Weekly Wire
Metro Pulse Reel Success

The story of Regal Cinemas' astounding rise to the top of the theater business.

By Mike Gibson

MARCH 2, 1998:  When the lights dim and the radio cuts and the slide-show advertisements for Pepsi and Easy Pagers and Steak 'n' Shake suddenly fade from the screen, the Regal train sets off on its winding, super-animated sojourn. It navigates a tortuous maze of digital cartoon madness—a vivid neon spacescape littered with cyclopean candy cartons, volcanic popcorn boxes, and mountain-sized soda cups—before docking in its animated bay and morphing into the ubiquitous Regal Cinemas logo, complete with its tell-tale reel of film.

That Regal train, as depicted in the minute-long promotional spot that prefaces every movie shown at a Regal Cinemas theater, will roll into hundreds more movie halls all over the country in the coming year. Regal spokesmen recently announced that the Knoxville-based theater group would be the focal point of a massive movie merger, a three-company transaction that will create the largest movie exhibition chain in the country.

The deal, whereby Regal would be purchased by heavyweight buy-out firms Hicks, Muse, Tate, and Furst, Inc. and Kohlberg Kravis Roberts and Co. (owners of Act III Theatres out of Portland), affords the resulting conglomerate control of nearly 3,100 screens. (On Feb. 20 Hicks Muse announced that it would not be purchasing United Artists Theatre Group, a 2,174-screen operation that Hicks had agreed to buy in November, prior to the Regal deal. The combination of Regal, Act III and United Artists would have given the planned conglomerate more than 5,300 screens across 727 locations. A Hicks Muse spokesman confirmed, however, that the aborted buy-out would not affect the company's plans to partner with Regal and KKR.)

The new corporation will retain Regal's Knoxville headquarters as well as its Knoxville-born head, Regal founder and CEO Michael Campbell, the King Midas of movie halls, an ex-grocer who entered the theater business on a lark.

Regal's story is noteworthy in large part because of Campbell. The unassuming former bag-boy eschewed college and went full-time with the White Stores regional supermarket chain upon his graduation from a local high school in the early 1970s; it was only after a decade in the grocery business that he and fellow store manager Neal Melton began forging what would be the first of two successful, locally based theater companies.

But the Regal saga is also important because of the sheer magnitude of the pending merger and because it reflects a larger movement toward consolidation in the fragmented theater industry, a trend that has seen the title of biggest chain change hands no less than three times in the last five months thanks to a series of high-rolling mergers and acquisitions.

Many believe deals like the Regal buy-out are part of an inevitable maturing process, the growth spurts (and growing pains) of an industry that has spent decades in a sort of piecemeal adolescence. Campbell notes that even now, the country's top 10 movie exhibitors claim only about a 50 percent market share. "Compared to other industries, ours is still very scattered."

But others say these sweeping consolidations set an unsettling precedent, one that may render small, independent theaters extinct and leave the viewing public with fewer movie-going options at a higher admission price. "There doesn't seem to be any concept of anti-trust anymore," rues a Georgia-based film buyer who works exclusively with independent theater owners, including one close to Knoxville. "It's frightening to me. I think we're only a step away from seeing companies make movies and then put them in their own theaters."

It would be more than mildly presumptuous to give Michael Campbell a lecture on the merits of mom-and-pop enterprise. His story, if not quite a rags-to-riches epic, is certainly a triumph of talent over circumstance; the slim, mustachioed Knoxvillian and his partner built their first theater chain (Premiere Cinemas) screen by screen, pooling personal savings and scrounging small bank loans to fund modest complexes in small Southern towns.

Maybe the most striking thing about Campbell today is his palpable discomfort with the trappings of show business and high-profile success. His tidy office in Regal's Halls headquarters sports only a few nods to moviedom—most notably an advertising lay-out of a visibly uptight Campbell cuddling stiffly with slinkily attired supermodel Cindy Crawford and actress Tia Carrere. For the most part, the modest executive suite, rife with family photos and business tomes, is reflective of the Regal chieftain's clear-headed work ethic and resolutely unpretentious demeanor. "I like to tell people we're not really the Hollywood types," he says with a quiet chuckle.

