geographies and partnerships. Cineplex can identify theatres with excess capacity and close down select showrooms to convert into Immersion Rooms. Additionally, more production companies are likely to partner with Cineplex once early partnerships are proven, especially film producers looking to build franchises with high levels of consumer stickiness. As demand for these experiences from consumers intensifies, Cineplex can generate more revenue from partners looking to capitalize on strategic partnerships.
Curtains Down
Although Cineplex is faced with both the rapid growth of streaming and a precarious financial situation post-COVID, the sudden drop in demand has created excess real estate capacity. By leasing out showrooms to movie production companies to create Immersion Rooms with content-specific experiences, Cineplex would add an additional revenue stream while generating a moviegoing experience truly differentiated from streaming. Ultimately, Cineplex can lead the transformation of theatres from simply “places to watch movies” into cinema hubs where consumers experience their favourite characters and storylines