Dealing With Risk and Uncertainty

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Introduction

Cinemark Holdings, Inc. is one of the largest movie theater chains in the United States and Latin America. It holds one of the highest shares of the theatrical exhibition market, along with AMC Theatres (Hallinan & Reynolds, 2019). The main branch of Cinemark includes 534 theatres with a total of 5,977 screens, many of these locations take the top positions in box office revenues in the United States (“About us,” 2020). However, the number of theater attendees continues to plunge due to the increasing popularity of Netflix, HBO, and other video-on-demand services, as well as rising ticket prices (Smits, 2019). The company’s stock market price has decreased significantly in recent years due to the emergence of streaming services, and the current pandemics further worsened its position, as the overall industry ratings have dropped (Rothman, 2020). This essay analyzes the status of Cinemark on the market, evaluates its recent actions to alleviate the issue, and includes recommendations for optimization of the business.

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Recent Attempts to Control Risks and Instability

The company implemented several initiatives that aimed to reduce the risks and instabilities of the movie exhibition industry. These initiatives are aimed at both current issues and the expansion of future potential. Rothman (2020) states that to make theaters more attractive to visitors, Cinemark “has been upgrading theaters to include more-comfortable reclining seats as well as advanced sound and picture quality.” However, this initiative barely affected the number of attendees while increasing the company’s expenditures by a significant amount (Rothman, 2020). This notion signifies the fact the company needs to explore other options to increase profitability.

The second major initiative consists of aggressive expansion of the theatrical chain in multiple locations outside of the United States. The company’s recent growth in revenue is attributed to its success on the international scene, especially in countries where streaming services did not yet gain overwhelming popularity (United States Securities and Exchange Commission, 2020). However, as stated by the U.S. Securities and Exchange Commission (2020), there are “challenging industry circumstances, such as economic and political conditions in Latin America, weakening foreign currencies, rise in construction costs” (p. 29). Despite this fact, Cinemark’s presence in these markets gives it higher stability, since it provides its ability to withstand the prolonged lockdown in the United States.

To alleviate the adverse impact of the forced lockdown, Cinemark has attempted to reopen theaters at critical locations as soon as the possibility was available. DiFurio (2020) states that the company “was the first major theater chain in North Texas to welcome moviegoers back amid rising coronavirus cases” back in June. It gave Cinemark more time to adjust to the future perspectives that the movie theater industry is facing, however, it also attracted negative criticism to the company. Following this trial reopening, Cinemark attempted to gain permission to open its facilities in another location, yet this request was met with a strict refusal (Goldsmith, 2020). Goldsmith (2020) states that “theaters had tried to make a case for discrimination since New Jersey allowed churches to open but not movie theaters.” Many theaters stay closed up to today due to the lockdown.

Improving Risk Management

Several corrections can help the company to improve its standing and allow it to increase profitability. One of the primary means of reducing risks that the company has taken is its deals with other theatrical exhibition companies, as well as movie studios (Hallinan & Reynolds, 2019). Hallinan and Reynolds (2019) state that “North American movie theater circuits, including AMC, Regal, and Cinemark, joined forces with Warner Bros. and Universal Pictures to form the Digital Cinema Distribution Coalition,” which was a successful move (p. 2). Cinemark needs to avoid these conflicts and stay on good terms with movie producers.

The company continues to increase ticket prices to keep its revenue high, yet this strategy involves significant risks. It is essential to keep in mind that this is not a viable approach, as this type of entertainment becomes more available by other means, which are less expensive and more convenient. Following the example of the AMC Theaters, Cinemark can expand its loyalty program to give more significant benefits to attendees and to promote theatrical visits by adding value to the ticket via supplementary products and services.

Cinemark can follow another AMC Theaters initiative to diversify its portfolio further and gain stability. Its primary competitor is set on a path of digitalization, which is the primary trend in modern times, by using the newest technologies, such as augmented reality, streaming video-on-demand, and automated ticket booths (Hallinan & Reynolds, 2019). Palomba (2020) argues that “that traditional movie consumption has become a fractured enterprise, as consumers view movies not just on movie screens, but through tablets, smartphones, television screens, desktops, laptops, and video game consoles” (p. 2). By expanding the presence of the Internet of Things and VOD technologies into its structure, Cinemark can increase its revenues.

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Adverse Selection Problem, Moral Hazard, and Principal-Agent Problem

Theatrical chains use personal data for various purposes, including selling it to studios for further analysis. Cinemark, as well as other major movie chains, collects data about moviegoers to find new opportunities to improve its services (Palomba, 2020). This data can be exploited by the companies to produce higher revenues, yet it can be harmful to viewers, as they can be put at a disadvantage if this information would create an unequal distribution. Therefore, companies that deal with this data are bound by strict rules for personal information usage.

