Why I prefer CKEC to DWA

January 8, 2012

A recent article in The Atlantic asks the interesting question : Why is there a single price for movie tickets? We have different prices for airplane tickets and Broadway shows; why don’t theater owners use different ticket prices to manage demand and keep their venues packed? The article points out that the single price system is not all bad for theater owners. Theaters keep their venues full by allotting an appropriate number of theaters to the movies, not by charging different prices. Flexible prices could lead price competition between theaters, to their collective detriment. It also increases policing costs, since people will be tempted to buy cheap tickets and sneak into expensive movies. However, the article fails to mention the main reason for the single price, that is, the market power of the distributors. The Big Six majors, namely Paramount, Warner Brothers, 20th Century Fox, Disney/Touchstone, Columbia/Tristar, and Universal Pictures, wield enormous clout in the movie business. By maintaining a single price regime, they keep the movie theaters dependent on the big budget films that only the majors have the financial muscle to pull off, and thereby are able to negotiate a bigger cut of the ticket prices. And allowing flexible prices could allow independent films to gain a foothold in the theaters, threatening their lucrative franchises.

A brief history of movies

To understand how this state of affairs came to be, it is instructive to briefly examine the history of the movie business. The movie technology matured in the early 1900s, with the first movies with soundtracks appearing in the 1920s, and the first color movies in the 1930s. The early movie industry was vertically integrated by necessity, since companies had to invent every aspect of the movie business, from making movies to distributing them. Cinemas showed only the films of the studios to which they belong, and actively avoided competing with each other by scheduling films so that they do not compete head on. Studios had a chokehold on the creative and acting talent, and films were low budget and generally of low quality. This state of affairs came to an end in the landmark anti-trust case United States v Paramount in 1948, which forced the studios to break up. The studios naturally chose the least profitable parts of their empires to divest, and spun off their production and cinema businesses. From then on, the movie business was split into 3 parts, The studios contracted out the actual movie making to independent production companies, and contracted with independent cinema owners to show the movies at the theaters. But they kept the most profitable part of the business for themselves, becoming movie distributors who market, finance and distribute films. More importantly, the oligopoly structure remained intact in the distribution division of the industry, forever allowing the middlemen to continue extracting large profits from the weaker arms of the business.

Why CKEC is better than DWA

Long-time readers of this blog will know that I am bullish on CKEC, while bearish on DWA. This is because DWA occupies the least attractive arm of the industry, the production arm. Making movies is intrinsically a creative business, and creative industries are usually highly fragmented (see the fashion and IT industries), because ideas can and do arise in outsiders all the time. Production companies own libraries of films, but take outsized risks in making those films, and must share the revenues with gatekeepers like the distributors and Netflix/Amazon. Even worse, the Internet has driven down the cost of everything it has touched (see journalistic content, stock photography, online shopping etc.), and promises to do the same to movies. So, the future does not look bright for this part of the business.

A more attractive part of the movie business is the cinema owner arm, where CKEC resides. It is more attractive now than in recent history because the cinema chains have just gone on a massive consolidation spree in the 1990s and 2000s, and now has significant market share. The only problem, of course, is that they took on massive debt to consolidate, and now may not survive the hangover. But if they live past this crisis, it is likely that this part of the business will gain significant power and be able to push back somewhat against the distributors.

The most attractive part is, of course, the distributors themselves. But many are subsidiaries of major media conglomerates, so a pure analysis is difficult. And they never got cheap enough during the financial crisis to become a value investment, which isn’t surprising considering that their oligopoly status has been recognized for decades.

Disclosure : I have a long position in CKEC.


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