[by Richard Greenfield, Analyst, BTIG Research]

Despite the cheerleading of RealD’s Michael Lewis, DreamWorks Animation’s Jeffrey Katzenberg and Lightstorm Entertainment’s James Cameron, US consumers are increasingly rejecting 3D movies.  In early-mid 2010, the movie industry talked about how the biggest issue holding back 3D box office was screen count – meaning there was demand to see movies in 3D, but too few screens that had been upgraded to 3D.  In the past year, 3D screen count has more than doubled from over 4,000 to north of 8,500, in turn, 3D screen availability is no longer a problem/constraint.

Pirates 4’s 3D Box Office Below Shrek 4, Despite Total Box Office $20 Million Higher. Despite exhibitors rolling out as many 3D screens as they possible can, utilizing the RealD financing vehicle in the US, 3D share of box office has started to decline.   So if the exhibitors goal is to fill-seats (to sell ultra high margin popcorn), pushing 3D screens is starting to work against them.

As shown in the first exhibit embedded below, non-IMAX 3D percentage of attendance has declined since last year, despite an aggressive 3D screen rollout.  When How to Train Your Dragon and Shrek Forever After came out a year-ago, 2D attendance per screen was half of non-IMAX 3D attendance per screen. Fast-forward a year later and you can see 2D attendance per screen exceeding non-IMAX 3D for Thor (see our 5/9 blog post, click here) and nearly doubling non-IMAX 3D for Pirates of the Caribbean 4 this past weekend.  We suspect, if exhibitors had allocated more of Pirates 8,000+ screens to 2D overall attendance would have been higher (more than half the screens were 3D, whereas it probably should have been 1/3 at best).

• Non-IMAX 3D box office for Pirates was only $34 mm, or 38% of its opening $90 mm (compared to Shrek 4 at about $38 mm, which was 54% of its opening weekend box office with 500 fewer 3D screens).
• To make matters worse, Pirates (and Thor) is the type of movie that is supposed to outperform in 3D given the “fanboy” demo focus, compared to the animated/family segment were 3D is burdened by young children not wanting to wear 3D glasses.
• The second exhibit embedded below shows the 2009-2011 3D openings by film.

Exhibitors Do Not Believe 3D Pricing is an Issue. Just this past February, Regal CEO Amy Miles was asked about consumer push-back on 3D pricing:

“I just had a time the other day to survey our total customer complaints for the 2011 fiscal year — I’m sorry, the 2010 fiscal year. And actually pricing as a percent of our overall complaint base was down as compared to 2009 and compared to 2008. So we’re just not getting any kind of feedback from our customers that would indicate pricing fatigue having an impact on overall attendance. But I do think it’s important that we continue to provide our consumers a choice with a 2-D and a 3-D option.”

We disagree with Regal’s view (which is in line with what others have said) and believe 3D pricing has become a problem, especially given the explosion of 3D movies (over 35 this year) with most nowhere near the quality of “Avatar.”  Pricing remains our single biggest concern, especially with so many 3D movies aimed at the family segment.

• This coming weekend, Kung Fu Panda 2 is set to open worldwide.  In rural America – such as at Regal’s Trussville 16 in Birmingham, Alabama, a “child’s” 3D ticket for an afternoon presentation this Friday will cost $11.00 vs. $7.50 for 2D – a 46% premium, while in NYC the AMC Kips Bay 15 is set to charge kids $13.50 for KFP2, compared to $9.50 for 2D (42% premium).  3D premiums remain awfully large – are all these films really good enough to warrant it?

3D Problems Go Beyond Pricing:

• While we have begun to see some exhibitors ease up on the 3D upcharge (Marcus the most notable reducing children’s tickets, click here), 3D attendance is suffering as the “novelty” effect wears off.  This summer it feels like every single weekend there is yet another 3D movie being released.
• 3D is far more tiring on the eyes than 2D, which may be impacting the frequent movie goer, who is simply not interested in watching a 3D every weekend.

No Fatigue Yet Overseas.  As we discussed in our 4/19 blog post (click here), foreign consumers are still “gobbling up” 3D movies, with 3D presentation still a far newer phenomenon in many overseas markets than it is in the US.  This past weekend was no exception, with 3D leading to an all-time best foreign box office opening for Pirates (in sharp contrast to its disappointing US opening).

Our Advice to Hollywood:

• Make Fewer 3D films in 2012 – use it to make certain movies more exciting – such as Avatar or how we expect Transformers 3D to benefit from 3D (both were actually shot in 3D), rather than simply converting 2D films to 3D and trying to take more money from moviegoers.  3D should be special versus “the norm” as it is quickly becoming, enabling it to command/deserve a ticket premium.
• Exhibitors should be rethinking their screen allocation plans.  We believe they should start to limit 3D presentations of each film released – shifting the mix back in favor of 2D presentations.
• Focus 3D on IMAX.  IMAX has a strong brand that consumers are increasingly seeking out when it comes to event movies and 3D movies.   As shown in the first exhibit below, while attendance per non-IMAX 3D screen has fallen dramatically over the past year, attendance per IMAX screen continues to rise.  There is a scarcity value and premium nature of the presentation that is benefiting IMAX.
• Focus on making consumer-desirable films rather than worrying about the technology. 3D cannot fix a bad film and a 2D film can generate substantially more box office than a 3D film. It is all about the content, not the technology.

Read the full original post here: http://www.btigresearch.com/2011/05/23/the-american-consumer-is-rejecting-3d-will-hollywood-listen-to-consumers-vs-forcing-3d-on-us/