Captive audience: theaters grow revenue through pre-show ads.

HOLLYWOOD film exhibitors can still point to one silver lining on the dark cloud that was theater attendance last year.

Advertising revenue, led by ads before movies--or "pre-show entertainment" as the theater owners like to call them--is expected to show its fourth consecutive year of double-digit growth when the 2005 figures come in.

Theater chains traditionally derive much of their income from concession sales. Thus, a poor year at the box office, such as 2005's 4 percent decline in ticket sales, meant fewer people in the snack line. And that resulted in a crimp in the theater owners' bottom lines.

To create new revenue, Regal Entertainment Group, AMC Entertainment Inc. and Cinemark Theaters Inc. established National CineMedia LLC four years ago, to market 10- to 20-minute packages of cinematic-quality advertising by national companies.

In a rough year, that cash injection has made a difference. At Regal, for example, admissions and concessions (92 percent of total revenue) were down slightly for the first three quarters of 2005. But "other operating revenue," including advertising and theater rentals, rose 5 percent to $138 million from $125 million.

"We're eventually hoping that the (advertising) industry will use the cinema as a premiere platform for their campaigns before they move over to other media such as TV and the Internet," said Lauren Left, spokesperson for CineMedia.

Today, pre-show ads account for 80 percent of theater advertising, which has shown double-digit growth for the past three years. Nationwide, sales for all cinema advertising were up 23 percent in 2004 to $438 million, according to the Cinema Advertising Council. Of that, pre-show advertising brought in $347 million. Lobby displays and other in-theater promotions accounted for $64 million, up 41 percent. Audio programming, special events and lobby promotions rounded out the total.

"The growth area is advertising," said Matthew Harrigan, analyst for Janco Partners Inc. "As inventory is sold out, the rate of growth will slow down, but more and more theaters are buying into the national network in terms of advertising."

High Cost

Pre-show advertisers aren't able to purchase time before specific movies. They buy a share of the total network of the three theater chains. Different ad rates apply to different media markets and the few minutes before the movie's scheduled show time are the most valuable. A film's rating is also taken into consideration.

Rates start at $500,000 for a four-week, partial-network buy of 30-second spots during off-peak times such as January. The entire network, 13,000 screens, starts at $2 million for a four-week ad buy in off-peak times. Peak season rates vary wildly depending on availability, which is often tight.

"It's a relatively high cost-per-thousand (viewers) because you literally have a captive audience," Harrigan said. He anticipates theater advertising to remain an important income stream, but sees the business maxing out at 10 percent of gross.

Harrigan also hopes to see innovation in the future, such as three-dimensional effects to enhance entertainment value.

Fan Fatigue?

Not everyone is a fan of the pre-show advertising. And as the ads become more prevalent, so have the complaints. Legislators in New York City, Illinois and Connecticut introduced bills in 2005 to force theater owners to post the actual starting times of films, so that consumers could avoid the pre-show ad blitz if they wished. At least one class action suit has been filed to block the ads and Internet rants on the subject are common.

Theater owners remain unfazed.

"We really get very few complaints," said Dick Westerling, spokesperson for Regal Cinema. "Most of the movie patrons are familiar with mix of the content prior to National CineMedia's existence and they consider this much more entertaining and of a higher quality than any of the prior content, which was predominantly static images."

Brandon Gray, president of Internet movie fan site Box Office Mojo, maintains that it doesn't matter--as long as the movies are good.

"It doesn't have a huge impact, because what else are people going to do?" Gray said. "It's annoying and it's inconvenient but it's not a dealbreaker providing that someone really wants to see a movie. If it's a passing interest or they can wait until DVD to see it, then it might be a factor."