Sony I-CADE Theatres Submitted by: xxxxxxxxx Management of Information, Communications and Media, B8210 Fall, 1998

Transcription

1 Sony I-CADE Theatres Submitted by: xxxxxxxxx Management of Information, Communications and Media, B8210 Fall, 1998

2 TABLE OF CONTENTS Executive Summary 3 The Companies 4 Industry and Competitive Analysis 6 Customer and Market Focus 12 The I-CADE Product 13 Pricing and Revenues 16 Costs 17 Advertising and Promotion 19 Forecast and Valuation Assumptions 20 Financial Forecasts and Valuation 21

3 Executive Summary Executive Summary The Sony I-CADE (Individual Choice Activated and Driven Entertainment) Theatre concept is a Location Based Entertainment complex centered around a series of small (16 seats) theaters exhibiting quality digital interactive (in the form of audience plot line participation) films. The I-CADE Theatre concept exploits the paradigm of modern interactive technology and consumer dissatisfaction with interactive television. Formed as a joint venture between Sony Corporation (Sony) and Loews Cineplex Theatres (51% owned by Sony), the I-CADE theatres will allow Sony to take advantage of the opportunity this paradigm offers, as well as strengthen its brand image in the minds of consumers as the leader in interactive entertainment technology and products. The venture presents the out-of-home entertainment consumer a first-class interactive film going experience, similar in concept to its innovative predecessors, IWERKS Entertainment and IMAX Theatres. With Sony's vertically integrated business organization, the joint venture will be able to control the entire process of the I-CADE experience, from digital content production, to digital interactive technology, to digital content exhibition. The I-CADE venture will bring an entirely new and dynamic entertainment experience to the currently one-directional motion picture exhibition industry. Financial Summary (000s except Complexes) Complexes in Operation N/A Revenues N/A 69, , , , ,354 Operating Profits N/A (22,210) (843) 11,359 15,268 21,131 Free Cash Flow (165,843) (137,148) (1,079) 48,654 33,421 87,036 NPV of Venture 69,915 04/14/99 Page 3

4 The Companies The Companies As can be seen from excerpts taken directly from each of the joint venture partner business descriptions, the I-CADE project relates directly to the current strategic plans of both corporations (see italicized comments). Loews Cineplex Entertainment 1 Loews Cineplex Entertainment Corporation is the leading motion picture exhibition firm in the U.S. and Canada with 2,787 screens at 451 locations representing a 9.3% market share. The current company is a result of a combination of the Sony Loews Theatres and Cineplex Odeon Corporation, effective May The Company currently operates in large urban and suburban areas with a strong presence in metropolitan New York, Boston, Chicago, Baltimore, Dallas, Houston, Detroit, Los Angeles, Seattle, Washington, D.C., Toronto, Montreal and Vancouver. The Company's strategy is to continue to be the theatrical exhibition leader in highly populated metropolitan areas and the preferred exhibitor for distributors and the theatre-going patrons in such areas. Sony's Loews Entertainment Corporation was one of the largest theatre exhibition companies in terms of revenues and operating cash flows. Total revenues for the years ended February 28, 1996, 1997, and 1998 were $359, $375 and $414 million, respectively. Cash flows from operations for the same periods were $46, $48 and $64 million. The Combination of the Sony and Cineplex Odeon Theatres was not effective until May, 1998 and therefore these figures do not represent the results of the combined company. The Company expects the additional revenues and improved efficiencies from the recent combination to improve operating results considerably. The I-CADE concept also relates closely to a current Loews business development initiative of "VIP Screening Rooms." According to The Houston Chronicle ("Be a VIP at the Movies", December 12, 1998), Loews Cineplex is already experimenting with "VIP Screening Rooms" in one of its complexes in Toronto. These rooms feature coat checks, waitresses and oversize seating with a smaller screen. Prices are at a premium of about $3 to traditional movie going tickets. Sony Corporation 2 Sony is one of the world's leading designers, developers, manufacturers and distributors of electronic and entertainment products. Sony's products are sold under the trademark "Sony", which has been registered in 193 countries and territories. The Company believes the "Sony" name is among the most recognized in the world, and intends to continue to enhance brand recognition through the development of high quality, innovative products. Sony has experienced compound annual growth in sales and operating revenue of 19.1% during the last three fiscal years. For the fiscal year ended March 31, 1997, which marked the Company's fiftieth anniversary, Sony reported sales and operating revenue of $45.7 billion, 1 All Loews Cineplex Entertainment information per Company's K report. 2 All Sony Corporate information per Company's Form F-3/A, filed 2/20/98 04/14/99 Page 4

