The Cinema Industry - On the Brink of Disruption
How the 'experience economy' is disrupting cinemas (and streaming).
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Meme Stocks and the ‘Experience Economy’
This week, I wanted to spend some time on the 'experience economy', emphasising how the cinema industry, in particular, is set for disruption. As cinema venues start to re-open, it's worth thinking about the longevity of old business models in an increasingly digitally native world driven by the buying power of Millennials and Gen-Zs.
The time feels ripe for this discussion – AMC, the largest cinema chain globally, has gained a 'meme-stock' label, driving its valuation ~100x since the end of 2020. Yet, in an era when consumers seek authentic experiences, will this business model strive as venues re-open?
One thesis follows that consumers will gravitate towards authentic 'experiences' which encourage social interaction, especially as we emerge out of pandemic restrictions. Several ‘experience-economy’ startups already command significant valuations:
Below, I highlight how the cinema industry's disruption will further crystallise as consumers continue to become more experience-seeking.
1️⃣ The Shift from Cinemas to Streaming
The latest company to attract the label of a 'meme-stock' is AMC Entertainment – warranting a ~100x valuation compared to the end of 2020. Whilst this is not a post on AMC's valuation, its steep rise does warrant a discussion over the future of cinema and whether the business model of old will still hold going forward.
It's worth first taking a step back to understand the traditional cinema business. Over the past 10-15 years, a number of cinema chains have built up portfolios spanning hundreds – sometimes thousands – of cinemas through a mix of organic growth and acquisitions. AMC is the most notable – expanding out of its US base with the acquisitions of Odeon and Nordic Cinemas, respectively.
Revenue in the cinema industry is the product of admissions and ticket prices and has reached somewhat of a steady-state dynamic. Admissions will always vary given its dependence on the quality of the movie 'slate' in any given year – blockbuster movie years will naturally drive more cinema-goers – and ticket prices continue to follow an upward trajectory. Successful operators, such as AMC, further drive customer value through add-ons such as F&B sales.
However, whilst cinemas have made efforts to optimise the existing cinema experience through better screens (3D screens, etc.), seats (reclining chairs) and F&B (more choice), these innovations only serve to improve the cinema experience not transform it.
This is an important call-out at a time when up to 80% of Millennials said they rather spend money on experiences than over material things. Additionally, the risk of “FOMO” is at a low point given the very close cinema substitute audiences now have in the form of a multitude of streaming services. This trend has been exacerbated by the entry of additional players into the streaming world, including Apple, Amazon, etc. As a result, consumer choice has never been higher.
This substitution effect is by no means a new phenomenon. Yet, cinema admissions have remained broadly flat as they have been buoyed by older generations where there is more friction to watching online. However, the pandemic has forced older generations to digitise - for entertainment; this has meant their adoption of streaming services.
The role of studios further puts cinemas in a precarious position. Studios are re-evaluating the cinema-studio power dynamic when it comes to movie release windows. Whilst studios used to rely on cinemas for the bulk of their box office revenue, this is changing as studios create proprietary streaming platforms and equally streaming platforms emerging as studios in their own right. This is particularly the cases as studios leverage premium video-on-demand (PVOD) – where an additional fee is charged for new releases – to substitute for a theatrical release.
This cements the idea that cinema revenue will increasingly be geared toward blockbuster releases where the cinema experience of watching a Jurassic Park or Marvel release is essentially not possible at home – making cinemas increasingly sensitive to the movie slate going forward.
Admissions, as a result, may suffer. One parallel, albeit a more extreme one, is the widespread adoption of televisions in the mid-20th century, resulting in a significant downward shift in cinema admissions.
Source: Screenville.
2️⃣ The (future) disruptors
Mercedes Bent has a great piece on the experience economy here. I've also updated her excellent market map by adding a few UK names to the mix:
Whilst the likes of TopGolf, SoulCycle and Merlin Entertainment are already successful names on this map, the sector as a whole is young, with many operators historically being local mom-and-pop or regional operations. Yet startups are now entering this market through various formats that look to create shareable experiences with friends and are designed to be instantly shareable on social media, supporting the Millennial and Gen-Zs quest for social media"likes".
A significant divergence has emerged between 'passive' activities where a consumer is a bystander to the main act and truly immersive experiences. The latter of which cater to younger generations who look for differentiated or unique experiences that create a sense of belonging.
As a result, we are seeing significant shifts in consumer behaviour. There are many examples:
Consumers are enticed by ‘local adventure’ spots such as TopGolf, Flight Club and Bounce to socialise instead of ‘just’ going to the bar.
Consumers will go to boutique fitness studios to exercise with friends instead of a solo gym endeavour.
Similarly, Cinemas are struggling to differentiate their experience from streaming platforms - neither encourages any form of real socialisation with others. Immersive experiences such as Secret Cinema offer an opportunity to engage with the movie in a way which completely diverges from the traditional film industry.
3️⃣ Secret Cinema
“Where filmmakers take a book and transform it into a film, Secret Cinema takes a film and transforms it into a theatrical experience.”
Fabien Riggall, Secret Cinema Founder and Chief Creative Office
Concepts that have been 'transformed' range from blockbuster hits such as Star Wars: The Empire Strikes Back and Casino Royale to independent cinema releases such as The Grand Budapest Hotel.
What distinguishes Secret Cinema is the extent they factor in immersion to their experience. Guests, for instance, are expected to dress up in a way befitting the film and collectively play a part in the movie. Together with the abundance of props (Casino Royale featured over 30 original movie props), the experience naturally generates 'shareable' moments, perfectly catered to Instagram & TikTok generations. Importantly, unlike traditional cinemas, the Secret Cinema experience cannot be replicated at home - the immersion, costumes, etc. all add a sense of IRL belonging.
Back to the Future, Printworks London (2014)
For any startup in the experience economy, there is a threat of becoming a “one-time” experience. Yet, a constantly evolving 'slate' of productions ensures that Secret Cinema continues to pique consumer interest.
The future is bright for Secret Cinema. Its recent US expansion proves the portability of the concept internationally. Importantly, studios are taking note of the success of the model. For instance, Fox Searchlight provided Secret Cinema with a 10-day preview of The Grand Budapest Hotel, which resulted in 10% of the film's overall UK box office. It’s everything cinemas are not.
Final Thoughts
Cinemas represent one of many traditional entertainment forms that face the need to modernise their format, with business models shifting to align with the interests of younger generations.
Whilst AMC is looking at novel ways to compete with streaming services, for instance through a subscription model, this may not be enough as consumers seek authentic experiences over the siloed viewing experience cinema & streaming both offer.
Cinemas won't disappear anytime soon, but their increased sensitivity to the movie slate will likely change their format going forward. For instance, megaplex cinemas may dwindle in favour of smaller formats geared towards blockbuster films. Studios may choose to skip the theatrical release window and opt for other channels - such as PVOD.
Those in the experience economy, such as Secret Cinema, look set to become disruptors as they revolutionise the traditional entertainment industry.
Disclosure: I’ve invested in Secret Cinema. This article does not constitute investment advice.
Sources & Additional Reading
Investing in the Experience Economy | Mercedes Bent
Cashing in on the US experience economy | McKinsey & Co