What I Learned Today - The Economics of Popcorn

25th July 2008

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The Economics of Popcorn

“The Dark Knight made $155M in opening weekend.” What does that mean? Where does the money go? And why am I paying $11 for a movie ticket, and $5 for popcorn and a soda? I did some research and here’s what I got:

In the days of yore, the studio and the theater were one in the same. But in 1948, the Supreme Court forced the studios to divest themselves of the theaters due to antitrust laws. (Paramount dominated the theaters in all but 4 of the existing 92 US cities with a population over 100,000.) However sixty years later, though in a different way, studios still control the theatres. Studios run an exorbitant bill, sparing little on actors, locations, post production etc. When it comes time to get a return on their investment, they turn to ticket sales.

See, studios must find a company to distribute the film to theaters, and then later to DVD or television. The distributor takes on the cost of making the copies of the film and decides how many prints to make, and to which theaters those prints will be distributed. This is often doing through a profit sharing scheme, where the distributor gets between 10 and 50% of revenues. In the case of The Dark Knight, Warner Bros used its own domestic distribution.

How it Works: The distributor leases out the movie to theaters that promise to return a percentage of ticket sales. This percentage of this profit sharing scheme changes over the life of the lease. In the first two weeks, the theaters get between 0 and 25% of ticket prices and fork over the rest to the distributor. The next couple, they get more: about 50%. The last few weeks they get about 75% of the movie ticket sales. But who goes to see a movie four weeks after its release? This leaves the theatres with no option but to raise ticket prices and charge as much as they possibly can get away with at the concession stand.

So why aren’t ticket prices higher? This is the age old question of whether to charge more for the primary product, or the secondary product. Keeping ticket prices (the primary product) at a reasonable rate (the average ticket price in the US in 2007 was $6.88) enables theaters to capture both the price sensitive and price insensitive customers. The price-insensitive customers can then shell out cash for overpriced popcorn and candy (the secondary product), the profit of which goes fully to the theater. Imagine ticket prices at $20. Many price-sensitive consumers would avoid the movies, and theaters may lose revenue. Plus, the theater wouldn’t even get much of the $20, since it must share ticket sales with the studio.

However, it’s not all about the popcorn. Theatres also make money by selling ads. The local advertising that shows before the movie begins generates a good percentage of revenue for the theater. And as for the previews - the studios give trailers to theaters, and pay for each showing based on the number of people who saw them. Per a theater owner in Long Island, “we have to call in our numbers every night to the film companies, and they give you ‘x-amount’ per person.”

So that’s why I had to pay $11 this weekend to see The Dark Knight. And that’s why we’re gouged at the concession stand. And that’s why we have to endure “The 20” and the numerous previews.