Multiplex Theaters

CINEPLEX ODEON: BACK TO THE FUTURE
Case prepared by Joseph Lampel & Jamal Shamsie, assisted by Xavier Gonzalez-Sanfeliu & Katherine White.

THE EARLY YEARS

An Opportunity for Multiplex Theaters
The origins of Cineplex Odeon date back to 1979 when Garth Drabinsky, a young film maker, joined forces with
Nathan Taylor, an industry veteran. Taylor had long championed the concept of theaters with multiple screens. Drabinsky
found the idea appealing, and together the two formed Cineplex. Their first multiplex theater was located in Toronto's Eaton
Center, a newly developed shopping center. It contained as many as eighteen separate theaters, each with a seating capacity
ranging from 60 to 150 people.
Cineplex saw itself as a niche player. It countered the trend in the industry that saw exhibitors using their large theaters to get
the potentially lucrative releases from the Hollywood distributors. Instead, the newly developed multiplex chain used its small
screens to show specialty movies, in particular foreign art films that could not be shown profitably in large theaters. As Taylor
put it, Cineplex was not out to challenge the major chains, but to complement them: "We are seeking to develop a market that
to some extent doesn't exist. We are taking specialized markets and filling their needs. It's a latent market and a different niche
than the major chains go after1."
In addition, Cineplex sought to obtain successful U.S. films after they had completed their run with the larger theater chains. It
was commonly known that the share of the box office receipts accruing to the distributor decreased with the run of the movie
(see Appendix). Although this allowed exhibitors to keep more of the revenues, the inevitable decline in attendance ordinarily
forced large theaters to discontinue exhibition once the number of empty seats exceeded a certain level. It was at this point
that Cineplex could pick up the films and, by virtue of its small theaters, keep most of the seats full.
The advantages of the multiplex concept were primarily due to a carefully planned use of shared facilities. All the theaters in a
location were served by a single box office and a single concession stand. The use of advanced projection technology made it
possible for a handful of projectionists, in a centralized projection booth, to screen films in several theaters at once. Show
times were staggered to avoid congestion. Even advertising costs were lowered by using a single ad for all the films playing at
a particular location.
The success of the multiplex concept spurred Cineplex to expand its operations across Canada. The company also entered
the large U.S. market with the development of a fourteen-screen theater complex in the Beverly Hills section of Los Angeles.
By the end of 1982, the company had inaugurated almost 150 screens in as many as twenty different locations.
A Close Brush with Bankruptcy
The rapid rate of expansion brought Cineplex face-to-face with financial and market realities which its owners had not
anticipated. During its expansion, the firm had amassed $21 million in debt, mostly in high and floating interest rates. This
came in the midst of an economic recession that cut deeply into the company's earnings. To make matters worse, U.S.
distributors were increasingly reluctant to supply Cineplex with hit films for fear of alienating the two large Canadian exhibition
chains, Famous Players and Canadian Odeon. Without the revenues of major U.S. releases, the firm's future was bleak.
Only drastic measurers could avert imminent bankruptcy. In reaction to this crisis, Cineplex took steps throughout 1983 to
reduce its debt and improve its cash flow. This was done by selling off some of the company's assets, raising funds through
the public offering of more shares, and persuading the banks to extend further credit. However, these measures did not
address the company's blocked access to major releases. To break through this barrier, Drabinsky sought government
intervention. Using his legal training, Drabinsky marshalled the evidence and managed to convince the Canadian government
that strong grounds existed for launching an investigation into the existence of a conspiracy aimed at depriving Cineplex of
access to major releases.
In the face of a government investigation, and possible sanctions, the U.S. distributors modified their stance and agreed to a
system of competitive bidding that would ensure that all exhibitors had equal access to their films. With this hurdle surmounted,
Drabinsky was able to secure greater financial backing, particularly from institutional investors. A large investment came from a
trust company representing the Bronfmans, a powerful business family associated with the Seagram liquor business.
To Drabinsky, the close brush with bankruptcy also had revealed a basic flaw in his company's position. He became acutely
aware that his small theaters generated insufficient revenues to bid for early runs of the most lucrative U.S. films. So when the
principal owner of Canadian Odeon passed away, Drabinsky saw an opportunity that was not to be missed. Canadian Odeon
had been greatly weakened by the new bidding system that Drabinsky had helped to bring about. Alarmed by Odeon's poor
performance, the heirs finally accepted Drabinsky's offer of a little over $22 million dollars for the entire chain.
The acquisition of Canadian Odeon in the spring of 1984, at what many viewed as a bargain basement price, began a
remarkable turnaround for a company which just two years earlier, had faced bankruptcy. Now, with over 450 screens in as
many as 170 different locations, Cineplex Odeon was a major player in the industry. Drabinsky relished his comeback and
was not above taking a passing shot at his detractors: "A lot of people who were waiting for me to go under were
disappointed. Well they didn't get their jollies2."