5 The Companies operating income of $3.0 billion and net income of $1.1 billion, generated by its three business segments: Electronics, Entertainment, and Insurance and Financing (not included in this discussion). Electronics. Sony's Electronics Business develops, manufactures, and sells various kinds of electronic equipment, instruments and devices. Sony aims to be at the forefront of the latest technology in all of its electronics product lines, including digital video-related equipment, audio-related equipment, televisions, electronic components and PlayStation game consoles and software. Sony believes that it has positioned itself as a producer of quality products using advanced technology and creative design. Sony intends to continue to capitalize on its reputation as a world leader in innovative ideas and products by focusing on digital technologies. Entertainment. Sony's Entertainment Business is engaged in the development, production, manufacture and distribution of image-based software including film, video, television and new entertainment technologies, primarily through Sony Pictures Entertainment (SPE). SPE set a new industry record in global box office revenues during calendar year 1997, with hit movies such as Jerry Maguire, Men in Black and My Best Friend's Wedding. I-CADE Theatres Structure From a organizational standpoint, the I-CADE venture will resemble that of the current Loews Cineplex Corporation. Local functions will be organized by region with all regions reporting to a centralized corporate office. The corporate functions will supervise the regional operations and guide the top level decision process, such as new complex openings and film production relations. The venture will also be able to recognize efficiencies in the overhead areas of accounting, finance and MIS support functions from the current Sony and Loews Cineplex organizations. The structure of the venture will be a 60/40 split of investments and profit split (note that Sony already owns 51% of Loews Cineplex as well so the actual split is more like 80/20). Sony will fund all film production costs and digital technology costs. Loews will handle all theatre operations areas, such as location contracts, funding of leasehold improvements and the day to day management of the complexes. This split appears reasonable due to the magnitude of the respective investments required and the related risks to the partners in the event of dissolution. Exit Strategy In the event that both partners determine that the venture should be dissolved, Loews Cineplex will be able to convert the I-CADE Theatre complexes into complexes dedicated to the "VIP Screening Room" concept mentioned above. After a negotiated settlement for Sony's contribution to the venture, Loews will be able to recover most of its investment via such a transformation of the I-CADE locations. 04/14/99 Page 5

6 Industry and Competitive Analysis Industry Analysis The Sony I-CADE Theatre concept is a cross between Location Based Entertainment, due to the interactive element, and Motion Picture Exhibition, due to the audience based format of the concept. Location Based Entertainment The overlap-point of traditional movie exhibition and interactive entertainment is the Location Based Entertainment (LBE) industry. "The phrase (LBE) has come to stand for a fixed-location facility that allows members of the public to engage in an entertainment activity, usually in groups. The social element, in fact has tremendous significance." 3 The social element will have significant impact to the success of the I-CADE venture due to the more personable theatre layouts and the audience interaction among themselves and the film. The most famous, and successful, of the LBE pioneers was the "Star Tours" ride at Disneyland in California which opened in This attraction was so successful that competing theme parks such as Universal Studios and Great America developed copycat attractions such as the Back to the Future ride and Days of Thunder. The LBE industry breaks down into four distinct types of attraction: (1) the Single-Use LBE, where one type of attraction is offered; (2) the Family LBE, a slightly larger site with a variety of entertainments; (3) the Urban LBE, where the family entertainment complex idea is extended to include adult facilities such as a restaurant, bar with pool tables, specialty theatres and live entertainment; and (4) the Urban Entertainment Development, a major site in excess of 100,000 square feet which creates its own critical mass of consumers. 4 The majority of these attractions rely on virtual reality content and technologies such as ride simulators or 3-D films. The I-CADE Theatres resemble the Single-Use LBE, however the concept does not rely on ride simulation or 3-D films, and therefore differs slightly from the traditional LBE attractions. The closest competitor in this field is IMAX Theatres, which specializes in large screen (70mm films on 8 story screens), 3-D entertainment content and exhibition. LBE has become a prevalent form of the out-of-home entertainment industry by combining the interactive, audience participation entertainment experience with the traditional theatrical audience market. The formation of numerous LBE companies over the years includes IMAX Theaters, IWERKS Entertainment, SEGA World, Gameworks, IntenCity Centers, TimeZone, LBE Technologies NASCAR Centers and Skyline Multimedia Entertainment. Sony has entered this market with its Metreon complex, which is a 350,000 square foot urban entertainment complex in San Francisco. 5 The emergence of multiple new firms demonstrates the growth of this industry and indicates the expected future profits for such forms of entertainment. However, this industry is still in a development/growth stage of the industry life-cycle model as most of these companies are still developing product and awareness in the marketplace (for example, since 1994, IWERKS has had only year of positive earnings results 6 ). 3 "OOH - the Out of Home Experience", apcmag.com, April 29, "OOH - the Out of Home Experience", apcmag.com, April 29, "Attack of the Killer LBEs", The Red Herring, January IWERKS Entertainment K report. 04/14/99 Page 6

