Misix Library

Curtain Call: Netflix vs. America’s Movie Theaters

August 14, 2015

Summary:

  • Since Netflix was introduced, the average gross-per-movie has decreased by $2 million.
  • Quarterly ticket sales have dropped by 21 million.
  • We predict up to a 5.2% drop in ticket sales through 2017.

 

Here’s a bit of news for those of you who don’t obsess over all things cinematic like us: Fewer people go to the movies these days.

This article will tell you all about it.

As will this one.

And this one.

And if you Google “declining movie ticket sales,” you’ll find about 349,000 more.

Slumping ticket sales are nothing new, and there are a host of factors contributing to the trend:

  • The economic downturn of 2008 left many Americans with less disposable income to spend at the theater.
  • Studios produce fewer movies overall.
  • Other forms of entertainment – sports, video games, etc. – have eaten into market share the movie studios once controlled.

But we had a strong hunch there was another culprit that didn’t receive its share of credit in this debate: streaming media.

Streaming services such as Netflix, Hulu and HBO Go are typically positioned as competitors to traditional cable television providers, which is a natural (if somewhat spurious) correlation. After all, we consume most streamed media through our televisions. The binge-watching phenomenon made possible by streaming media services focuses on television series. Even the original content being created by these providers (House of Cards, Orange Is the New Black, etc.) uses the traditional episodic model employed by just about every television network on earth.

But we wanted to test a hypothesis wherein a substitution effect has resulted in individuals foregoing first-run movies in theaters for the convenience of slightly older films from the comfort of their living rooms. To test this theory, we focused on the undisputed heavyweight champ of the streaming media industry: Netflix.

 

Why Netflix?  

For the sake of our research, Netflix served as a proxy for the streaming content industry as a whole. As one of the original providers, Netflix is a major player in the arena and has the size to back up that categorization. Earlier this year, Netflix eclipsed the 60 million subscriber mark, with more than 40 million of them right here in the United States. Compared with Hulu’s roughly 9 million subscribers, Netflix is clearly the more popular option, at least for the time being. Similarly, the company’s financial statements provided access to information useful to our research.

 

The methodology

To test Netflix’s impact on domestic movie ticket sales, we needed access to historical sales data. For this, we turned to Box Office Mojo’s quarterly results. For the purposes of our research, we utilized a quarterly moving average of estimated ticket sales (Box Office Mojo offers a full explanation of how it calculates this metric), allowing us to control for seasonality. To ensure our dataset was large enough to draw meaningful conclusions, we examined sales from the first quarter of 1984 through the second quarter of 2015. With our base data secured, we controlled for two other variables:

  • Movie quality. We utilized the quarterly moving average of the top 10 movies using ratings sourced from Rotten Tomatoes.
  • Population. We utilized the seasonally adjusted population of the United States, available from the U.S. Census Bureau.

Finally, we determined the point at which Netflix gained broad market penetration – Quarter 1 2011 – through analysis of the Google Trends tool.

 

The results

We’re not ones for manufactured suspense, so let’s get right to it. We found on average, holding all else constant, Netflix has negatively impacted estimated movie ticket sales to the tune of more than 21 million tickets per quarter. At the current average price-per-ticket of $8.12, that represents more than $170 million in lost earnings every quarter and more than $680 million every year.

Note: When we tested our statistical model, we found, holding all else constant, an increase of one index point in the average rating of the top 10 movies added more than 956,000 to the estimated ticket sales for the quarter, lending credibility to our methodology.

Results weren’t much better at the individual level, either. As the streaming service has grown in popularity, the average gross take per movie has tumbled. When we examined the relationship between the number of domestic Netflix subscribers and the average gross per movie, we found a negative correlation of 0.89. To add some context, in the time period examined (Q3 2011 through Q1 2015), the number of domestic Netflix subscribers nearly doubled while the average gross per movie decreased by almost $2 million.

 

Average $/Movie vs. Netflix Streaming Subscriptions

 

Is the movie industry another innocent victim of technological innovation? Perhaps to an extent, but the studios and theaters have also played a part in their own decline. For proof of this, we need only examine average annual ticket prices.

From 1998 through 2007, ticket prices increased steadily by approximately 1.5% each year. From 2007 through 2010, however, that annual increase jumped to approximately 2.9%. In an unfortunate twist for theaters and studios, 2007 also marked the introduction of Netflix’s streaming service to the U.S. market. In other words, a nearly 100% increase in the annual inflation rate of movie tickets coincided with the entrance of a significant disruptor. Add an inopportune recession to the mix, and movie theaters had a recipe for disaster on their hands.

 

Avg. Ticket Price - Inflation Adjusted

Avg. Ticket Price – Inflation Adjusted

 

Future projections

As unpleasant as the past seven or eight years have been for all things cinema, the next few may be even worse. Using the findings we derived from our historical data, we projected a host of scenarios through the end of 2017 with ticket prices and overall movie quality serving as variables. The results were grim.

First, let’s look at our best (in relative terms) projected outcome. We calculated our results based on:

  • Ticket prices remaining flat.
  • Overall movie quality maintaining its highest average level of the past four years.

Even with these favorable conditions, we projected a 1.6% drop in ticket sales through the end of 2017. For our worst projected outcome, we calculated our results based on:

  • Ticket prices increasing 0.4% annually (the average rate of increase over the past three years).
  • Overall movie quality maintaining its lowest average level of the past four years.

Under these conditions, we projected a 5.2% drop in ticket sales through the end of 2017. These scenarios represent two extremes, and as with most things in life, the actual outcome will likely fall somewhere in the middle. But they serve to demonstrate that even flat pricing and a consistently excellent product won’t reverse this trend.

 

What’s next?

To their credit, the theater chains haven’t taken this threat lightly. Some reduced ticket prices. Others installed upscale amenities like reclining leather seats. And still others opted for the tried-and-true route of plying us with food and booze for our patronage.

But what will happen if theaters are unable to boost attendance? While moviegoers have been confined to a single channel of consumption since the dawn of cinema, there’s nothing saying this can’t change. What’s to stop Warner Brothers, Universal or Paramount from signing distribution deals with Netflix, bringing original content to an in-home audience?

If this sounds ludicrous, keep in mind the precedent has already been set by one of the world’s largest television networks. When NBC found itself without a bloc of comedic programming to support Tina Fey’s latest project, Unbreakable Kimmy Schmidt, executives decided the program stood a better chance on a different network. They approached Netflix, which liked the concept so much it not only agreed to air the first season, it immediately ordered a second. While Netflix distributes the series, production remains with Universal Television, a sibling of NBC. NBC content, distributed via Netflix. A sign of things to come?

There’s no guarantee the studios will follow suit. They may decide to stick with the theater-based distribution system they’ve known for the past century. They may even decide to introduce their own streaming services, though the wisdom of competing with established players like Netflix and Hulu is more than a little debatable. But one thing is certain: Studios will face a breaking point at which they’re forced to take action. Inflated ticket prices can only prop up the industry for so long. If they can’t deliver the audience the studios need to turn a profit, it could be curtains for America’s movie theaters.

What do you think? Has access to streaming media changed your movie-going behavior? Let us know in the comment section below.