A Knoxville native, Campbell began his workaday career as a bag-boy for White Stores while he was still attending the old Fulton High School. He accepted a full-time management position upon his graduation in the early '70s and worked for the company for more than a decade before finding his life's second calling, in the form of an aging movie house in New Tazewell.

Campbell's epiphany came in 1982, two years after his transfer to the Claiborne County town, when the tiny burg's old single-screen Star Theater closed down. Motivated more by a sense of civic duty than any dreams of mega-plex millions, Campbell and fellow White Stores manager Melton took over the building's $500-per-month lease, then plundered their savings accounts to purchase air conditioning and a concession stand.

"We heard a lot of people say, 'Gee, the kids really don't have anything to do anymore,'" Campbell remembers. "Neither one of us went to movies very much; we were the people that went maybe twice a year, so it was more a community service than anything else."

The renovated movie hall's first showing was E.T., and Campbell remembers box-office lines curling around the block. The excitement of that initial blockbuster success whetted the two partners' entrepreneurial appetites; within a few months, they had quit their grocery jobs and immersed themselves in the minutiae of movie exhibition.

In researching his new industry, Campbell says he noted a number of common business practices that were rooted more in convention than cost efficiency. Having cut their teeth in the notoriously frugal supermarket biz, he and Melton began implementing cost-control measures that even today allow Regal to rank among the industry leaders in profit margin—exploring the finer points of theater design, employing the same contractors rather than putting every new building project up for local bids, cutting bulk deals with food and paper producers rather than purchasing through concession middle-men.

They built slowly, taking out their first loan from a New Tazewell bank to finance construction of a four-screen complex in a mall in Middlesboro, Ky., in 1983. By 1987, Premiere Cinemas had "borrowed and bootstrapped" its way into 13 small towns across Kentucky, Tennessee, and North Carolina. Then the duo sold a portion of the company to a group of venture capitalists, and between '87 and '89, the chain exploded from 45 screens to nearly 150.

Campbell describes an unsolicited buy-out offer from the Cinemark Theatres chain in 1989 as "something we couldn't pass up," although it would mean relinquishing control of the company. He and Melton sold Premiere for about $21 million, a sum that left both men comfortably well-off even after they had paid their investors.

Within a month, they had already plunged into a new venture, with Campbell acting as president and chief executive officer and Melton as vice president of construction of the fledgling Regal Cinemas Inc. "I was 35, and I wasn't really ready to retire," Campbell recalls. "I liked the challenge of building something, and I liked being my own boss."

Regal's first project was the acquisition of a two-plex cinema in Titusville, Fla.; by the time the company had its first public offering four years later, it controlled more than 300 screens.

Regal's growth was bolstered by an ambitious business plan. Wiser, wealthier, and better connected, its two founders began looking at larger urban and suburban markets rather than the small towns that had been the underpinnings of Premiere. And along with their own not-inconsiderable resources, they brought to the table substantial investments from close associates and other financial players, money they leveraged to obtain larger bank loans.

From that initial public offering, Regal continued to grow almost exponentially. By the time the Hicks Muse/KKR merger was announced in January, the company was operating more than 2,300 screens at 257 locations in 22 states. According to The Wall Street Journal, the merger will make Regal the centerpiece of the country's largest theater chain even without the Hicks Muse purchase of United Artists. The Regal/Act III partnership will boast some 400 more screens than Carmike Cinemas, the second largest theatre group, with a net worth estimated at nearly $2 billion.

But despite Regal's unqualified success (some financial observers hail Campbell as the man with the "golden touch"), the merger is in many ways a means of self-preservation. Campbell admits that the recent wave of consolidations (in September, the merging of Sony Theaters and Cineplex Odeon forged the nation's largest chain; after the Regal transaction, Sony-Cineplex will rank only third), has radically changed the dynamics of the industry.

