Waiting for the next wave 3D entertainment 2012 www.pwc.com Contents Introduction 1 3D films 2 3D television 10 Other 3D screens 16 3D screens’ penetration forecast 18 2 Waiting for the next wave As we continue to analyse the 3D entertainment markets, we interview players around the world in the different industries including film studios, game studios, broadcasters, pay‑TV operators, network operators and main entertainment screens. Introduction Reviewing the past two years The 3D film industry underperformed in the 3D entertainment in the US in 2011, though it did better market, we now find a lull – in Europe and China. The conversion an industry that has lost of cinemas to both digital and 3D momentum and faces strong continues, but the pace of conversion varies across regions. headwinds. The early success of 3D and the record‑breaking In television, 3D TV sets sold quickly – accomplishments of Avatar far more quickly than HD TV had. led to overexcitement and, But there are few 3D TV programmes, in many cases, too much and this situation may continue as mediocre content that could there is no stand-alone business case not justify the premium prices for a 3D TV channel. On other fronts, that cinemas charged for 3D. and other types of screens, small accomplishments offered scant hope for momentum in the short term. The most interesting prospects for 3D could be in user-generated content rather than in professional development. So overall, 3D entertainment awaits the next wave. Can the film industry produce an Avatar-like surprise? Can consumers stir up demand for user-generated 3D content? It is hard to be optimistic in the short term. 3D entertainment 2012 1 In the US, growth potential seems limited in the short term, as the film‑screen digitisation phase is coming to an end. The number of 3D screens revenue (the 3D ticket premium) has more than tripled since that could be split by the exhibitor 3D films Avatar in 2009, not only in and the distributor/producer. In the US, but in all regions. 2009, the share of 3D box‑office revenues was 38% higher than the We see regional variations in the share of 3D cinemas releasing the additional growth potential for 3D film vs 9% higher in 2010 and 10% screens (see figures 1, 2 and 3). In the lower in 2011. US, growth potential seems limited in These disappointing results have added the short term, as the film‑screen fuel to a debate on 3D sustainability digitisation phase is coming to an end. and on the value of the 3D premium In other regions, the pursuit of that has raged in the US since Avatar digitisation will drive the penetration (see figure 9). “The audiences have of 3D screens, as the 3D upgrade is now come to realise that there are bad marginal compared with the movies that can be in 3D as well, and investment to digitise. that on top of that you are being charged an extra $5 to see a movie that This positive development in 3D-screen was as bad as the one you saw in 2D,” penetration does not translate said director Peter Jackson*. The 3D satisfactorily into box‑office revenues. premiums “are starting to backfire a What a disappointing year 2011 turned little bit,” he added. And this pressure out to be for 3D film in the US. on the 3D price premium makes 3D less appealing for studios. While 3D maintained its market share among the 20 top‑grossing films in the On the positive side is the very notable US in 2011 (see figure 4), the overall exception of IMAX cinemas, which results were not good in the US. continue to show strong growth globally, and which are generally held Among the disappointing indicators to deliver strong value for its price in the US: premium (see figure 10). Steven • The share of box‑office revenues Spielberg told a group of journalists*: generated by 3D decreased in “I am certainly hoping that 3D gets to 2011 for all genres (see figure 5), but a point where people do not notice it. also for specific genres such as Because once they stop noticing it, it animation and live action films just becomes another tool and helps (see figures 6 and 7). tell a story. Then maybe they can make ticket prices comparable to a 2D movie • The average 3D box‑office revenue and not charge such exorbitant prices of 3D screens decreased in 2011 just to gain entry into a 3D one, with (see figure 8) with two possible the exception of IMAX – we are getting explanations: a potential decrease a premium experience in a premium of the 3D ticket premium and a environment.” decreasing