Market Watch

Vue Cinemas Switches Ads to Rivals' DCM



Vue Cinemas has ended its relationship with Pearl & Dean (P&D) for provision of screen advertising and moved over to Digital Cinema Media (DCM), owned by rival circuits Odeon and Cineworld. Contract will start from 1 January 2011. Vue has 18 per cent of UK's cinema screens and a 23 per cent market share by revenue, making it P&D's largest client and as such a significant loss for a company which recently had a number of successes in signing screens and had increased its market share by screens and admissions to its highest in a number of years at 40 per cent plus. That will now sit at around 20 per cent, with DCM taking an 80 per cent share by screens. P&D will focus on servicing the layer of exhibitors below the big three and maintaining its position with the UK's independent exhibitors. In a sense though, the contract loss may also be a positive, as it ends the existing contract with Vue that was seen as a problem by potential buyers, and was contributing to the screen advertiser's losses, which equalled £13.3m ($20.4m) in 2009 on revenues of £19.9m ($30.6m). In the long-term contract, screen advertisers pay a minimum income guarantee to an exhibitor for screen rental so when market conditions for advertising change, as they did with the financial crisis in 2008, such a payment can alter the equilibrium of the deal. P&D was sold in April 2010 by STV to Limited to Image, which itself is owned by the owner of Empire Cinemas. Image paid out £9.1m ($14m)to STV for remainder of 2010 contract (May to December) when it took over P&D. Total annual guaranteed payment for 2010 was £17.6m ($27m), which STV described as 'onerous'. Significantly, Vue's contract with DCM is a revenue share deal, with no minimum guarantee.

Analysis
Vue has calculated that in a digital cinema world, the economies of scale that DCM can offer could bring down the screen advertising cost base and thus increase its profitability from this small but significant medium. In addition, digital cinema alters the USP of cinema as an advertising medium, with much shorter lead times, diferentiated formats (such as 3D) and higher transparency of admissions and on-screen fulfilment and this is likely to increase the revenues generated by screen advertising in the medium to long term. Digital has meant that both screen advertising companies are able to react to the market more quickly, and both are also keen innovators, with P&D, for example, developing an interactive 3D on-screen ad campaign in 2009. Overall cinema advertising spend in UK rose from £171.1m ($263.4m) in 2008 to £179.4m ($275.7m) in 2009, although 2008 was a poor year. The deal also offers a stronger negotiating position for DCM, which will feed through into overall revenues.

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