Watching Movies in Mexico

Mexico City

A firm produces a product to sell to consumers.  Simply stated, the goal of the firm is to maximize profit.  Now, consumers have different utilities with respect to this product --- that is to say, some people may pay a lot for it, some people may pay a little and some people may not want it at all.  If the firm is forced to set a single price, it will only be able to sell to those who are willing to pay that price and consequently lose the others.  

In an ideal business model, the firm would like to charge each consumer the maximum price that the person is willing to pay.  Compared to the single price situation, the firm is now able to extract more from those who are willing to pay more and also include those who are willing to pay less.  Unfortunately, for certain types of products, it is impossible to implement this form of price discrimination, as in the case of the ticket box office at the cinema where one would expect a single price to be posted (except possibly for discounts to senior citizens or minor children).

In the case of films, price discrimination is practiced over space and time.  A movie made in one country will be shown elsewhere with ticket prices charged at levels that are commensurate with local standards of living.  More significantly, a movie is released through different distribution systems at different price levels at different moments in time.  This strategy is known as 'windowing.'  

Owen and Wildman shows the following release window for U.S. movies in the late 1980's:

For the consumer, the price of the product will drop over time, from the maximum of the $10 single person ticket down to the free (interrupted by advertisements) television broadcast.  Therefore, the consumer can assess the utility of the movie to him/her against the time delay, and make a personalized decision. 

For the film owner, there is a myriad of factors to consider in order to come up with the optimal windowing combination.  Owen & Wildman listed these six factors:

1. Differences in the per viewer price earned in the different distribution channels

2. Differences in channels' incremental audiences (i.e. differences in the number of new viewers they contribute to a program's total audience

3. The interest rate as a measure of the opportunity cost of money (i.e. a dollar earned today is worth more than a dollar earned later, because interest can be earned during the time)

4. The extent to which viewers exposed to a program through one channel are eliminated from the potential audience in other channels

5. Differences among channels in their vulnerability to unauthorized copying

6. The rate at which viewer interest in a program declines following its initial release

In practice, most film owners follow the same windowing schedules since consumers have developed certain standard expectations by now.  Occasionally, some of them may forego the first run in the theaters due to difficulties in procuring broad distribution, and hit the video market immediately.

We will now cite some survey data from the TGI Mexico study.  This is a survey of 6,200 Mexicans between the ages of 12 and 64 years old who were interviewed during late 2000 and early 2001.  Overall, 39% of these people said that they have attended a movie performance in the past 6 months.  The breakdown of the most recent occasion is as follows: 8% within the last 7 days, 18% between 8 to 30 days ago, 9% between 1 to 3 months ago and 3% between 4 to 6 months ago.

The question that we are interested in is this one:  Does the fact that someone owns home movie delivery systems make him/her less likely to attend movies?  In the next table, cinema attendance incidences hare broken out by ownership of three television technologies.  The numbers in this table shows that those people who own these television technologies are in fact more likely to attend cinema.

Of course, cable and satellite televisions service encompasses a variety of channel offerings; apart from films, other program genres such as sports, cartoons, news, etc are also popular.  In the next table, we provide the breakdown for those people who are movie channel viewers on cable/satellite television.  Here, we should remember that HBO stands for Home Box Office, and was originally envisioned to displace the cinema box offices altogether.  According to the data here, if anything, these people are even more likely to attend cinema.

According to Owen & Wildman, "until a film is released on cassette, owning a VCR does not change a viewer's willingness-to-pay to see the film in a theater."  This is certainly confirmed by the survey results here.  Owen & Wildman goes on to say, "the theatrical release draws equal fractions of viewers who own VCRs and viewers who do not."  The survey results here would extend this further to the point where those who own television technologies are more likely to attend cinema because they are more ardent movie lovers. 

PUBLICATIONS

• Hollywood Planet: Global Media and the Competitive Advantage of Narrative Transparency.  By Scott Robert Olson.  LEA. 1999.
• Video Economics.  By Bruce M. Owen and Steven S. Wildman.  Harvard University Press, 1992.

(posted by Roland Soong, 7/13/2001)

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