Monday, May 18, 2009

Who will pay for 3D Glasses?

Earlier this year an article from USAToday discussed who would pay for 3D glasses that are used at movie theaters. This is an interesting example of a sequential game and also a simultaneous game.

Here is a basic version of the sequential game: first, movie studios - like Fox - determine whether they will pay for the 3D glasses worn by moviegoers or force the movie theaters to pay for the 3D glasses; second the movie theaters determine whether they show the movie in tradition 2D or 3D. Please note - more can be added to this sequential game, such as does the movie theater invest in 3D or digital movie projection technology or stay with their current model, and does the movie studio produce movies to be shown at movie theaters that are expected to big hits only in a digital format?

Additionally, there is a simultaneous game being played by the movie theaters. Since there are a number of different movie theater firms, each has to decide whether to show the movie in 2D or 3D. If they each choose 2D, then the current business model is in tact, but some may choose to show the movie in 3D and even pay the cost of the 3D glasses. If the profits from some movie theaters showing movies in 3D while other movie theater firms simultaneously show movies in 2D, then each movie theaters best strategy is to show the movies in 3D and if necessary pay the cost of the 3D glasses.

The movie studios would like the movie theaters to pay for the 3D glasses and visa versa. How about this as an idea - negotiate with the makers of the 3D movie projection systems (such as RealD) to pay for the 3D glasses as a condition of purchasing the 3D movie projection systems. Although we have two players that are oligopolists in their respective markets - movie projection systems and movie theaters, this would be a natural place for movie theaters to use the asset specificity of the3D glasses to enjoy their 3D movie projection systems to get movie theaters to invest in 3D movie projection systems.

Fine - don't think that idea is workable. Suppose movie theaters choose to purchase 3D glasses in order to show 3D movies. Why not create a deposit-refund system for 3D glasses? When purchasing a ticket the consumer pays say $1 (the estimated cost of the 3D glasses from the article) for each 3D set of glasses, and then after the movie is over consumers can choose to keep the 3D glasses or refund them for say 50 cents. You may be thinking that the movie theater would be losing money on the refund, and that would be true if the movie theater never rented the glasses again. But for the next 3D movie - of course after the glasses have been meticulously cleaned by the movie theater - see my comment below - you could sell them for a $1 (making a 50 cent profit) or redeem them for 50 cents and break even after two wearings. If the 3D glasses could be worn more than two times and are redeemed say four times the movie theater is now making a profit on the 3D glasses.

My point is that movie theaters can get a little creative and make profit on 3D movies - assuming movie customers demand movies shown in 3D.

Did anyone notice this statement in the article: "The glasses cost as much as $1 apiece. That can amount to about 20% of a theater's take from a $10 movie ticket". That means that the average take for the movie theater is $5 per ticket. Now if movie theaters can raise prices by $3 for 3D movies then the demand for 3D movies must be price elastic, otherwise the movie theaters sales revenue would be increasing.

OK, final comment - does anyone really believe that someone is cleaning the 3D glasses, and if there is someone with this wonderful job, which I doubt - it is probably some 15 year old high schooler - how clean do you think these "recycled" 3D glasses are?

1 comment:

revo said...

Doesn't entirely change your argument but the theater owners negotiate (but are essentially told by the studios) the % of ticket revenue that they keep and the % the studio keeps. For major films (e.g. Batman movies) the studio will keep much more than 50% (e.g. 90%) of the ticket receipt. So if the theater owners add the 3D glasses to the ticket cost some of the added cost will go to the studios, not just the theaters.

Regardless if public demands it they can charge more for 3D the same as they charge more for IMAX.