Home > News and media > Comment and opinion > 2011 > 3D cinema - the billion pound bonanza?


3D cinema - the billion pound bonanza?

 Gerben Bakker

In 2009 cinema admissions increased by six per cent. This was despite the recession, despite the five per cent-rise of ticket prices, despite the increasing popularity of videogames, and the availability of other distribution formats such as DVDs, video-on-demand and internet.

How did this happen? First, a spate of hits such as Slumdog Millionaire, The Hangover, Harry Potter and the Half-Blood Prince, Star Trek and Avatar drew more people into cinemas. Second, the film exhibition industry adopted a cost-reducing innovation: digital cinema. Although they first appeared a few years ago, the number of digital screens doubled in 2009. Digital cinema lowers the cost of film copies, shortens copying time and makes switching films easier – although contractual obligations and suitcase-sized digital hard-disks driven to cinemas diminish the advantage.

3D glassesThird, the industry adopted a quality-enhancing innovation: 3D cinema. Originally launched in analogue form in the 1950s, it is now digitally reinvented, eliminating the analogue drawbacks such as breakdown-prone projection and headache-causing asynchronous flicker. 3D was greatly helped by the boom in digital cinemas, as most can play it easily and cheaply and the number of 3D-screens increased six-fold and 3D-revenue forty-fold.

Today, sixteen per cent of admissions are for 3D movies, up from almost nought in 2008, and we were willing to pay more for them, suggesting we find it an enjoyable quality-increase, and that ticket prices might have remained flat if we adjusted for quality.

Fourth, cinema going has traditionally been recession-proof. In the 1930s it was hardly affected, and it did well in every recession since about 1970. This is in sharp contrast to music expenditure, which tanks in almost any recession. We replace more expensive activities, such as expensive foreign holidays, luxury meals out, live musicals, with less expensive cinema. Also, as wages moderate and available work declines, our opportunity costs fall, as what we could have gained by not watching a movie declines.

Ever since cinema emerged opportunity costs rises have dwarfed ticket price hikes. Since 1934, real ticket prices have more than doubled, while opportunity costs (linked to the wage rate) have almost quadrupled. Given the latter’s almost continuous lead on the former, cinema should become ever-more recession-resistant.

Although you might think that new distribution platforms such as postal DVD-rentals, video-on-demand, internet and mobile threaten cinema admissions, they have actually achieved the obverse: a film release has become a big marketing event meant to lift sales across all platforms. If it bombs, the studio loses across all platforms; if it wins, it yields far more than box office revenue. The antique delivery system drags along the new high-tech channels in its slipstream.

It is not surprising therefore that the total consumer expenditure on films in 2009 , £3.7 billion, was a multiple of box office revenue. That compares to £2.9 billion on videogames and £1.3 billion expenditure on music.

On the production side, the British industry also seemed to be made of teflon. Real expenditure increased by over 50 per cent in 2009, despite the financial crisis. Although UK independent film makers are finding it ever more difficult to get cash, the lion’s share of UK production expenditure comes from the Hollywood studios, who profited from a falling pound and generous tax breaks.

Film production is one of only a few sectors that immediately respond to these breaks. Expenditure rose to almost £1 billion. Similar sectors include videogames development (£625m) and media post-production (£900m). In little time, massive amounts of foreign resources can be shifted to Britain, resulting in significant services exports. While the last Government was sinking money into cars, incentives for the creative industries might have had a faster, larger and more durable economic impact, and an immaterial benefit as well.

Ever since 2005, when the WTO made ‘cultural’ industries an exception, countries have waged tax wars to lure them to their territories. One of the stalwarts is Quebec. Riding on the WTO exemption, the Canadian province offers a layer cake of different tax breaks and subsidies, leading to an influx of videogame makers, film producers and other creatives. Three different tax incentives also rescued Hollywood from the doldrums between the early 1970s and mid-1980s.

So what does the future hold? The previous Government set up the UK Film Council, an industry body distributing subsidies and administering tax incentives, and promised a videogame tax break. The current Government has axed the latter as well as the Council itself, but kept the film tax incentive. Uncertainties lie ahead, depending on what will replace the UKFC, whether the pound goes up or down, and what tax breaks other countries have up their sleeves.

A big wildcard is 3D. It could further boost the burgeoning £900 million British post-production sector, and will undoubtedly further increase admissions. However, the industry is still holding its breath to see whether 3D remains a fad, just as in the1950s, or whether 3D is here to stay.

Two billion-dollar questions are whether cinemas can offer non-film live events in high-quality 3D (their 2D-revenues for sports, opera and other broadcasts are growing fast), and whether anyone succeeds in developing technology that converts old 2D-films into a top-of-the-range 3D-quality, drawing us into cinemas again and enticing us to buy DVD versions for our new 3D-televisions.

The latter is the ultimate wildcard: it could lead to an almost unimaginable boom in cinema-going and a renaissance of the industry surpassing the CD-boom in the music industry. One need only think of re-releasing Harry Potter parts 1 to 8, or of all the James Bond films in 3D, to see the enormity of it. Several venture-backed post-production companies are gambling on it, at costs ranging from fifty to a hundred thousand dollars per minute. Yet at present both billion-dollar questions still remain unanswered: there is just a small chance of a big bonanza starting in 2011. If you are in for a gamble buy cinema stock.

Posted 12 January 2010

This article appears in the new magazine Britain in 2011, published by the Economics and Social Research Council, which is on sale now.

Gerben Bakker| is a Lecturer in Economic History and Accounting at the London School of Economics and Sumantra Ghoshal Fellow at the Advanced Institute of Management Research, UCL.

He acted as Specialist Adviser for the House of Lords Communications Committee inquiry into the UK film and television industries and as a consultant on the creative industries for the Department of Business, Innovation and Skills.