Movie Theatre and Distribution Business Model | How do Movie Theatres Make Money

Harshit Verma Harshit Verma
Nov 26, 2021 11 min read
Movie Theatre and Distribution Business Model | How do Movie Theatres Make Money

A quote is a good way to start an article about art. If you are reading this, chances are you are aware of art. Any sort of art for that matter. You read this article, a poem, a story; or you watch a film, listen to a song; or embrace a painting. All these are forms of this one term “Art”. That term has been constantly celebrated from time immemorial. Be it a hundred years ago or hundred years from now, it will be relatable ad infinitum.

The current times, the pandemic and the life afterwards hasn't affected this culture. Our escape from the dust of daily life still hides in some form of art. Music, films are our top favourites of art. If you are a movie buff then the first-day first show feel would be super important to you. This is where cinema halls and movie theatres come in to quench your thirst. They are temples for cinephiles.

Have you ever thought about how these work? How is a movie released nationally? What do the numbers and charts say? This is an article about the business model of movie theater. Read on to find how movies earn and how cinemas are run. How the current unprecedented times are changing our movie experience.

“Art enables us to find ourselves and lose ourselves at the same time.” ― Thomas Merton , No Man Is an Island

Cinema Halls
The Distribution of Movies
Revenue Sources or Income Generation of Cinema Halls
The Unprecedented Pandemic times
Behavioural Change of Moviegoers
The Expected Future of Film Distribution
FAQ

Cinema Halls

The journey of a movie starts with a story in the director's mind. Which is edited multiple times to get just about the perfect fit. Drafts and drafts and more drafts. Actors and actresses are auditioned for character roles, and a big crew is assembled to kick off the production.

Once the movie is produced, it is time for its distribution. The first most distribution channel for any film has always been ‘Cinema Halls’. It is a century-old way of distributing what the actors and producers have produced.

The model is also quite unchanged, visitors pay a fee for entering the hall. The hall has seats, lots of seats and the movie is shown through a projector to the front screen. The screen is big enough to be seen from around the theatre.

This has been the business model of a cinema hall for a very long time. However, It is added with some tweaks, like refreshments and snacks. More or less this model is unchanged.

The audience sits on padded seats. In most theatres the seats are aligned on a floor that is sloped, to enhance visibility for viewers. The highest part of that slope is at the back of the theatre. Movie theatres often mostly sell snacks like popcorn, carbonated drinks, etcetera. In some areas, movie theatres with allowances and licenses can also sell alcoholic drinks.

The Distribution of Movies

The distribution has always been primarily in cinema halls but it is as on certain terms and conditions. The production and completion of a movie is just one part of the whole big picture.

After the production, the movie is distributed via various channels. Cinema being the first tunnel but thereafter too the movie travels the market. They are turned into DVDs, some go on to follow a streaming service way. But before the train moves to the next station, some decisions are made. These are known as terms and conditions about the licensing of these films.

Terms regarding the revenue sharing and movie releases timings are also decided in advance. Before we get further we need to know some technical terms that will help us get a more clear view of what the process looks like, so here goes

Producer

A producer is a person who invests in producing a film. He is the investments guy who takes the risk of failure and the gains of success of a film. They invest in films under the name of a production house. For example, Karan Johar invests via a production house named “Dharma productions”.

Distributor

Distributor is the person who distributes the film through the medium of theatres. The distributor buys the “distribution rights” directly from the producer. In most cases, he buys the rights in the very beginning itself, sometimes after viewing the final cut. Distributors can be of many types. They can vary in numbers also.

If we are talking about a big-budget movie then there can be a domestic distributor who is responsible for distributing in the home country of the film production. Others can be an overseas distributor who is responsible for distribution in the rest of the world. There are typically some forms of how a distributor deals with the producer, here we discuss the types of distributors

Minimum guarantee for Royalty

A minimum guarantee is that sum that is paid to the producer by the distributor of a film. It is here to be noted that the price is irrespective of how the film performs, it can be a flop or a hit that does not affect the minimum guarantee royalty. Usually, producers who have a stronghold in the industry, ask for a high sum due to their brand name that pulls in crowds into theatres.

