How Movie Theater Chains May Be Ripping You Off

Mario Tama/Getty Images

Mario Tama/Getty Images

Grab a $7 bucket of popcorn, because things are about to get entertaining in the entertainment business.

If you’ve ever felt like a night out at the movies was more or less a rip-off, your instincts may be correct. Prices for movie tickets and concessions have grown substantially over the past few years, as piracy and inflated film budgets have eaten into profit margins. In order to bolster profits, theater chains have had to resort to some new strategies — some that may be in violation of federal law.

The U.S. Department of Justice evidently feels strongly enough to issue notices to some of America’s largest movie theater chains that it was engaging in an antitrust probe regarding the theater’s apparently legally dubious business tactics. The chains in question include Cinemark, Regal, and AMC, and revolve around those companies’ use of ‘clearance agreements,’ which The Wall Street Journal reports are agreements distribution companies make with theater chains to keep a level of exclusivity in certain areas.

A clearance agreement would allow only a certain number of screens in a given city the opportunity to showcase a selected movie. And if you’re a small, independent theater that doesn’t have the pull and capital to secure such an agreement, you may miss out on some of the biggest blockbusters on the market — and a lot of money in ticket sales as a result.

Basically, it’s a case of the big guys like AMC, Regal, and Cinemark pushing around the little guys, who don’t have the money to secure said agreements. This artificially limits the supply, so to speak, of seats in movie theaters playing a particular movie in a particular area. By constraining supply, the bigger theaters can then leverage higher prices for tickets, at least in theory.

In their defense, the big theater chains are maintaining that the use of clearance agreements are standard industry practice, and have been in use for years. The agreements only affect a small number of locations, according to a report from The Consumerist. Even so, it seems that there’s been enough interference with smaller competition that the DOJ is willing to at least look into the issue.

The big chains are maintaining that they’ve done nothing wrong, though they are working with the DOJ and other authorities to work the whole situation out.

There may be some evidence that, slowly but surely, the big chains are effectively running their smaller competitors out of business. It’s been fairly well documented that small theaters are having trouble keeping up with the changes in the industry, including switching to digital projection, and movie budgets growing increasingly swollen, which means that prices for everything else must come up to justify them.

For consumers, average ticket prices have climbed to $8.17 as of 2014, a record high. That figure may actually seem low to a lot of people, as ticket prices can be as high as $12 or $15 in certain cities, where theater seats are in high demand.

One way to ensure that demand stays high is to — you guessed it — constrain supply. By making sure that your theater, and only your theater (or theaters), have an agreement to screen a given movie. Again, the only ones who have the clout and capital to put those kinds of agreements in place are going to be the bigger chains, putting the small, independent theaters at a disadvantage.

This may, in fact, just be the Darwinian nature of the business world manifesting its will. But it could also be that the movie studios, distribution companies, and big theater chains have conspired to put this framework into place in an effort to maximize profits. The DOJ is at least going to attempt to find out.

What’s really interesting is what could happen as a result. Would the government declare exclusivity agreements between theaters and studios illegal? And how could that ruling affect other such agreements in other business sectors? It’s also worth wondering if tearing down those agreements would even help independent theaters stay alive, or just delay the inevitable.

We’ll have to wait for the DOJ’s findings, but at the very least, it should give us some entertainment — what these theater companies specialize in.

Follow Sam on Twitter @Sliceofginger

More from Business Cheat Sheet:

More Articles About:   , ,