Preshow ads hitting their spots

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There's lots of money being made in theater advertising. Just ask investors in National CineMedia.

The company famous for "FirstLook," its theater preshow packed with what it hopes are entertaining advertisements, went public Feb. 8, offering 38 million shares at $21 apiece. Since then, they've risen 21% to $25.56.

The quick rise might impress even bullish investors looking to turn a buck from in-theater commercials. Pali Research analyst Richard Greenfield recommended the stock just before the initial public offering and predicted it would rise to $27 during the next 12 months. But the stock actually closed at $27 a share on just its seventh day of trading before retreating in recent days.

For the three months ending in September, National CineMedia reported a $5.5 million profit on $74 million in revenue. The company isn't talking much about its business prospects, citing a post-IPO quiet period, but it will report its latest financials Monday.

Its major competitor, Screenvision, often preaches the virtues of in-theater advertising. "People are surprised at the popularity of our preshow," Screenvision CEO Matthew Kearney said.

He said data suggests that theater on-screen advertising targets a demographic that is young, affluent and well educated. Plus, they have a propensity to leave the home and spend money.

A recent Arbitron study found that of frequent moviegoers -- those who have attended at least five movies in three months -- 53% find on-screen ads acceptable, better than the 46% who find TV ads acceptable.

The study also found that among that same group, 29% of them subscribe to TiVo or another DVR that allows for the skipping of TV commercials, compared with just 11% of non-moviegoers -- people who have seen no movies in the past six months. Such avoidance of TV commercials make the in-theater approach appealing to advertisers, the study asserts.

Cinema advertising reaches more than 124 million Americans each month ages 12 and older, according to Arbitron, with the average moviegoer (anyone who has seen at least one movie in the past month) arriving at the theater 24 minutes before the first trailer unspooling -- plenty of time to catch a few ads.

The Cinema Advertising Council trade group estimates the industry grossed nearly $528 million in 2005, a nearly 21% improvement compared with 2004. John Fithian, president of the National Association of Theatre Owners, guesses that in-theater advertising has grown to $700 million since then and could in the coming years reach the $1 billion mark (HR 5/12).

On-screen ads represent the bulk of the revenue, though roughly 15% comes from in-lobby ads and other promotions, the CAC said.

For exhibitors, in-theater ads represent their third-largest revenue source, behind the sales of tickets and concessions, but its growth far outpaces each. And advertisers like it because it works. "We have a large screen and the full attention of patrons," CAC board member Bob Martin said.

In the U.S., in-theater ads, part of the moviegoing experience since the early days of cinema, really took off in the past decade, spurred by deals struck with studios as theater chains struggled for profitability.

"Various circuits were coming out of bankruptcy or very near it," said one studio insider who was involved with negotiations with exhibitors over on-screen advertising. "When they said, 'Hey, we have the opportunity to make some money on a preshow,' it was difficult for studios to say, 'No, you can't have that additional cash flow.' "

The studio insider, and others, said they have no problem with on-screen ads as long as they are entertaining and are shown before the advertised start-time of the feature film.

"It doesn't bother me, and I don't think it bothers the audience. They've become complacent with it," said Clark Woods, president of domestic distribution at MGM.

"Once upon a time, studios in the U.S. were concerned that ads were counterproductive," Screenvision's Kearney said. "Now, they're viewed as valuable contributors to the economics of movie theaters."

Screenvision is in the process of equipping thousands of theaters with digital-projection systems, at a cost of about $10,000 apiece, to increase the quality and flexibility of their preshows.

While prices vary, it typically costs an advertiser $3 million for an ad that will appear for four weeks on 15,000 movie screens, Kearney said.

The CAC's Martin said in the future, on-screen advertising will get more interactive. Experiments with patrons' cell phones, for example, already are under way.

"We'll see if they become commercially viable," he said. "The key is that it can't in anyway compromise the moviegoing experience."
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