5 Forces Model
1. Threat of Substitute Products (strong)
2. Bargaining Power of Suppliers (strong)
3. Existing Rivalry (moderate)
4. Bargaining Power of Buyers (weak as individuals, strong as group)
5. Threat of New Entrants (weak)
In this case, the threat of substitute products is far and away the strongest force on the movie theater industry. As stated in the case, “in 1995 movie exhibitors confronted new challenges from video rentals and cable TV.” VCR’s had penetrated the American market at almost 80%. Consumer preferences were clearly being demonstrated and purchasing or renting videocassettes was winning out over making a trip to the local movie theater.
Suppliers also had a serious amount of power in this case. Studies cited in the case determined that the number one factor for whether people would go to see a movie was the film itself. In this sense, film studios had a considerable amount of negotiating power when licensing their films to theaters. If theaters could not secure the rights to a popular new movie, they would miss out on considerable revenue.
The rivalry that existed between theaters was also prominent. The consolidation of many small theaters into the larger companies provided higher levels of competition. Theaters were undergoing major changes and the companies that had the funding to stay at the forefront of consumer preferences would win out. The top ten exhibitors controlled more than 50% of the movie screens in the industry, with the rest mostly fragmented. Profitability amongst these was widely varied, so which of them would last the test of time would be known in the coming years.
Moviegoers themselves did not have much individual power in the transaction. If they had their heart set on going to the movie they would pay the price of admission and possibly concessions as well, but did not have the leverage to negotiate either of those. However as a group, they were possibly the most powerful force on the industry. People vote with their dollars, and if consumers did not like a movie or a specific theater it was very quickly known. The theaters that got the licensing for popular movies and had the preferred amenities would ultimately prove successful.
The threat of new entrants in this industry was very low. As mentioned, the small theaters were consolidating into larger groups. Therefore, if a firm had the intention to make any sort of splash in the movie theater industry they would need an enormous amount of capital. A small theater could easily be built, but attracting customers and securing film rights is a much more difficult task.
Summary: Depending on how the bargaining power of buyers is defined, that could be the most influential force on the industry or the least. Most if classified as a group, or least if it means just the individual consumer. The threat of substitutes could pose to be an enormous threat as technology improves and allows more homes to be able to afford new types of entertainment. The rivalry between firms always stands to be a threat to theaters, but as more consolidation happens that will probably increase competitiveness. It is unlikely that new entrants will pose any real threat to existing firms.
The two main driving forces in the movie theater industry are somewhat connected. The first being that consumers are increasingly investing in new technologies, namely VCR’s and cable television, that allows them to get the same sort of visual entertainment within their own home. The second is the development of these same technologies to allow the common consumer to be able to afford them. One other force causing change in the industry was the consolidation of smaller theaters into larger groups.
In the mid-1990’s, consumers had the new luxury to be able to go to a store and rent their preferred movies on videocassette.