After relieving the margin of the distributor, Anything more revenue earned than this minimum price then is earned is shared with the producer. So we see that the distributor cannot become the owner of the movie, he is licensing the movie.

Outright sale/purchase

As the name suggests, this is a contract of sale. The distributor buys the whole produced movie and all its rights. So lawfully, the distributor is the owner of the project. He is free to choose whatever medium he wants to use for the distribution. All the profits or losses earned or incurred are solely owned by him.

Commission basis

Commission is the typical model which many producers follow. They sort of hire a distributor to spread the movie. The distributor in lieu of his services asks for a fee or commission. In this case, he does not share profits or losses, he is just entitled to the negotiated commission. Risk still is left with the producer. However the film performs, the distributor is entitled to his fee anyway.

The Exhibitor -

He is the owner of a theatre who exhibits the right to play the movie by the distributor. Both the parties, the distributor and the exhibitor are bound through a contract. That contract acts as a basis for sharing the revenue that is earned within the first, second, or third week of the release.

Here is a basic typical sharing agreement terms and conditions. Take note that this is just to be taken as an example. Agreements can be changed and made with further discussions and debates between the distributor and exhibitor.

Duration Profit Percentage Sharing
First Week After The Releasing of Film 65%:35% (Means 65% of PRofit Share For Distributor and 35% of profit share is for Exhibitor)
Third Week 55%:45% (Means 55% of Profit Share for Distributor and 45% of profit share is for Exhibitor)
After Fourth Week 50%:50% (Means there after the profit sharing right is equal for both the Film producer and Distributor)

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Revenue Sources or Income Generation of Cinema Halls

We just learnt how the movies of our beloved stars travel to the nearest theatre screen. This is a huge step, once distributed, the movie is ready for its trial. It is ready for critics and reviews of any sort.

With this onset, cinema halls are ready to be flooded with people. People like you and me who love the movie-watching experience. This turns the cash making wheel. Here we are going to look at some of the most commonly seen revenue-generating sources for a cinema hall.

Tickets

The revenue source of a movie theatre is mainly through ticket sales. A person who wishes to watch a movie in a theatre has first to buy a ticket to enter the premises. The premises where the movie is to be projected.

As discussed earlier, It is a common ground for every ticket carrying a person with seats and a movie projector. However, it is to be noted here, that a cinema hall is allowed to have different sections of seats according to their floor plan.

For example, some theatres also operate on a slightly changed pricing mechanism. They can give out some special seats for people who are willing to pay more. Those with premium seats would enjoy more comfort and more accessibility while watching the movie. All these are made in adjustments to improve the overall movie-going experience for the people.

Eatery and snacks

A theatre has also added snacks to its revenue streams. It now also provides people with snacks for some extra bucks. The eatery can be assessed before the movie starts, in the middle of the movie (The intermission break) or whenever the customer wants. However, this source of revenue is as per the customer’s needs, even then it also has become a strong money medium. The reason is the price differences of the articles that you buy while enjoying a movie.

Yes, the snacks that you buy at the eatery at a movie theatre are significantly higher than the maximum retail price which you may find in a regular market. I am sure you must have noticed that by yourself, the prices are exorbitant.

Once you are in a theatre, you unconsciously play by their rules. These are also known as MRP manipulations that not only theatre do, but they are accompanied by companies too. Companies produce the same products with an inflated or premium price for selected channels like our beloved theatres, cinema halls, eateries etcetera.

Advertising revenue

If you think that you will not witness a single second of advertisement after paying the ticket price, you are probably wrong. Advertisements are always there in between the gaps of movies.

Advertisements run on the reel before the movie starts, and it also immediately covers the screen when intermission comes. So this medium of advertisements, however small, also adds up to the cash for operating a theatre.


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The Unprecedented Pandemic times

Up till the February of 2020 BC (Before corona), Movies were first released in theatres and played exclusively for at least 75 days before home release. Home release means streaming online, video on demand and DVDs etcetera.

