Business Model Generation Project Cinema and Movie Theater Subscription Service This document presents a business model for the cinema and movie theater industry based on the nine key building blocks for all business models. Overview AMC Theaters is the second-largest movie theater chain in North America with 5,325 screens. 1 During the past few years, however, AMC Theaters has been having problems during the past few years consistently generating enough revenues to cover its fixed and variable costs. In 2007, the last year for which financial data are publicly available, AMC Theaters revenues were $2.5 billion, while its net income was just $134 million. Cash flow problems became so bad for the theater company that they created a shell corporation (Marquee Holdings) to own AMC Theaters and raised capital for the shell corporation from the public through an initial public offering of its stock. At the same time, however, there are more movie screens per major theater location than ever before, and more movies than ever before. The price for admission to most first-run movies is around $8. Most American adults report that the typically see 5 first-run films a year at a movie theater This average includes 35% who have seen no movies in a theater in the past 12 months, 37% who have seen between one and four films, and 27% who have seen five or more movies. 2 Most Americans seem not to value their experience at a movie theater, or they would attend more often, right? To help solve AMC Theaters revenues problem, I am proposing a unique application of a subscription business model to the movie theater industry. Rather than relying solely on individual or group ticket purchases for specific movies and times, a subscription model allows a 1 http://en.wikipedia.org/wiki/amc_theaters 2 http://www.gallup.com/poll/25990/americans-biggest-gripe-about-going-movies-cost.aspx 1
movie-goer to become a member by paying an annual membership fee in exchange for the ability to watch as many movies as he or she wants at an AMC Artists theater in the same period. The subscription model has proven its reliability as a revenue generator in the magazine and newspaper industries, cable TV industry, fitness club industries, and more recently in the Internet-based businesses. One of the benefits of the subscription model is that people frequently pay for content or access to services on a routine, set-price basis but may not actually use any of that content or access to services in a particular period. In its early days, America Online survived cash flow problems by selling AOL accounts and receiving monthly payments for service that it could not have met with its then under-investments in bandwidth capacity. In other words, AOL received money for nothing, though most customer happily continued to maintain and pay for their AOL accounts. 1. Customer Segments: Who will use the product? AMC Theaters will be the first customer for this service. They already have the most sophisticated ticketing options with online purchasing and Fandango purchasing online and are currently experiencing the most financial difficulty with its single ticket sale per movie transaction plan. AMC Theaters will be motivated to use this product/service to normalize its cash flows throughout the year, rather than relying on the seasonal holiday and summer blockbusters to draw the majority of revenues from ticket buyers. 2. Value Proposition: Why will they use the product? AMC Theaters will use this product because it will provide them with additional revenues over what they can typically expect through their by-the-ticket sales model. Individuals who opt to buy a subscription plan could see as many movies as they want for $200 a year. This subscription plan motivates 2
customers to come to the theater more often than they might otherwise through by-theticket purchases. With the increase in the number of visits to movie theaters, AMC Theaters can realize an increase in revenues from food and beverage sales, and other types of promotional sales. Many amusement parks already use a subscription or annual membership fee approach for selling tickets. Families who buy these tickets value them for the opportunity they present to go to an amusement park when busy schedules and weather allow without feeling like they have to spend an entire day at the park to get full value. Related to this, many people buy memberships to fitness clubs rather than pay by the visit, yet they do not always take full advantage of the opportunity to go to their fitness club. People even pay up to $100 a year to join Costco for the opportunity to realize bargains in Costco stores. 3. Channels: How will the product be delivered to the customers? They key stages in channels are awareness, evaluation, purchase, delivery, and after-sales support. First, AMC Theaters can build awareness by advertising a subscription membership option for customers and follow awareness building with an evaluation stage in a select city market or select individual theaters. Many subscription-style memberships are sold with a onemonth free offer, followed monthly charges to a person s credit card unless the customer expressly declines to accept the membership. AMC Theaters customer can buy subscriptions in movie theaters or on the AMC Theaters website. Subscriptions could be purchased for others as birthday or Christmas presents. For in-theater purchases, the customer will be provided with a plastic membership card similar to a credit card with the member s picture on it. For online purchases, the customer can pick up his or her card and have his/her picture taken on the first trip to the theater as a member. 3
