On this episode ofIndustry Focus: Consumer Goods,the team looks at theater operators and how they have upgraded the viewing experience with better seating, renovated properties, and more substantial food and drink menus.
And despite the banner year Walt Disney (NYSE: DIS)recently enjoyed, they discuss how a coming vacancy in the executive suite could have major long-term repercussions for the company.
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A full transcript follows the video.
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This podcast was recorded on Jan. 3, 2017.
Vincent Shen: I did want to spend a little bit of timetalking also aboutthe theater operators themselves.AMC(NYSE: AMC) hasdefinitely been the busiest of the bunch for 2016. They acquired bothCarmike Cinemasand Odeon& UCI, which is the biggest European theater operator, all in 2016. I think just within three or four months of each other. After closing them, AMC will be the largest theater operator in the world. They'll have 900 theaters, 10,000 screens. The Carmike deal cost about $1.1 billion. This is mostly a domestic operation. It's going to complement AMC's existing market penetration in the U.S., whereas Odeon, the largest operator in Europe, a similar purchase price, about $1.2 billion. That gives AMC a strong position in markets like the U.K., Spain, Italy, Austria, and Portugal.
With the first three quarters of results available that I have here for 2016, the company reported record revenue for both their admissions and food and beverage. So,getting a little bit to what you had talked about previously,in terms of making that theater experienceas welcoming as possible. People are paying more for each ticket, obviously an effect of some of the formats, like IMAX and 3D. But they're also buying more at the concession stand. The average ticket is now, like, $4.80 in terms of food and beverages and snacks. And with the amenities, in terms of theater renovations, reclining seating, seat reservations -- do you feel like that's just going to be the way they can constantly keep the price up?
Dan Kline:They have to up the movie experience. That's going to mean things like beer and wine service in theaters, you're going to see more AMC theaters that actually have food beyond nachos and chicken fingers. You're going to see higher-end candy. You're seeing coffee bars likeStarbucks, or Starbucks, but in a lot of cases, faux Starbucks coffee bars. And if I'm going to spend the money -- $16 to seeAssassin's Creed,which, I cannot tell you how terrible that was -- it'd better have a good snack and a comfortable chair. This theater had reclining chairs. It had reserved seating. Andreserved seating is nice because you don't have to get therea half hour early and sit through all the terrible commercials they're playing for you. So, I see this as a time for theaters as, they'regoing to have to lose some screens, they'regoing to have to build some megascreens todeliver that experience, they're going to have to build some tiny screens to show arthouse stuff.
And you'realso starting to see some of the theaters branch way beyond movies. In Boston, you can watcha lot of home Red Sox games in movie theaters. You're seeingoperas and concerts and one-off events,UFC, other things, in theaters. It's, really,you have this real estate,and there's only a certain level of movie, maybe 10 or 15 movies a year, that might getpeople out of the house,so you need to make that experience great. Then, maybe, on aSaturday at a matinee price, I'm going to go see, I don't know, theHarry Pottermovie or something I don't really want to see, butI know I'm going to get some great snacks and a beer, or whatever it might be.
Shen:Yeah. Takeaways, then, for our investors who are listening, for thehandful of companies that we've discussed, a few things I wanted to point out. For Disney, as the king of the box office, as we've described it, keep in mind, the Studio Entertainment segment makes up about 17% of their revenue and operating income. But, on that note, for its most recent fiscal year, which ended back in October, on the 1st, Disney Studio Entertainment revenue was up 20%, operating income up 37%. That's the highest growth shown, by far, of the four major segments of the company. The main thing that I'm looking at for Disney is, each box office win translates, for them, to new characters, new heroes, new toys, new TV shows, new rides for the parks. I think the fact that the company is able to deliver one blockbuster after another is a really important signal to any shareholder that management definitely has its fingers on the pulse in terms of what its target customers and movie viewers want.
And I would also add, for its top three films of 2016, which happened to also top the overall box office, all three titles were the product of acquisitions.Finding Doryfrom Pixar,Rogue Onefrom Lucasfilm, andCaptain America: Civil War, of course, from Marvel. I think it's no coincidence that CEO Bob Iger held the reigns for all three of those deals when he acquired those properties. His leadership abilities have come up again and again on the show. What happens, then -- something else to watch, if you're an investor -- when he officially retires in 2018,I think the new leadership will have a pretty well-oiledmachine for most parts of the business, but there's still the issue, forESPN, for example, and the influence that it holds in the changing landscape of cable and television. We've also, Dan and I, discussed that on this show.
Kline:Here's the thing. Disney is a cash machine. And I'm not 100% sure -- I don't buy that Iger is going to retire in 2018. I don't see why you would change captains on that ship. Disney, and Comcast to a lesser extent, can take a property likeStar Warsand get everything out of it. So, not only are thereStar Warslicensing,I believe I read aVanity Fairarticle this morning that said thatForce Awakensmade $500 million inlicensing fees for Disney in the first year. So, not only is there that army that gets you toys, andStar Warssheets, and lunch boxes, and all that stuff, but they also threw together someStar Warsevents at the theme parks that draw people while they're buildingStar WarsLand, which isprobably going to be the next major theme park driver in both Florida and California. And, they're advertising a one-day DisneyStar Warscruise in Florida, where I live. Basically, if there's anythingStar Wars-- I mean, I'm literally wearingStar Warsboxers shorts while I do this show -- if there's anythingStar Wars, Disney can exploit it. Comcast can do the same thing with its theme parks andlicensing, maybe not as well.
And absolutely, ESPN is going to keep taking haircuts. But as rights deals come up, they can push thatback to the sports. They don't have to pay $1 billion forNFL rights. They could go to the NFL and say, "Hey,it's a changing market." And if they lose some rights,that's probably not going to change very much. So, you're going to see some economy change inthe next few years. But for the film economy,it's a machine. They're going to have five or sixguaranteed hits every year. If they can find anotherFrozen, another animated property that can spin off and become a bunch of movies, it'sonly going to get better for Disney,because I don't seeStar Wars, or Marvel, or Pixar petering out anytime soon.
Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks and Walt Disney. The Motley Fool has a disclosure policy.