Author:   Lyn Goleby Director, City Screen Limited

Background to the UK Exhibition Sector

Since 1995, the number of cinema screens in the UK and the number of admissions have both increased by more than 60%.

Cinema Screens: 1995 - Admissions: 2,005 - Admissions/per Screen: 108.0m/53,865 Cinema Screens: 2001 - Admissions: 3,258 - Admissions/per Screen: 176.0m/54,020

Most of the screens in the UK are owned by one of the major cinema chains. Independent cinemas accounted for 938 screens (29% of the total number) in 2002, a proportionate decrease from 857 out of 2,349 screens (36.5%) in1997. The cinema sector is still in some turmoil at present with two major chains having been sold recently and up to three others available for sale. The emergence of EasyCinema may have some impact on the market, although there is no evidence yet to suggest that their business model, which is based on an assumption that people will book cinema tickets well in advance, will work. Also, the terms that they are trying to negotiate with distributors are entirely different to those that have pertained in the industry for forty years and there are no signs that the distributors are willing to change their practices to meet the needs of a single cinema operator.

The advent of digital cinema may change this landscape somewhat, but no-one is yet making the necessary investment in digital projection equipment and distribution systems. The Film Council are currently considering plans for intervention in this area to support independent cinemas' acquisition of digital technology.

Distributor and Exhibitor Relationships

The distributor and exhibitor share the risk of exploiting films. Generally, the terms are such that the distributor bears more of the risk if a film performs badly, but they normally also gain more from the upside if a film does well. The distributor will make more money from a film doing well in a single cinema than if the revenues are split between a number of sites. They will, therefore, try to restrict the number of prints available to maximise their income from each site. Without cutting across the distributor's release strategy, cinemas should be involved in helping to promote films. Producers and distributors should look at the opportunities for taking talent and crew to regional cinemas to meet the audience and generate good local press. Sometimes exhibitors have to take the initiative themselves to bring stars to their cinemas and create events.

How Exhibitor/Distributor Deals Work

There are three different types of deal that an exhibitor might enter into with a distributor:

i) The House Nut

The House Nut is a figure calculated to represent the notional costs of running the cinema (including allowances for cost of capital etc). In a house nut deal, the rental paid to the distributor will be the greater of 25% of the gross Box Office or 90% of the Box Office minus the house nut. This is the deal structure generally favoured by the majors.

ii) Scale

Under this arrangement, the amount payable to the distributor rises according to the amount that Box Office exceeds a pre-set break figure, which is often capped at 50%. Exhibitors will often offer guaranteed minimum payments and the parties may agree special terms to cover overages if the film performs particularly well. This structure is often used by independent distributors.

iii) Percentage

Finally, the parties might agree a straight percentage split of the Box Office. This type of deal is becoming increasingly common in the UK, being used on an ad hoc basis where special terms are applied for perceived blockbusters.

Cinema Revenues

Ticket sales are only one aspect of a cinema's revenues. In 2001, ticket sales contributed about 66% of gross revenues, with concessions income and advertising accounting for around 16% each. However, this is based on gross revenues: when VAT and the distributors' share of revenues are excluded from the exhibitors' revenues, the proportion accounted for by ticket sales falls to less than half. On average, cinemas generate £1 of net concessions income and £1 of gross advertising revenue for every person who buys a ticket. (These figures are averaged across the multiplex chains and independent cinemas - in practice, the multiplexes tend to make proportionately more from sales of popcorn and drinks than the independents make from their concessions. Between them, the top three chains sell some 16 million buckets of popcorn a year.)

Top Tips

• Exhibitors are the conduit to the customers. Film makers need to think about how their production decisions affect the exhibition sector.
• Exhibitors should be involved in promoting independent films - especially in the regions where personal appearances by cast and crew can generate good local press.
• The exhibition sector in the UK has grown rapidly but now is a period of some consolidation. The advent of digital technology could raise some interesting issues for the relationships between producer, director and exhibitor.
• The last three years has seen a power shift within the industry leading to a cut in exhibitors' margins and creating a possible threat to their established business model.