Kathryn Harris

George Lucas applied his defibrillator in the nick of time. The May 19 release of his "Star Wars: Episode I The Phantom Menace" was direly needed to resuscitate the movie theater business this year. Lucas' latest film garnered almost $300 million in its first four weeks.

After a dreadful first quarter, the summer is shaping up as a record box-office season, with at least one major hit in "Austin Powers: The Spy Who Shagged Me" and films with proven stars like Will Smith and Adam Sandler set to follow.

But don't be fooled. Summer won't solve the problems besetting U.S. movie theaters. Many of the exhibition companies are suffering in the race to build megaplexes to protect or expand their market share. Not all are expected to survive this expansion period after taking on significant debt.

Alan Gould, an analyst with Gerard Klauer Mattison & Co. Inc. in New York, said he expects a few bankruptcies and more consolidation. In fact, a number of movie theater companies are tagged for sale, but buyers appear to be scarce.

Hoyts Cinemas Group said last month that it had shelved a plan to sell its U.S. theaters after a potential buyer withdrew. Nor has Mann Theatres announced a sale, despite a five-month effort by Warburg, Pincus Ventures LP to unload its 374-screen company.

If moviegoers want stadium-style seating in sparkling new theaters, what's the incentive to buy existing companies saddled with older multiplexes? It's a chore to lease, close or sell older theaters.

Even Cinemark USA Inc., which was reported by the New York Post in April to be soliciting bids, apparently hasn't been swamped with offers, despite its reputation as a well-run company with modern theaters.

Hollywood Theatres Inc., an ailing Dallas-based company, found a buyer in April, but bondholders "took a 30 percent clip in about 12 months," says Stephen D. Sautel, a high-yield bond research analyst with Banc One Capital Markets Inc.

Senior subordinated notes for Silver Cinemas International, which operates discount movie houses as well as the specialty Landmark Theatre Circuit, have been trading at 45 cents on the dollar, Sautel said.

According to several industry analysts, movie exhibition companies are little more than midway through the changeover to stadium seating and larger complexes, which is costing a bundle. But few dare stand still in the stampede.

Sumner Redstone, the shrewd New Englander who made his first fortune from movie theaters before acquiring Viacom Inc. and Paramount Pictures, offers an example. His closely held National Amusements Inc. theater company is tearing down a 14-screen multiplex in Revere, Mass. "the largest-grossing theater in New England" to replace it with a 20-screen megaplex with stadium seating. Why?

"If you don't do it, your competitors somehow get to you," he said. Redstone says the rewards are evident. After making a similar decision in Cincinnati, he quadrupled that theater's revenue.

"Big capital costs, big revenues," said the Viacom chairman, who has turned over much of the National Amusements operation to his daughter, Shari Redstone.

She is among the industry leaders heralding the summer slate of films, saying, "I think this is the best summer I've seen since I've come into the business." She points to the breadth of product, which ranges from romantic comedies to children's stories and adventure movies.

Most competitors pushed back the release dates of their films to avoid competing directly with the "Star Wars" film. Variety reports that 20 films are slated for wide release in August.

Shareholders of Carmike Cinemas Inc., Loews Cineplex Entertainment Corp., AMC Entertainment Inc. and GC Cos. Inc. are certainly ready for an uptick.

The stock price of Carmike Cinemas, once a favorite on Wall Street, is trading near its 12-month low. Carmike took restructuring and other charges of $73 million in late 1998.

Loews Cineplex is also trading about 30 percent below its year-ago price; GC Cos., the owner of General Cinema Theatres, has been on the decline for most of the past 15 months.

AMC Entertainment recently said it would reduce the size of its future megaplexes and increase its sales or closure of outmoded theaters. Chief Executive Stanley Durwood, 78, pioneered the megaplex, building some theaters with as many as 24 and 30 screens.

But senior executives at the company told analysts last month that they're scaling back to 20-screen structures in the future. Indeed, some screens have been shuttered during non-peak hours and the company is even eliminating six screens at a 30-screen complex in its hometown of Kansas City, Mo., to convert the space into a restaurant.

AMC Entertainment, like other theater operators, must constantly fret about the supply and quality of films. For the past three years, major studios have released between 235 and 253 films a year. Due to high costs, the big Hollywood studios show no interest in increasing the number of big-ticket productions to fill the largest megaplexes.

"People who built 30 screens are going to have trouble filling them," predicts Redstone, who prefers his 20-screen prototype.

Naturally, Hollywood film suppliers are pressing their advantage when they find a vulnerable theater market. Manhattan, for example, used to be the market where distributors had little leverage because the theaters were tightly controlled by a handful of operators, with high costs of real estate deterring new entrants.

The advent of megaplexes, however, changed the economics and enticed more theater operators. Loews Cineplex so dominant in the past failed to win the latest "Star Wars" film for its Manhattan theaters when it refused to guarantee a "floor," or certain percentage of its box-office receipts, to the film's distributor. Until now, Manhattan theaters have brushed off such requests.

But the distributor, 20th Century Fox Domestic Film Group, easily found other Manhattan venues, and said it will demand "floors" for all of its films in Manhattan in the future. "If the market didn't allow us to ask for a floor, we couldn't," said Tom Sherak, chairman of the Fox unit.

Look for more restaurant conversions in those 30-screen theaters.

Kathryn Harris is a columnist for Bloomberg News.

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