How Netflix Is Closing The Curtains On Movie Theaters

By Markets Fool.com

U.S. movie theaters had their worst attendance in nearly 20 years last year. Based on preliminary estimates, theaters sold 1.26 billion tickets in 2014, down 6% from 1.34 billion in 2013. The last time sales were this bad was in 1995, when just 1.21 billion were sold.

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Critics have pointed the finger at a weak crop of summer blockbusters, including theAmazing Spider-Man 2 and Transformers: Age of Extinction, but there's more to this trend than a couple of flops. Americans simply have more choices for entertainment and video on demand services such as Netflix are helping make the local multiplex pass.

Movie theater ticket sales actually peaked in 2002 at 1.57 billion, and 2001-2004 were the four best years for the industry, according to Box Office Mojo data.Overall, ticket sales are down 20% since the peak over a decade ago, but on a per-capita basis, the decline is even steeper as the population has grown 10% since 2002.In that year, the average American saw 5.5 movies in a theater, while last year that number was just 4, a decline of close to 30%. Per-capita sales have not been this low as long as records have been kept, starting in 1980.

The advent of 3-D movies has meant that average prices, and therefore box office sales, have increased significantly over the last decade, providing a boon for theaters, but even that bounty seems to have dried up as average ticket prices are projected to increase from just $8.13 in 2013 to $8.15 in 2014. While ticket prices have increased, the average cost to make a movie has also ballooned from just $10 million in 1980 to close to $100 million.

The last picture show
Americans today have more entertainment options than ever before. In the past decade, we've seen the release of the smartphone, tablet, video streaming, high-definition and Internet-enabled TV, and interactive video games, as well as several other innovations.

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Movie theaters, meanwhile, have done little in the way of innovation to keep up with the increasing level of competition from home-based entertainment, with the notable exception of 3-D movies, which are now beginning to look like a fad as the number of 3-D releases has declined every year since 2011.

The three major movie theater companies. AMC Entertainment , Cinemark Holdings , and Regal Entertainment are still solidly profitable, but revenues have declined along with ticket sales over the last year, as the chart below shows.

RGC Revenue (TTM) Chart

RGC Revenue (TTM) data by YCharts.

The real threat to theaters, however, comes from the rise of streaming and video on demand.Netflix has made no secret of its aspirations to stream movies the same day they premiere in theaters.In 2013, Chief Content Officer Ted Sarandos said:

Why not premiere movies on Netflix, the same day they're opening in theaters?Why not follow the consumers' desire to watch things when they want?Theater owners stifle this kind of innovation at every turn ...I'm concerned that as theater owners try to strangle innovation and distribution, not only are they going to kill theaters, they might kill movies.

Netflix has already taken significant steps to compete with theaters. In the fall, it announced that it would release its first major feature film, Crouching Tiger, Hidden Dragon: Green Legend, in partnership with The Weinstein Company, premiering on Netflix and in IMAX theaters on Aug. 28, 2015.The Crouching Tiger sequel is just the first of many original movies expected from Netflix, which has already produced over a dozen original series plus a number of stand-up comedy specials.

The streaming leader's holy grail is to destroy Hollywood's windowing system, the model in which films are released first to theaters, and then several months later on DVD and streaming.Not surprisingly, the major theater chains have resisted a move away from this system and the three biggies are among those going so far as to refuse to show the Crouching Tiger sequel, but they may only be able to resist for so long.

Pass the popcorn
In its most recent quarter, Netflix had over 36 million U.S. households subscribing to its streaming service, up more than 20% from the year before. At approximately $100/year, those subscribers will bring in about $3.6 billion in revenue over the next year. Movie theaters in 2014 sold 1.26 billion tickets at an average price near $8, bringing in about $10 billion, far ahead of Netflix, but the trend is clearly working against them. In the next five to 10 years, Americans will likely spend more on Netflix than on movie tickets.

The Hollywood model is already starting to change. Releasing films simultaneously to video on demand has become more popular, and as Netflix's market power increases, some studios will inevitably start to play ball. Weinstein already has.

Movie theaters aren't about to disappear, but the decline of ticket sales is only likely to speed up as on-demand options improve. After a significant expansion in the '90s, growth in movie theater screens has gone flat,and underperforming theaters may begin to shutter as sales fall. In response to falling demand, theater companies may also raise ticket prices to compensate for volume shortfalls.

As Netflix knows better than anyone, the American consumer wants to watch movies when and where they please, and in a free-market system, consumers almost always gets what they want eventually.

The credits aren't about to roll for movie theaters just yet, but they will need to come up with better ways to entice moviegoers if they hope to remain profitable. Otherwise, the screen could slowly fade to black.

The article How Netflix Is Closing The Curtains On Movie Theaters originally appeared on Fool.com.

Jeremy Bowman owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.