Regarding the Risks of Being Regal Entertainment Group (RGC)

“You Ought to be in Pictures” was a popular song in the 1930’s and 40’s about the excitement and glamour of being on the performing side of the film business. Oddly, there doesn’t seem to be a complementary romantic song about investing in the film business, probably because angel investors have from time to time lost pots of money backing films that flopped. Fortunately, more risk averse investors can also participate in this iconic American industry by purchasing shares in theater operators such as the nation’s largest developer and operator of multi-screen theaters, Regal Entertainment Group (NYSE:RGC).

Regal’s brand names include Regal Cinemas, United Artists theaters and Edwards theaters. They operate nearly 7,000 screens in 537 locations across the

In the company’s recently filed 10-K, they alert us to some of the risks their business faces.

“A change in the type and breadth of movies offered by motion picture studios may adversely affect the demographic base of moviegoers.”

“We license first-run motion pictures, the success of which has increasingly depended on the marketing efforts of the major motion picture studios.”

An unsettling aspect of Regal Entertainment Group (NYSE:RGC)’s business is that they depend on other companies making wise marketing decisions that result in consumers flocking to their theaters. If film studios lose touch with what the mass audience wants to see, the mass audience will find other things to with their time. Similarly, we’ve all seen the confusing ad campaigns studios roll out for their films. One ad makes the movie look like a romantic comedy, the next one implies it is an adventure film.

For example, I have no idea what this new “The Great Gatsby” film will be like. The ads look like an over-caffeinated “Dancing with the Stars” episode. I do know F. Scott Fitzgerald probably wouldn’t buy tickets to see the thing. I will, because I’m both an admirer of Fitzgerald’s work and a fan of the horror film genre. And I’m sure the film will make big bucks for Warner Brothers Pictures and its parent company, Time Warner Inc. (NYSE:TWX), although the task of recouping the film’s reported $127 million budget is a daunting one. Yep, that’s right: $127 million.

Players in the film industry sometimes make a fundamental Marketing 101 mistake: looking at the demographic segments that are currently attending movies as the only ones that will attend in the future. It would seem to me a better growth strategy would be to try to understand what the customer segments that aren’t currently a big part of your customer base want to see at the cinema and then make movies that attract them to the theaters too. One major
film mogul always talks about who “today’s audience” is. He doesn’t realize that by the time he gets this demographic data, that’s actually yesterday’s audience. I always advise my consulting clients that our task is to expand our customer base beyond today’s. Just sayin’, for you moguls out there.

Hollywood churning out clunkers or launching unfocused marketing campaigns will always be a significant risk for Regal Entertainment Group (NYSE:RGC).

“An increase in the use of alternative delivery methods may drive down movie theater attendance and reduce ticket prices.”

First it was that video stores were going to be the demise of theaters because we could rent a film and watch it at our convenience at home. That of course didn’t happen. The video stores’ popularity waned and the theaters are still going strong. Now the risk has expanded to pesky high-tech competitors such as video-on-demand and Internet delivery platforms. Netflix, Inc. (NASDAQ:NFLX) is a company taking full advantage of the burgeoning demand for video-on-demand. Regal uses a cool term for this: “the domestic exhibition industry.”

I always thought that a domestic exhibition meant your neighbors wearing really tacky looking pajamas and robes when they come out in the morning to pick up the newspaper. That sight can certainly put me off my eggs and bacon.

And here’s another issue: motion picture distributors shortening the window of opportunity they allow theaters to show first-run films before they offer them to cable TV stations and video-on-demand outlets. The window was about six months a decade ago, Regal reports. Now it is only four.