A Theater Very Near You

By Daniel Eisenberg

Picture this: at General Cinema's Premium theater in suburban Chicago, the $15 luxury cinematic experience starts with valet parking. After the concierge escorts you to a leather recliner, a waiter is on hand to mix up a martini and serve "previews" like shrimp cocktail and "feature presentations" (get it?) like prime rib. "It's like watching a movie with all the comforts of home but better service," says Mark Kanter, a regular at the luxury venue.

In a business famous for stale popcorn, rickety seats and sticky floors, first-class cinemas may sound like a bad joke. But with a surfeit of mammoth megaplexes filling cities and suburbs, theater owners seem willing to try anything to make their marquees stand apart from the crowd. General Cinema is teaming up with Robert Redford to launch a Sundance chain of art houses.

While Americans have flocked to the flicks in record numbers this summer, movie theaters are breaking ground at an even greater pace. Over the past five years the number of screens in the U.S. has soared 40%, to almost 35,000, according to the National Association of Theatre Owners. And since every town with an economic-development plan sees the movies as some kind of retail miracle, the number may reach 40,000 before the building spree ends. Yet no matter how many geeks go to see a Star Wars film 17 times, it's doubtful they can fill all the seats. This could be a tearjerker for the accountants.

The modern megaplex doesn't come cheap. Even though it tends to attract more patrons willing to shell out for those $6 bags of popcorn, each snazzy new location, complete with stadium seating (for unobstructed views) and ear-shattering digital sound, costs in the range of $15 million to $25 million. Moreover, theaters still retain only 50% of ticket revenues, handing the rest over to the studios and relying on concessions for the big bucks. Add to that the fiscal drain of shutting down "older" multiplexes (relics around for a decade), and it's no wonder that the bottom lines of leaders like AMC, Loews Cineplex and Carmike are getting bad reviews. "It's going to be ugly," says analyst David Londoner at Schroder & Co.

For some, it already is. United Artists Theatre Group, which runs more than 2,000 screens across the country, has recently been working with bankers to avoid defaulting on hundreds of millions of dollars in loans; it blames its woes on declining attendance and high real estate costs.

To get a sense of a saturated market, take in a show in Ontario, Calif., where rivals AMC and Edwards Theatres have set up megaplexes with a combined 52 screens practically across the street from each other. While both theaters claim to make a profit, neither is happy. Apparently, though, the rest of the industry hasn't learned its lesson: developers in Chicago are building two neighboring theaters in a similar face-off. Says Jeff Blake, president of worldwide distribution at Columbia Pictures: "Building screens at $1 million each and closing theaters that aren't fully amortized has to hurt."

Most of the chains, though, claim they are feeling no pain. "We don't just redivide the pie, we enlarge it," argues Phil Zacheretti, a senior vice president at industry leader Regal Cinemas, a privately held behemoth with 4,000 screens. Yet even AMC, the aggressive, $900 million-a-year pioneer of megaplexes, based in Kansas City, Mo., is scaling down some of its 30-screen locations. "When does the big wave of capital expenditure end and we get to see some return on the investment?" asks Stewart Halpern, a senior analyst at ING Barings, who remains cautiously bullish. "That point seems to keep getting pushed off further and further." And if they keep putting up more theaters, profits could remain a coming attraction for quite some time.

--With reporting by Maggie Sieger/Chicago and James Willwerth/Los Angeles

With reporting by Maggie Sieger/Chicago and James Willwerth/Los Angeles