Real estate is not the only industry where foreign companies have a big influence, yet Japanese culture and history have a strong impact on the way business is done. Three years ago, I built a cinema complex at a shopping center we own in Chiba Prefecture, and I am still struggling to rationalize some of the strange practices in the industry.
One of the first things that struck me was the simplicity and timing of Japanese film business contracts. The president of one of Japan’s top movie distributors later explained the situation to me by saying that contracts were not really necessary because the Japanese movie industry is like “a small village.” Everybody knows everybody, he said, and if anybody went back on their word, they would be “thrown out of the village.”
The funny thing is, however, that cinema distributors do require contracts for every film. The contracts are short and simple, but they are always executed after the film starts showing, and usually after we stop showing the film. Since these contracts really don’t say much, I normally don’t mind signing after the fact. The problem is that the contracts dictate the percentage of box office revenues that we pay the distributor, which means that at the time we make a decision to show a film, we usually don’t know for sure what our split will be. Most of the time, the terms are the same, but occasionally we learn after the fact that our cut is worse than expected and because cinema exhibitors have little bargaining power, we have to accept the terms dictated by the distributors or risk losing future access to the most popular films.
This situation has been going on for some time, where a virtual oligopoly of film distributors has been dictating terms to cinema operators. But not too long ago, something funny happened, that although little noticed at the time, is beginning to snowball and help tip the balance of power more slightly in favor of exhibitors. And even stranger, the move was initiated by an affiliate of a distributor giant, not an independent exhibitor.
Before “Avatar” came along in late 2009, industry pundits had long been predicting an explosion in popularity of 3D films. Exhibitors who invested early in the expensive digital projection technology weren’t seeing much of a return. Part of the reason was a paucity of hit films, but perhaps more importantly, consumers were turned off by the exorbitant ticket cost, which averaged about 2,000 yen. Unlike regular movies, where consumers take advantage of a variety of discounts and few people pay full price, 3D ticket prices were not subject to discounting. Prior to “Avatar,” when it was unclear if 3D films would ever be financially viable, Toho Cinemas, the largest exhibitor chain in Japan and a subsidiary of the leading domestic film distributor, introduced a new 3D pricing system called “plus 300” or 300 yen on top of the prevailing rate for ordinary movies, including any and all applicable discounts. On the weekly “Ladies’ Day,” for example, one of the cinema industry’s most successful discount programs, the price of a 3D film dropped from 2,000 to 1,300 yen—a huge savings. Competing chains were forced to match Toho’s pricing policy, so when “Avatar” opened in late 2009, consumers were more willing to see what the 3D hype was all about because of much lower ticket prices.
Last year, shortly before its parent company launched “Umizaru,” the first domestically produced 3D hit, Toho Cinemas took another shot at the power balance between exhibitors and distributors by introducing a 100 yen “rental fee” for 3D glasses. Unlike ticket prices, the majority of which must be handed over to distributors, 100 percent of this rental fee stays in the pockets of exhibitors, offering a rare opportunity for operators to improve the economics of their business. Once again, many exhibitors, including us, have followed Toho’s move.
Perhaps coincidentally, although probably not, one of Hollywood’s major distributors sent us a revised contract on the exact day our 3D glasses rental fee took effect on December 1, 2010, with new language seeking to claim a share of all non-ticket revenue such as 3D glasses rental fees. Finally, in a sudden and very surprising move, Nikkei reported on January 19 that Toho Cinemas would lower the general admission price by 300 yen to 1,500 yen in six of its theaters on an initial one-year trial basis. This should cause shockwaves among both exhibitors and distributors. Going forward, I expect to see more jockeying for power between exhibitors struggling to make money in a very difficult business and distributors trying to hold on to their pricing power dominance.