Why the Movie Industry Is Dying

The movie industry received its latest negative diagnosis over the weekend as box office tickets sold fell to the lowest levels in over a decade with the top 12 grossing films bringing in just $51.9 million.

The weekend 10 years ago that was even worse? That was two weeks after the September 11th attacks.

The week after Labor Day is notoriously slow in the industry, and observers may blame the poor selection in theaters as September is known as a dumping ground for Hollywood, sandwiched between summer blockbusters and the end-of-year Oscar candidates, but there's something more than seasonality afoot here.

Much has changed in the entertainment industry over the last 10 years. The music industry has been turned on its head with the proliferation of MP3 players, and the advent of websites such as YouTube and Pandora, which give users free and almost instant access to nearly any song they'd want. Netflix has (NAS: NFLX) made traditional in-store video rental a thing of the past, and streaming and On Demand have become significant channels of at-home video entertainment. Meanwhile, social media sites like Facebook represent an entirely new channel of timewasting diversions, particularly appealing to the teenagers who are normally avid movie-goers.

Unlike their peers, the movie business, both in theaters and studios, has done hardly any innovating in that time. Aside from the occasional 3-D offerings, which many critics have called disappointing, hardly anything has changed in the movie-going experience in the last decade or even generation.

Despite the foodie revolution, which has made celebrities out of chefs, and brought years of industry-stomping growth to companies like Whole Foods and Chipotle, theaters continue to offer the same overpriced, pre-packaged snacks like popcorn and nachos that they always have. There's been no attempt to redesign or modernize theaters despite the loss of the unique single-theater cinemas of previous generations, which have given way to the cookie-cutter multiplex chains that now blanket the country. Theaters just don't seem to be experimenting with ways to enhance the experience.

The industry has what always been at odds with innovations in delivery channels, whether it be TV, the VCR, or streaming, which earlier this year led to the debate over SOPA and PIPA, but it now seems to have become a victim of its own stubbornness.

And the numbers bear this out. 2011 saw the lowest number of tickets sold at the box office in 16 years, though sales have come back slightly this year, rising 4% thus far.

The theaters
The cinema companies themselves are the most obvious victims of this trend. At Regal Entertainment Group (NYS: RGC) , the largest movie theater group in the company, shares have been sliced in half over the last five years, and net income has been essentially flat over that period. Regal is also paying out dividends at an unsustainable rate. In 2011, the company distributed $0.84 per share to its shareholders, but only made $0.26 in net income. Previous years followed a similar pattern. While a hefty amount of depreciation helps boost cash flow, those assets will eventually be depleted, and Regal will no longer be able to maintain its 6.1% yield.

Rivals Cinemark (NYS: CNK) and Carmike (NAS: CKEC) may be in better shape financially, but will still suffer from the same macroeconomic industry forces. In 2011, Cinemark paid out 84 cents on dividends per share on earnings of $1.14, a payout ratio of 74. Carmike, on the other hand does not offer a dividend, and just turned in a small profit after years of losses.

The studios
The traditional movie distribution channel isn't the only part of the industry that's suffering. The vast majority of films fail to make a profit for the studios, like Disney (NYS: DIS) , Columbia, and 20th Century Fox, that produce them, and those companies are forced to use additional strategies to remain solvent by selling TV, overseas, and streaming rights to companies like Netflix, as well as other cross-promotional vehicle such as video games or theme park rides. Hollywood is also notoriously woeful at forecasting revenue or understanding why a certain movie was a success or a flop. Even top grossers struggle to break even. Men In Black 3 made over $550 million, but for a while, Columbia Pictures execs were concerned that it wouldn't turn a profit. According to Planet Money's Adam Davidson, that lack of predictability has driven away financing and has made Hollywood more dependent on sequels and existing intellectual property, and therefore less willing to take creative risks. As he sees it, that lack of creativity should drive audiences even further away.

Foolish takeaway
Ironically, television, the close cousin of Hollywood, has done anything but stand still during the last decade. Entire genres like reality TV have been and invented and plied to the fullest extent, while dozens of new channels have sprung up, and innovations like HDTV, the flat screen, DVR, and On Demand have come along to make the viewing experience more enjoyable. And the availability of film and TV shows on computers, tablets, and smartphones is transforming the business model.

Given the above scenario, Hollywood seems doomed to decline not only financially, but also in terms of cultural relevance. As Netflix's rise to dominance shows, audiences don't just want the convenience of at-home viewing, but also a range of options including documentaries, independent movies, foreign films, and TV shows that the theaters simply aren't providing. If Hollywood and the theater companies continue to make no effort to enhance their offering, they will continue to lose their competitive advantage.

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The article Why the Movie Industry Is Dying originally appeared on Fool.com.

Fool contributorJeremy Bowmanowns shares of Chipotle Mexican Grill. The Motley Fool owns shares of Netflix, Walt Disney, Whole Foods Market, Facebook, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Netflix, Chipotle Mexican Grill, Facebook, Whole Foods Market, and Walt Disney. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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