4. Customer Relationships: how will you develop and maintain contact with your customers in each segment? Customers who buy theater subscriptions will be able to view movie schedules and exclusive promotions for members on a AMC Theaters website. Restaurants near theaters, for example, may wish to offer coupons targeted to AMC Theaters subscribers to drive up their own revenues on movie nights. Customers could also be rewarded for recruiting new subscription customers. 5. Revenue Streams: How is revenue generated from which customer segments? The primary source of revenues is from sales of subscriptions to customers. Ancillary revenues may come from using the website as an advertising venue for related businesses. This program should also generate additional revenues from food and beverage sales because people will visit the movie theaters more often. 6. Activities: What are the key things that you need to do to create and deliver the product? Promote the membership program in theaters during previews before the feature film begins. This would require the production of an informational video describing the program, the benefits, the costs, and how easy it is to use. Theaters who adopt this service will also need to produce promotional posters to display in the lobbies. The posters should contain the same information as that presented in the promotional video on movie screens. Theaters would need the means to produce membership cards with member pictures and a way to track the use of the card, such as with a magnetic strip or RFID chip. The tracking feature is important because it prevents the ticket office from overselling tickets for a given film-time. Related to this, theaters would need to develop websites that allow for the purchase of membership cards. Finally, for additional promotions, theaters may create T-shirts that they give away to their first members (first 4
100, 1,000, whatever) or simply as part of their membership so that the members are promoting the service to others outside the theater environment. AMC Theaters may also want to consider securing choice seats for members, such as in a balcony or choice seats in the front section, but they should consider carefully what possible negative impacts this might have on non-members attitudes toward the theaters. 7. Resources: What assets are required to create and deliver the product? Theaters will need to be able to track subscribing customer entrances into the theater so that they do not oversell tickets for a specific movie time and alienate their customers. AMC Theaters will also need to develop a website that allows for the ordering and purchasing of member cards and the ability to place product and service advertising on that site. 8. Partners: Who will you want to partner with (e.g suppliers, outsourcing)? Fandango, soft drink and snack manufacturers and distributors, promotional ventures for movies for contests, Hollywood studios, local communities that want to promote their activities to audiences in movie theaters. Hollywood studios frequently form partnerships through product placements in movies and various promotional activities to creatively advertise their movies. McDonald s and Burger King, for example, provide toys that resemble characters from movies in their kids meals. Other restaurants accept ticket stubs as coupons for discounts on meals, while amusement and theme parks accept ticket stubs as coupons for discounted entry. 9. Cost Structure: What are the main sources of cost required to create and deliver the product? The cost of providing a customer with a membership card is literally pennies, along with the variable cost of the seat that is committed to the member when he or she decides to exercise membership privileges to see a particular movie. But because most 5
movie theaters are rarely full, this is similar to airlines selling seats that would otherwise be unused to customers through name-your-own-price outlets like Priceline. Unlike Pricelinbe, however, the revenues from subscription sales would be far more predictable than a Priceline model. A given theater that sells 500 membership for $200 each can realize an additional revenues of $10,000. AMC Theaters operates 1,000 theaters across the United States, so this represents additional revenues of $10,000,000. Note that this model attempts to normalize and make more predictable revenue flows that it already gets from the top ten percent of movie goers; this should not present too significant a decline in the per-ticket sales these people would otherwise purchase. Further, more variable revenues will be generated by the increase in movie attendance by frequent movie-goers who also buy soft drinks, snacks, and participate in other in-theater promotions. About 50 percent of a theater chain's gross revenues is derived from boxoffice receipts, with the remainder coming from concessions. Yet concession sales actually have a much higher profit margin. In fact, theaters make about 85 percent profit on the soft drinks, popcorn, candy, and other items patrons purchase before, during, and after seeing a movie. 3 If most movie goers purchase snacks and beverages at an average cost of $10 per person in addition to their movie tickets, an additional 20 visits by, say, 500 members a year would result in an additional $10,000 in beverage and snack revenues along with a hefty margin over cost of goods sold. This cost structure should make the company s 21,000 employees more productive without requiring the addition of greater fixed costs to operate the theaters. 3 Business and Company Resource Center. Current Industry: 7832 - Motion Picture Theaters, Ex Drive-in http://galenet.galegroup.com.libdata.lib.ua.edu/servlet/bcrc?vrsn=unknown&locid=tusc49521&srchtp=glbc&cc= 1&c=2&iType=sic&mode=i&ste=85&tbst=tsIS&cind=7832+-+Motion+Picture+Theaters%2C+Ex+Drivein&tab=1024&ccmp=United+Artists+Theatre+Circuit+Inc.&mst=theatre&n=25&docNum=I2501500534&bConts= 14115 6
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