#DigitalSkeptic: Tiny, Independent Charlevoix Cinema III Has Film Industry Cure

NEW YORK (TheStreet) -- Mary Kurtz knows the sad ending if Netflix can ever release big movies the same day theaters do.

"I rent from Netflix all the time, but if they can get in and get movies ahead of everyone else," said Kurtz, co-owner of Charlevoix, Mich.-based Cinema III, a roughly 420-seat, resort town commercial movie house. "It will be bad for the film business."

Kurtz and I have been picking through the heap of new-media trash talk piling up on theater owners. "The big, big movies that Hollywood spends billions on are pretty much released the same way they were years ago," said Ted Sarandos, chief content officer at Netflix, back in October. "Premium on-demand models that could change that have been tried over and over again. But it's the theater owners who have stifled that innovation at every turn."

Kurtz is polite, but as she explains it, that Web-above-all attitude misses the business point: "If Netflix gets the movies at the same time we do, I think you are going to see both a lot of theaters close and a lot of studios make less money."

Investors would be inviting a flop of simply Mars Needs Moms scale if it dismisses Kurtz as out-of-touch theater owner refusing to adapt to the Information Age consumer. In fact, the articulate 25-year-old got her accounting degree online while working full time as a commercial credit officer at Charlevoix State Bank -- where she started when she was 15. Her husband, Luther, the other owner of the theater, is also co-owner of Bucket List Skydiving, a sophisticated adventure experience firm that manages roughly 30,000 jumps annually in eight locations across the U.S.

And a celluloid dreamer Mary Kurtz is not: Though she grew up in Charlevoix and knew the original Cinema III as a girl, she not only never dreamt of owning the place, she never even dreamt of going to the place.

"I never came to this theater as a child. I never liked it. I got into this business because the theater went into foreclosure and my former boss at the bank joked with me that maybe I should manage it," she said. "And the more my husband and I looked at it, the more we felt that if we invested in the proper technologies, made the theater a real experience, people would come out. And we could make a profit. "

So 10 months ago, the couple took ownership of the Cinema III for an undisclosed sum and began a $300,000 gut renovation that included fancy new seating, carpeting, digital projection, sound system, concessions and -- most of all -- the right to compete for first-run Hollywood movies.

"We looked at other models, like live events and nonprofit art houses. But we felt that if we made the place special enough so the older audience would come out for date night and still had the properly marketed, major hit movies to bring the kids, it would work," she said.

So far, the plot is playing out: Ticket sales are up 40% this year over last, she says, mostly from showing first-run movies such as The Hunger Games: Catching Fire and Despicable Me 2. And buckle up, Netflix groupies -- itty-bitty Charlevoix Cinema III did something the streaming media company never did: turn a profit in its first year in operations.

No scale in the movie business
Now comes the investor denouement -- Kurtz's lesson about the movie business:

"The biggest shock that I learned now that I own a theater is that people don't understand how expensive movies really are," she said. "The price of tickets simply does not cover the cost of films from the studios. That's why we have to charge what we do at concessions. It is the only way to pay the studio for the movie."

She doubts online media models can ever pay the true freight for the big-budget films audiences demand.

"Take my family of 10, who planned to go out for Thanksgiving," she said. Her in-laws are like most of ours -- it's tricky for everybody to agree on what film to go see. So instead of heading into town to see a movie, they rented a film on Netflix.

"Assuming that was a $10-per-ticket movie," she said, "instead of the studio taking in, say, $50 of that $100 ticket price, they only made probably $3 of the $6 for that Netflix rental. It would take 15 or more rentals to make up that loss. That's less money for the industry."

Even a brief skim of the financial statements for major movie studios and theaters owners shows Kurtz's gut sense for the profit in theatrical distribution is correct. Film-industry trade bible Variety estimated last week that Walt Disney broke its $4 billion worldwide box office record this year. Not on on-demand or DVD sales, but mostly on theatrical releases of commercial hits such as Thor: The Dark World and Iron Man 3. And Plano, Texas-based theater chain Cinemark not only reported a 20% gain year-over-year for its $757 million in sales for the third quarter, it also kept a sweet 10 cents of every dollar sold as profit.

Compare those sexy movie legs to the feeble stumps Netflix tries to run with. Even after 15 years of trying (15 years!!!) the online streaming service considers it a smash hit to keep two and half cents of every dollar it makes -- or 71% less than Cinemark keeps.

All that upside, Kurtz said, comes from one simple place: "We are only talking about a few weeks. After that, the film is released forever. But that's all we need to get that audience out for this high-margin experience," she said. "Eliminate that window and theaters -- and the profit that goes with it -- will go out of the business en masse."

It turns out Hollywood is just like any home: The more windows, the better.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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