"I believe the real catalyst was that big financial players like KKR and Hicks Muse decided this was an attractive industry and started putting billions of dollars into consolidating it," he says. "One thing that happened is that they started paying substantially more for theaters than we were paying on our own. That drove up the price of assets and took away some of our ability to grow at a reasonable cost."

According to Douglas Gomery, professor of mass communications at the University of Maryland and author of Shared Pleasures: A History of Movie Presentation in the United Statesa, the domino-chain of consolidations was set off in the 1980s when Hollywood film distribution companies began buying up screens. "The mid-sized chains said, 'We have to grow and give them something to fear, or we'll be eaten,'" Gomery says. "For most of them, that meant either getting bought out or merging with others."

The problem, says Gomery, is that such mergers have increasingly blurred the lines that separate the three phases of moviedom—production, distribution, and exhibition. Today, there are about seven major studios who market their films through any one of roughly 14 major distribution companies. The distributors then sell the films—via an ostensibly equitable allocation process—to a large but rapidly dwindling number of exhibitors.

Several producers and distributors are owned by the same company, however; Stephen Spielberg's DreamWorks studio, for instance, handles its own distribution. And the production companies who aren't directly affiliated with a distributor often sign exclusive contracts with one.

Conversely, many distributors have entered in the theater business; Gomery points to the Sony-Cineplex merger as perhaps the industry's most significant, given Sony's role as a distributor and the consolidated chain's domination of several major urban markets. "If you go to the movies in Washington, D.C., for instance, it will be at a Sony-Cineplex theater," he says.

"When you have big studios and big chains, there ends up being a certain amount of working together—'Wink-wink, nod-nod,' " Gomery continues. "As the system squeezes down, it becomes a poker game with only a few big players, and the little guys can't get in. If you look at Regal, they still have some uphill struggles, because Sony still distributes the movies. But with this merger, they've gotten themselves into the game. Now Hollywood has to play with them."

Of course, the rise of huge corporate exhibitors has seen the proliferation of larger, more lavish multi-plexes. Today's urban complexes house 12, 18, even 24 screens, and raise the ante on movie-going luxury through features like digital sound and obstruction-free stadium seating.

Recognized as an industry leader in multi-plex amenities, Regal may have hinted at the future of movie exhibition with its FunScape concept; the chain currently operates five FunScape entertainment complexes, massive multi-media movie halls that offer secondary attractions such as miniature golf, batting cages, arcades, and virtual reality games. The company will open three more in 1998, including a 10-screen FunScape in Knoxville's West Town Mall.

But Gomery predicts the new luxuries won't offset the coinciding loss of small, independently-owned theaters, a trend he thinks will ultimately yield higher ticket prices and fewer on-screen choices. "All things being equal, one would like more independents," he says. "But now it will be harder for the indies, because the big theaters will have more clout and will have bought out all the best locations."

Campbell grants that the number of theater owners will probably decline in the coming years. "New theaters are obviously going to take away market share from existing locations." He cites industry analysts who predict that as many as 50 percent of the movie houses currently in operation will close within the next five years.

But Campbell says the realignment points more at the demands of a clientele eager for a larger-than-life movie-going experience than at monopoly and collusion. A new urban multiplex, with more screens and costly features like stadium seating, will likely run two to four times higher than what a complex in the same locale might have cost a few years ago.

"What you're seeing, in some sense, is the re-screening of America," he says. "And that takes a lot of capital. What will happen is that those companies in a position to replace lost cash flow from older theaters with the construction of new complexes will fare well, and those that can't, won't. You may end up seeing three or four large companies controlling 75 percent of the market, but that isn't much different from a lot of other industries."

And not all independent theater owners are quaking in their aisles. Todd Holt, a Sevierville alderman and perhaps another Campbell-in-the-making (the twenty-something son of a local judge pulled the county's old Sevier Cinemas out of bankruptcy at age 18, and became its owner by age 20), acknowledges that his six-screen (with a five- to six-screen expansion pending) Reel Theatre wouldn't be immune to multiplex competition.