Then came the lockdown era which changed the whole scene. Every movie theatre and cinema hall were shut. Movies began flowing in a different medium, never expected before. That was the inception of day and date releases, in which a movie was available to watch the same day it hits the theatres. So, it was available for renting or streaming on the day of its release. This was a huge shift in cinema. Which also led to the shift in profits of cinema and box office.

Global Box office Revenue
Global Box office Revenue

As this trend continued, the viability of these options began to diminish. The profits were distributed to OTTs and it changed the behaviour of moviegoers. This puts up the question of what is the next strategy for spreading movies?

Before the pandemic happened, studios primarily hoped for box office revenues. Almost more than half of the total cash is earned through theatrical releases. Not only this. Theatrical releases also help in setting up a benchmark for further spread of the movie or anything filmy.

That benchmark after the initial release is used to sync negotiations of subsequent windows. Windows like that of ‘Licensing fees’ for television releases. The higher the benchmark is set by the initial release, the better the prospects of licensing fees for the artwork.

Behavioural Change of Moviegoers

Covid 19 encouraged two new behaviours - First behaviour was to watch movies in the comfort of our home. The reason for the decline in ticket sales is that home entertainment options have risen.

Be it streaming services and television, video games or even your smartphone, we have a lot of entertainment options within a distance of a mere 5 meters. This means people are becoming less and less likely to move to nearby theatres.

Secondly, studios now care about their own distributions. They are making their own streaming services to capture more market share for the film. Hence the pandemic caused studios to rethink their movie releasing and revenue model behaviours. Which was not to mention at least a century old method earlier.

The Expected Future of Film Distribution

Now you might think that streaming is the future. And whatever is happening in this industry makes it more flexible for the viewers. This is quite an obvious thought, but this industry is not that simple and this pandemic shift of behaviour is turning the revenues down. How do you ask?

Studios cannot monetise all their produced content through streaming. Especially when they have to rely on third-party streaming services for their releases. Despite their expanding market, profits are mostly churned out. Even for the studios who own distribution channels, streaming is not an economical way to follow for releasing.  

In these unprecedented times, when the Covid 19 fear remains unneutralized and uncontrolled. Studios are not playing it safe but rather they are re-strategizing whenever needed. But the time for which this can go on is uncertain.

Warner Bros. announced that after the release of ‘Wonder woman 1984’, every film release will be debuted on HBO Max. That can be accessed with a subscription fee. This policy was later changed and made fit for 2022. Now when the situation is a little normalised, HBO said that it will release first in theatres and after 45 days it will be available for further audiences. Thus, studios are approaching the situation dynamically.

On the other hand, Reliance Entertainment and T Series are hoping for the comeback of big screens in our society. They are reportedly inducing about a thousand crores ($135 million) for the big screen releases.

Disney, one of the most famous studios in the world, is doing something completely different. Disney is seeing this hurdle as an opportunity to burst out and grow its wings. It is trying to fight Netflix in world markets. It has its own distribution channel with the name of “Disney Plus”. This shows that the studio is trying to capture markets and it is long on the streaming game. So much so that short term revenue doesn’t fit their perspective for now.


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Conclusion

How this balancing act between theatrical releases and streaming online will go, this is to be seen. Only time will tell how studios manage to find a fit in these twisted markets. We discussed how the cinema halls earn money. We also saw how a film is distributed in a geographical area.

There is a lot of money that can be earned in this industry, it is often abbreviated as one of the most profitable domains. The entertainment sector has also been boosted by the ongoing global pandemic.

In such a big country as India, with a population of more than a billion. Movies are the go-to entertainment, but with the rise of streaming services, it is witnessing a twist. Will a movie be celebrated even when it doesn’t hit the theatres? As studios think again about their movie distributing strategy, the more intense question is – Would you pay for a popcorn tub at the theatre which is overpriced, if you could stream the movie at the comfort of your home?

FAQ

How do movie theaters make money?

Movie theaters receive a portion of each ticket sold. They also make money from Food, drink and merchandising sales, Advertising revenue and Public funding.

How does the movie Theatre business work?

The movie theaters give a portion of each ticket they sell to the production company of each movie.

How do movie producers make money on Netflix?

Netflix pays licensing fees to the production company of the movie to stream movies.

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