There is a significant longstanding issue with movie chains and movie distribution on the market. The theatrical exhibition industry is heavily concentrated, as more than 40% of the market in the United States is controlled by the three largest companies – Cinemark, AMC, and Regal (Cohen, 2017). While it would be more convenient for viewers to watch movies at home, studios are prohibited from releasing their products directly to streaming services or DVDs for a set period after their initial release (Hadida et al., 2020). This pressure allows theatrical chains to keep their revenues high, yet this notion has an adverse effect on viewers’ ability to access the content. In the past, theaters were a crucial part of the movie industry, as they were the primary source of publicity for studios’ products, yet now public attention can be achieved via the Internet. To minimize the effects of this issue, the company needs to address viewers’ preferences by including them in contracts with movie studios.

The primary principal-agent problem for movie theaters lies in the differences in relationships between companies that produce films with theatrical chains, and theatrical chains with their customers. The focus of the producer might not align with viewers’ expectations or preferences, as this actor might be focused on personal recognition, or artistic value, without considerable regard toward production costs and future revenues. In the meantime, it is up to the theaters to generate revenues that are expected to cover these expenses by advertising the product to its best perceivable value. In the end, it is up to the customers to judge the work and to alleviate this potential problem, theaters and studios create partnerships that help both sides to come up with agreeable expectations.

Organizational Structure

The company has a prominent tall organizational structure that further branches into divisions based on the location of the theaters. Its board committee leaders are separated from the day-to-day management and focus on overviewing the implementation of the company’s vision and mission (United States Securities and Exchange Commission, 2020). The responsibilities of the Board of Directors are focused on upholding structural integrity and the high quality of employees in leadership positions (United States Securities and Exchange Commission, 2020). The primary source of retention of high-quality employees is an extensive bonus program that is intended to encourage the achievement of performance goals (United States Securities and Exchange Commission, 2020). This organizational structure allows Cinemark to operate as a highly divisional company while upholding the high quality of services, yet it might require additional control to be stable.

In an attempt to improve overall profitability, the company had been restructured several times in the past. Recent events put a significant strain on the company, and it was forced to lay off approximately 17,500 employees, as well as cut executive compensations (DiFurio, 2020). To further address the issue with pandemics, the company might need to reorganize its low-end structure to cut costs and open up new possibilities for expansion.

Conclusion

In conclusion, Cinemark had encountered a significant number of issues that severely impeded its growth in the past few years. These concerns continue to grow as the current situation had a prominent adverse effect on the entertainment industry. The virus outbreak is one of the major forces that keep the company’s revenue down, and the company must conserve resources and keep a close look at its competitors and partners to prepare for the full reopening and further recovery. There are also longstanding problems that are linked with the process of digitalization (Hadida et al., 2020). The movie theaters industry is on the decline due to the emergence of streaming services, as Netflix, Amazon, HBO, and others push movie studios into releasing new products on their platforms.

The situation calls for extreme measures, such as expansion into the digital market and downsizing of theaters in countries where streaming services became the predominant means of accessing movies and series. As VODs became the primary means of consumption of the product that the company specializes in, it could prove beneficial for the company to begin exploring the new possibilities as a digital movie provider. Cinemark expresses its optimistic views on the future due to its success in the global market (United States Securities and Exchange Commission, 2020). However, the company needs to take the right course and follow the trends to stay competitive. The continued growth of the movie exhibition market in the developing countries, while allowing Cinemark to be sustainable, is not an infinite source of revenue, and rising costs of expansion calls for further experiments.

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References

About us. (2020). Web.

Cohen, J. N. (2017). Investing in movies: Strategies for investors and producers. Oxford, U.K.: Taylor & Francis.

DiFurio, D. (2020). Will movie theaters survive? Cinemark lost $170 million last quarter, but it’s optimistic. Web.

Goldsmith, J. (2020). Judge upholds New Jersey order closing cinemas; Denies theater chains’ request for preliminary injunction. Web.

Hadida, A. L., Lampel, J., Walls, W. D., & Joshi, A. (2020). Hollywood studio filmmaking in the age of Netflix: a tale of two institutional logics. Journal of Cultural Economics.

Hallinan, B., & Reynolds, C. J. (2019). New Media Goes to the Movies: Digitizing the Theatrical Audience. Television & New Media, 152747641986313.

Palomba, A. (2020). Consumer personality and lifestyles at the box office and beyond: How demographics, lifestyles and personalities predict movie consumption. Journal of Retailing and Consumer Services, 55, 102083.

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Rothman, L. (2020, March 24). Does COVID-19 spell the beginning of the end for Cinemark? Web.

Smits, R. (2019). The Powerful Influence of Netflix and Amazon Studios. Gatekeeping in the Evolving Business of Independent Film Distribution, 171–192.

The United States Securities and Exchange Commission. (2020). Cinemark Holdings, Inc. proxy statement and notice of 2020 annual meeting of stockholders. Web.

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BusinessEssay. 2022. "Dealing With Risk and Uncertainty." January 15, 2022. https://business-essay.com/dealing-with-risk-and-uncertainty/.

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BusinessEssay. "Dealing With Risk and Uncertainty." January 15, 2022. https://business-essay.com/dealing-with-risk-and-uncertainty/.