But the prospects of head-to-head rivalry would be daunting, even for a corporate chain. Holt used profits from Sevier Cinemas to build a new theater—Reel—in 1994. The posh neon movie hall off Highway 66 boasts digital sound and extra-wide row spacings, while several of his new screens will feature stadium seating. "To beat us out, you'd have to be prepared to lose money for several years," Holt asserts.

"I don't think the whole consolidation thing is all that new," he says. "It's gone on for years, with AMC Theatres, with United Artists, with Carmike. Now, with Regal, it's in our back yard, so it's much more visible to us than it was before."

Johnson City's Paul Wiley, owner of the town's four-screen Reel-to-Reel Theatre, butts heads with a nearby Carmike Cinemas eight-plex. The 40-year theater veteran has responded by installing digital sound on two of his screens—one more than his opposition.

Wiley calls Regal "an outstanding organization." And while he agrees that big-chain theaters may one day effectively phase out independents, he isn't troubled by the prospect.

"I can see where it may lead to fewer small owners, but that's not necessarily a bad thing," he says. "That's just the free market. The most important factor for moviegoers is having enough screens in any given area."

Wiley and Holt confirm that chain theaters tend to set the standard for concession and admission prices. Both owners generally set their prices at or slightly below those of nearby chains; admission to Holt's theater typically runs 25 to 50 cents below the going rate at Knoxville theaters, while Wiley matches Carmike's ticket cost but charges less for concessions.

But both men are dubious that the rise of chain theaters will drive the cost of a movie pass into prohibitive territory. "Some of these new features, like FunScape, may actually help keep ticket prices down," Holt says. "Ancillary things like concessions are where theater owners make their money, so I would think that anything we can develop as an additional attraction should help keep down overhead. You also have to remember that people can live without movies. If you're not careful, you run the risk of pricing yourself out of business."

Campbell, for his part, says Regal ticket prices aren't likely to increase sharply in the foreseeable future. "I think the efficiencies brought to the table by these larger complexes will negate the need for us to radically change the way we price," he says. "I don't really see admission charges going up any more than they have in the past on an annual basis."

The question of movie selection is a thornier issue. Campbell posits that the niche for independent films remains constant and that large complexes may increasingly devote a screen or two to "specialty" products. "If we're operating an 18- or 24-plex, it's not inconceivable we could take a couple of smaller theaters and play specialized films on a regular basis," he says. "I think the mega-plex trend could bode well in that regard."

Gomery disagrees. He believes the multiplex trend, the dearth of prime locations and increasingly chummy relations between big players in all three facets of the industry, have already made it more difficult for independent filmmakers to find distribution and for art house exhibitors to remain in business. He cites the recent closing of Washington's long-running art film house "The Key" as one example.

"Selection is already being cut down, and these recent moves will only cut it down more," he says. "There's no one keeping track of the independents the way they do the chains, but these things are observable phenomena. I've watched things happen in the cities I've looked at and in the trade magazines."

For now, such pronouncements are speculative, and the only bankable certainty is that big chains such as Regal and Carmike will continue their inexorable multiplication, filling the country's malls and suburban shopping hubs with larger, ever more lavish movie houses, grand gleaming halls complete with cafes and arcades and digital sound and screens by the dozen.

Already Knoxville's movie leader (with 36 screens and another 10 pending) and owner of nearly one out of every five screens nationwide, Regal won't rest on its laurels. KKR spokesmen have fueled speculation that Regal/Act III may look for further "consolidation opportunities," and the combined company already plans to open more than 1,000 new screens in the next two years, perhaps putting the monolith over 4,000 sometime in 1999.

"There's going to be some pain associated with the change, and some older theaters are going to shut down," the former small-town grocer says with characteristic frankness. "But I think that four or five years down the road, this is going to emerge a leaner, meaner, better industry."


Weekly Wire Suggested Links







Page Back Last Issue Current Issue Next Issue Page Forward

Film & TV: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Cover . News . Film . Music . Arts . Books . Comics

Weekly Wire    © 1995-99 DesertNet, LLC . Metro Pulse . Info Booth . Powered by Dispatch