7 Industry and Competitive Analysis Traditional Motion Picture Exhibition Industry The traditional motion picture exhibition industry is becoming a mature industry with revenues and attendance growing at less than 10% rates since Opportunities for real growth in the market exist in either stealing market share from existing companies in the industry or by creating new products/technologies to create an increase in the overall market via changed consumer demand. Revenues. Box office gross has grown by approximately 8% over the past few years and has reached record highs during this same period. Exhibitor revenues are directly related to box office gross, with exhibitor revenues as a percentage of box office gross totaling around 45%, and additional revenues from concessions and other income representing around 35% of that amount 7. See table below 8. Year Box Office Gross (millions) Growth Exhibitor Revenues (Est.) 1997 $6, % $3, $5, % $3, $5, % $3, $5, % $3, $5, % $3, $4, % $2, $4, % $2, $5, % $3,051 The driving force in industry revenues is the quality of the product provided to exhibitors by the motion picture production industry. Consumers now have multiple substitute entertainment choices, and in years when sub-quality product is released, exhibition revenues will suffer. Pricing. Prices for motion picture attendance have been steadily rising over the past years. Admission prices for adults in prime time showings now run from $7.50 to $9.75 depending on venue and geographical location. Increasing ticket prices account for the discrepancy between the higher increase in box office gross as compared to the lower growth of patron attendance in the past few years (7.7% compared to 3.7% in 1997). Attendance. Technological advancements in multi-media, in-home entertainment in the form of interactive and/or digital TV, and the internet have not had a detrimental impact on the out-ofhome-entertainment, movie-going public. Attendance in motion picture exhibition is directly related to the quality of the product brought to market and therefore, annual figures fluctuate accordingly, as shown below. According to the Motion Picture Association of America, 7 Estimated based on industry norms for movie rental revenues and exhibition company financial statements. 8 Motion Picture Association of America web site economic reports. 04/14/99 Page 7

8 Industry and Competitive Analysis attendance for motion pictures experienced only 3.7% growth in the recent year yet has consistently totaled over 1 billion since 1990, as shown in the table below 9 : Year Attendance (millions) Growth , % , % , % , % , % , % , % , % A reason for this consistency is that the public continues to recognize the advantages of viewing a movie on a large screen with superior audio and visual quality, while enjoying a variety of concessions and sharing the experience with an audience. The major factor in fluctuating movie attendance is the quality of the movie content brought to market as evidenced this past Summer '98 which experienced record breaking box office totals. Distribution. In terms of distribution, the Motion Picture Exhibition Industry is fairly fragmented, with over 400 exhibitors, most of which operate four or more screens. There are approximately 30,800 indoor screens in the United States (excludes drive-in screens). 10 A few industry leading firms (shown below) control over 50% of the screens in America, however none of them control more than 10%. 11 Theatre Company Total Screens Loews Cineplex Theatres 2,632 Carmike Cinemas 2,590 United Artists Theatres 2,237 AMC Entertainment, Inc. 1,930 Cinemark USA Inc. 1,459 Regal Cinemas 1,335 General Cinema Theatres 1,202 National Amusements 898 Hoyts Cinemas Corp. 817 Capacity. From the above admissions and total theatre screens in operation data along with estimates of seats per theatre (300) and shows per day (4), the motion picture exhibition industry appears to be working at approximately 10% capacity. The I-CADE plan will attempt to increase this capacity usage rate by reducing the number of shows per day to 2 during the slower 9 Motion Picture Association of America web site economic reports. 10 Motion Picture Association of America web site economic reports. 11 Per Loews Cineplex Entertainment Corporation K report. 04/14/99 Page 8