7

A BLOCKBUSTER STRATEGY

A Larger than Life Experience
The formation of Cineplex Odeon crowned Drabinsky's comeback from the verge of bankruptcy, but he was not
content to rest on his laurels. Now that he controlled one of North America's major theater chains, he set out to transform the
moviegoing experience itself. With the advent of pay- television channels, pre-recorded video cassettes, it was becoming
increasingly difficult to lure moviegoers from the comfort of their homes.
To remedy the situation, Drabinsky sought to change the public's perceptions of the moivegoing experience by renovating the
theaters, beginning with the physical layout. Cineplex Odeon abandoned the uniformly drab design, common in most theater
chains, in favor of art work in the lobbies; lush woolen carpets spread over marble floors; and coral-and-peach color-
coordinated walls. The screening auditoriums featured scientifically contoured seats, digital background music, and state of-the-
art projection systems. As a final touch, the firm reintroduced real buttered popcorn in the concession stands and cafes that
offered freshly brewed cappucino. By making such changes, Drabinsky had single-handedly changed the face of film
exhibition, rejuvenating what had become a stagnant segment of the industry.
The metamorphosis was completed with the unveiling of a new company logo in the form of a curved bowl that was
reminiscent of a Greek amphitheater. Furthermore, in choosing colors for the logo, Drabinsky decided on a combination of
imperial purple and fuschia. For him, the logo was no mere representation; it was intended to make people sit up and take
notice. As Drabinsky put it, "I felt that this would be more of a bravado kind of statement. I don't think anyone was ready for
that3."
Cineplex Odeon's new format differed sharply from the prevailing industry response to the threats posed by pay television and
take-home video cassettes. Most theater chains sought to cut their fixed costs by slicing old movie palaces into tiny cinemas;
and by eliminating many services that were deemed inessential. Drabinsky, on the other hand, believed that the moviegoing
experience extended beyond what was shown on the screen. As the customer entered the theater, he or she was meant
to leave behind mundane existence, and gradually move into a different reality. In the words of Drabinsky: "We are
determined to give back to our patrons the rush and excitement and anticipation and curiosity that should be theirs when
they leave the techno-regimented world of their daily lives for the fantasy world of escape that is the movies4."
A Costly Operation
Drabinsky's push for glamour and glitz was very costly. Cineplex Odeon typically spent almost $3 million on a typical
six-screen multiplex, a third more than the average for the industry. However, Drabinsky was convinced that the additional
investment would bear fruit not only at the box office, but at the concession counter as well. The classier upscale atmosphere
was meant to entice customers into spending more time in the theaters before and after the movie, resulting in higher sales at
the concession counter. Indeed, the concessions at Cineplex Odeon's theaters usually generated approximately $2 per
moviegoer, which was close to twice the industry average.
Despite the higher concession sales, Drabinsky was forced to search for other sources of revenues to cover all of the fixed
costs of a typical Cineplex Odeon theater. He raised admission fees well above the competition in most markets and began to
show commercials before the screening of the main feature. Both moves were highly unpopular. Irate patrons expressed their
anger in a number of cities, sometimes by protesting outside Cineplex Odeon's theaters. The most publicized of these protests
occurred in New York City where Mayor Ed Koch joined picketers in a call for a boycott of the chain because of its price
increase.
All of these criticisms against Drabinsky were tempered by his use of promotional gimmicks. Most significant among these
were the lower admission prices that were offered on Tuesdays. This pricing strategy was designed to make movies more
accessible to the general public. Attendance at Cineplex theaters climbed substantially on these Tuesdays, generating
additional revenues as well as much needed good will among customers. Finally, Drabinsky also made an effort to reduce
costs wherever possible. He imposed stringent cost controls throughout his organization. Odeon's management was
Drabinsky's first target. Upon acquisition, Drabinsky dismissed about two-thirds of Odeon's head-office staff and cut the pay of
the remaining personnel by 10 percent. The cost-cutting campaign did not leave any facet of the firm's operations untouched.
Even the traditional cardboard containers used to sell popcorn were replaced with bags, a move that saved Cineplex Odeon
close to $1 million per year.
A Powerful Competitor
Drabinsky was implacable to his competitors. In every market that he entered he used all the means at his disposal to
gain market share and to keep the competition on the defensive. He pursued Famous Players, his long-standing rival in
Canada, with special vengeance. In 1986, for example, Drabinsky seized an opportunity to lease part of a building in Toronto
that housed the Imperial Theater, a six-theater complex operated by Famous Players. Since his part of the building contained
the main entrance to all of the theaters in the complex, Drabinsky decided to deny Famous Players any public access,
ultimately forcing it to close down and sell all of its theaters in this key location to Cineplex Odeon.
Such a firm stance reflected the hardball approach to business that had earned Drabinsky the nickname "Darth", after the
screen super-villain, Darth Vader. In an industry known for tough negotiators and agile deal makers, Drabinsky gained a
reputation as a tenacious and abrasive businessman. He used his astute bargaining skills to make a series of acquisitions
across the U.S. and Canada. His biggest acquisition involved the Plitt theater chain, which had almost 600 screens in over 200

