In a recent issue of USA Today, DreamWorks Animation CEO Jeffrey Katzenberg was interviewed by a USA Today reporter and took questions in a CEO forum from 300 students at Syracuse University. DreamWorks Animation produces animated films. Its Shrek 2 is the highest-grossing animated film of all time.
Parts of Katzenberg’s interview and Q&A about the movie industry are very germane to the impact the digital world is having on all segments of the location-based entertainment industry:
“Right now, we're in this sort of period of transition into a digital world. I really do genuinely believe what will happen is that going to a movie theater is going to continue to migrate into higher and higher, and to more of a premium experience not unlike sports. . . People who want to go have a communal experience and want to be there in a big way. It's not competing with somebody that wants to the watch it, you know, on a BlackBerry.
“Here's what I mean. Take a movie like Madagascar 3. About 150 million people pay us about $10 from beginning to end on the movie. Some people go to the movie theater, some buy a DVD, some get it from HBO, some from Netflix and some from Redbox. But you sort of take it through the whole course, whole life of the movie, (it) is about 150 million people, and it's about $10, on an average.
Ten years from now, two and a half billion people are going to pay us, on average, $1.50. Literally hundreds and hundreds and hundreds of millions of people for 65 cents will watch it on a smartphone in all parts of the world. Then you'll pay $2 to watch it on your iPad. You'll pay $5 to watch it on a big high-def flat-screen TV, and you'll pay $15 to watch it in a premium movie theater, $25 to watch it in IMAX and $10 billion to watch it in Richard Branson's spaceship somewhere.”
What Katzenberg is explaining is that as movies have become available through different digital channels and at lower costs, both at-home and on mobile devices, to attract an audience, the movie experience at the cinema needs to become more premium, just like what has happened to the experience of attending a sport events at stadiums and sports arenas with their Jumbotrons, fireworks and other impressive events. Sports arenas are now even adding upscale nightclubs to the experience of attending a sport event. And when it is a premium experience, people are willing to pay a higher price for it.
The same phenomenon is happening with other location-based entertainment venues. The digital world is offering all types of inexpensive and 24/7 accessible entertainment and social experiences, which are competition to location-based entertainment and social-tainment venues. So for those venues to continue to attract people, the experiences they offer need to become more premium, or what we also call high fidelity. And for that premium experience, people are willing to pay a premium price. One example is the new upscale hybrid bowling centers and bowling lounges that get a much higher price for bowling than the old style alleys. They also offer a premium food and drink selection that commands a higher price than the snack bars at the alleys. Both of these factors plus a premium environment drive a much higher per capita expenditure by their customers. Another example might be Cirque du Soleil that has taken the stage performance to a much higher level where people are more than willing to pay a premium price to see it. And of course there is the movie example that Katzenberg referred to of the premium IMAX and 3D cinema experience.
That is exactly the growing trend today. With so many low or no cost and instantly accessible forms of social media and entertainment at home or on mobile devices, if the people with the needed disposable income are going to take a big chunk out of their limited disposable leisure time to get dressed, drive or take transportation to a venue, spend time there and then travel home, they want it to be a great experience. And for that great experience, they are more than willing to pay a fair price.
With the changing economic conditions over the past decade, middle and lower income households have basically been squeezed out of the market for location-based entertainment. That large segment of the population now represents only about 30% of all location-based entertainment spending. The bulk of the market is upper-middle and higher income households, the ones with the bucks to pay the premium price for a premium experience.
When location-based or any type experience is neither low cost and convenient nor a premium experience at a higher price, it falls into what we call the fidelity belly and falls out of favor. That’s what happened to CDs that ended up between high fidelity, premium music concerts and MP3 and instant streaming music offerings.
And that is exactly what we are seeing today with many family entertainment centers. They can’t compete on price and convenience with the digital world and they don’t offer a premium experience to attract high-socioeconomic customers. Most of these FECs were developed when the middle class was a much larger part of the market pie. And unfortunately, we continue to see many FECs being developed using the old formulas that are now out of date for the New Reality for entertainment and social-tainment experiences.
Those FECs that innovate to offer a premium experience to the higher socioeconomic customer will prosper. Those that don’t will die much soon than they would like.