fill‑in ratio of 3D screens. Both explanations raise critical issues on the sustainability of the 3D business case, as 3D was supposed to provide additional *Source: http://movies.about.com/od/theadventuresoftintin/a/steven-spielberg-peter-jackson-interview.htm 2 Waiting for the next wave Another positive development in 3D is So what lies ahead for the Development of 3D the strong performance abroad of 3D 3D film industry? films from the US studios (see figures The number of 3D films released films in 2011 was 11, 12 and 13). The critical markets for has stabilised, with the number of sharply mixed with US studios outside the US had strong 3D films announced and planned disappointing US years in 2011, and the 3D price for 2012, comparable in number premium held up, though much more to those released in 2011 (see box‑office figures for so on IMAX screens. figure 14). 3D films and pressure China, now the world’s second-biggest The disappointments of 2011 have on 3D ticket premiums film market after the US, has a growing created risk aversion. One lesson partially balanced by middle class that enjoys a night out. learned is that 3D does best when it a growing number of And China is taking steps to encourage concentrates on animation, or on 3D growth. For years, China limited established franchises. As a result, 3D screens and strong the number of foreign films that could we will see ‘The Amazing Spider-Man’, international box‑ be shown in China each year to 20. a reboot of the ‘Spider-Man’ franchise, It recently agreed to increase that to as well as Jackson’s ‘The Hobbit’, office results. 34, provided the additional 14 films both likely to build on the strong were shown in 3D or large format. track record of their predecessors. We will also see 3D re-releases of The Chinese are also encouraging films including ‘Beauty and the Beast’ co‑production; films made by Hollywood and ‘Star Wars: Episode 1’. In contrast, studios with a Chinese partner do not original live action films are not count against that total. likely to flourish (see figure 15). Outside China, the share of box‑office revenues generated by 3D remains relatively high, except in the US In the medium term, another cause for optimism is that some of the biggest names in film‑making – Martin Scorcese, George Lucas, Steven Spielberg or Peter Jackson, along with James Cameron – have committed to 3D. Scorcese’s ‘Hugo’ was released in late 2011, and Scorcese was pleased with the result and said he would direct more 3D films; Jackson’s ‘The Hobbit’ will be released in late 2012. Just as encouraging for 3D is the emergence of an increasingly solid 3D production and post-production ecosystem in the US demand continues to grow for skilled 3D professionals; one service provider said that more than half of all demand for film professionals involves 3D. So people are being trained, and they are finding work. 3D entertainment 2012 3 Figure 1: 3D film screens (in units) Figure 2: Cinema screens by format (2011, in units) CAGR 2009-11 45,000 (in%) 40,000 +99% 40,000 35,479 35,000 +137% 35,000 13,695 11,642 30,000 +126% 30,000 8,116 25,000 25,000 22,411 7,592 13,774 5,769 20,000 +82% 20,000 15,000 15000 10,000 19,977 10,000 9004 18,285 2,026 14,921 +69% 5,000 7,873 5,000 2,536 1,297 0 0 US/Canada EMEA Asia Pacific Latin 2007 2008 2009 2010 2011 America US/Canada EMEA Asia Pacific Latin America Analog Digital non-3D Digital 3D Source: MPAA, IHS Screen Digest, PwC analysis Source: MPAA, IHS Screen Digest, PwC analysis Figure 3: Cinema screens by format (2011, in %) - 50% of - 60% of digital digital screens screens 100 25% 30% 25% 80 32% 1% 18% 60 19% 32% 79% 40 57% 51% 20 35% 0 US/Canada EMEA Asia Pacific Latin America Analog Digital non-3D Digital 3D Source: MPAA, IHS Screen Digest, PwC analysis 4 Waiting for the next wave Figure 4: Films released in 3D among Top 20 grossing films in the US 2007 2008 2009 2010 2011 1 Spider‑Man 3 Dark Knight Transformers 2 Toy Story 3 Harry Potter 7 – Part 2 2 Shrek the Third Iron Man Avatar Avatar Transformers 3 Transformers Indiana Jones 4 Harry Potter Alice in Wonderland Twilight – Breaking Dawn 1 4 Pirates of the Carib. Hancock Up Iron Man 2 Hangover 2 5 Harry Potter WALL‑E Twilight – New Moon Twilight: Eclipse Pirates of the Caribbean 6 Bourne Ultimatum Kung Fu Panda Hangover Inception Fast Five 7 300 Madagascar Star Trek Harry Potter 7– Part 1 Cars 2 8 Ratatouille Twilight Blind Side Despicable Me Thor 9 I Am Legend Quantum of Solace Monster vs.