7

locations.
By January 1, 1989, Cineplex Odeon was the second largest motion picture exhibitor in North America with just over 1,800
screens in 500 different locations . Almost two-thirds of the company's screens were located in the U.S. and were scattered
over twenty different states. The remaining one- third of these screens were situated in six different Canadian provinces.
Cineplex Odeon theaters could be found in virtually all major population centers, from New York to Los Angeles in the United
States, and from Toronto to Vancouver in Canada.
Drabinsky also tried to use the size of his chain to obtain added clout with film studios and distributors. He consistently used
this strength to obtain potential hits on more favorable terms, but his insistence on having his way often created tensions in his
relationships with suppliers. For example, Columbia Pictures did not yield to Drabinsky's demand that Bernardo Bertolucci's
oriental epic "The Last Emperor" be made available for wide release during the Christmas period. In retaliation, Drabinsky
refused to exhibit another film produced by the studio that was slated for release during the same holiday season. This
episode created additional tension in Drabinsky's relationship with Columbia, resulting in the diversion of more of the studio's
films to other chains, such as Famous Players, Drabinsky's major Canadian competitor.
Moving Beyond Theaters
In 1982, at a time when Cineplex was still a small company screening foreign and art films, Drabinsky moved to
consolidate and expand the company's other film-related activities. These ventures consisted mainly of a film making
subsidiary originally started by Nathan Taylor, and a film distribution arm, launched by Drabinsky in 1979. The film making
subsidiary was one of Canada's largest and was located just north of Toronto. Its facilities were rented out to various groups
for film and television production, and included two sound stages, dressing and wardrobe rooms, a carpentry mill, a plaster
shop, and editing and screening rooms. Drabinsky had originally created the distribution arm to provide foreign and art films to
the newly developed Cineplex chain. It quickly developed into one of the largest distribution companies in Canada, acquiring
the right to distribute films to theaters and on videocassettes, as well as for use on network and pay television.
In 1986, Drabinsky increased his company's involvement in film making through the acquisition of the Film House. The
Toronto-based facility consisted of a large film processing laboratory and a fully equipped post-production sound studio.
Following its purchase of the Film House, Cineplex Odeon increased the capacity of its film laboratory and constructed new
upgraded sound facilities.
In addition, Drabinsky expanded the film production and distribution activities of his firm into the United States. With this move
into a larger market, Cineplex Odeon was able to step up its level of participation in film making. It began to contribute
towards the production of small budget films such as Paul Newman's "The Glass Menagerie" and Prince's rock concert
film "Sign `O' the Times".
Finally, Drabinsky entered into a collaborative venture with MCA, a large U.S. entertainment conglomerate. The two
companies agreed to jointly develop and operate a large film studio and theme park in Orlando, Florida that would compete
with Disney World. At the same time, Drabinsky persuaded MCA to purchase a large block of shares in Cineplex Odeon,
making them a significant partner in his growing company.
All of these moves reflected Drabinsky's determination to transform Cineplex Odeon into a corporation that would straddle
every part of the movie industry. As he put it: "It's an amalgamated company with revenue from theaters, distribution,
production, the studio, and, down the road, live theater. People aren't buying a share in this company just to have a share in a
motion picture. They're getting a share in a vertically integrated entertainment corporation5."