9 Industry and Competitive Analysis weekday periods and then increasing to 3 and 4 during the busier weekend period. This will allow for more efficient usage of the facility via the combination of the Sony Playstation and the interactive film offerings. Failure of Interactive TV Previous attempts at the interactive entertainment environment in the home have thus far failed. In the early 1990s, Time Warner, TCI and other large media companies sponsored total interactive entertainment home environments which featured "costly technology trials that included custom programming and the ability to view data, from sports trivia to soap opera star bios, without missing a jump shot or love triangle. They promised the chance to instantly buy products or view the movie of your choice, chat or play video games with other viewers and much more. Unfortunately, the technology didn't work, it was too expensive, and consumers didn't buy it. The supposed killer app of interactive TV--video on demand, or the ability to offer a wide variety of movies of the viewer's choice at any time--never materialized." 12 According to this article, the in-home experience requires a more "lazy interactivity." In other words, the in-home requirement is for "quick decisions and short attention spans, for people with a remote in one hand and a beer in the other." Interactive elements such as multiple viewing angles and personalized replays in sporting events also failed after the initial interest resided. These previous attempts at interactive in-home entertainment failed in part because they overwhelmed the audience with the interactive technology capabilities. Another reason for the failure of highly interactive TV is the cost to the consumer. Currently, a digital TV and interactive set-top box will run the consumer well over $7, Although these costs will come down as technology advances, it is doubtful that these prices will drop below $1,000 for both components anytime in the near future. These costs will slow the penetration of the interactive TV experience to the common household. The I-CADE Theatre concept will address both these issues by first enticing the audience out of the home and into the theatre complex where interactivity is more accepted. Secondly, the format of the I-CADE content is specifically designed to not overwhelm the consumer with interactive decisions or difficulty of use. Competitive Analysis Competition from without. Based on the slow growth of the motion picture exhibition industry revenues and attendance over recent years, it is unlikely that multiple new firms will enter the market to compete for profits. This observation indicates that growth for the incumbent firms will come from stealing market share from current industry players (via acquisition or expansion of locations), or from igniting new growth in the industry in the form of new products or technologies. 12 "Idea Whose Time has Come?", Los Angeles Times, November 16, Based on current prices of Sony Digital Products at 04/14/99 Page 9

10 Industry and Competitive Analysis In addition, the heavy concentration of industry power from the major players firms control over 50% of the market -- it also becomes unlikely that a smaller player will enter the market to compete for future industry profits with these entrenched players. Competition from within. Internally, competition will come from these major players in the industry in addition to the other 390 or so smaller firms that compete for audience share across the country. As mentioned above, there are over 30,000 indoor screens competing for a small number of productions that are capable of drawing large audiences. One aspect of this competitive environment is the power of the suppliers to the exhibition industry, namely the motion picture production industry. Major motion picture production companies seek to gain wide exposure for their product by affiliating with theatre chains that have large circuits in order to penetrate densely populated consumer regions and thus spread production costs. The production companies also have significant bargaining power with respect to the rental agreements they can negotiate with the theatre chains. Finally, as mentioned above, the exhibition industry is highly dependent on the production companies to supply quality product due to the picky nature of the movie-going public. The I-CADE Theatres will compete most directly with the traditional movie exhibition locations, however due to its interactive element, it will compete on a smaller level with other forms of LBE. On a high-level basis, I-CADE Theatres will compete for audience with all forms of Location Based Entertainment including theme parks, and sporting events, but will mostly directly compete with audience based attractions such as IMAX Theatres and IWERKS. Competition in either industry relies heavily on the quality of the content available to the attractions and also on the changing consumer demands. The key to commercial success for the I-CADE Theatres will rely on a supply of top quality creative content and a strong marketing campaign that will distinguish the combination of high quality movie content with an interactive element. Creating consumer awareness and demand will be a key element to the successful marketing of the I-CADE Theatres. The directive of this plan will be to distinguish the content and interactive elements of the I-CADE concept from the 3-D IMAX product and the ride simulation content of the IWERKS product. Competitive Advantage The I-CADE Theatre circuit will be able to exploit the expertise of the Loews management of theatres and also use its size to gain considerable economies of scale in the areas of concessions, lease agreements, leasehold improvements and labor. Sony Corporation's vertical integration on the technical side of the venture will allow the I- CADE circuit to outfit its theatres with the latest and most advanced technological equipment at a considerable cost savings compared to other companies attempting to enter this market. In addition, the use of all Sony components within the theatre complexes combined with a coordinated marketing plan will boost Sony's position as a leading innovator in the fields of DVD and Digital TV technology. The I-CADE concept will not only serve as a profit center in 04/14/99 Page 10

11 Industry and Competitive Analysis and of itself, but it will also raise consumer awareness into the In-Home digital and multi-media entertainment products market. Both venture partners will also be able to exploit the corporate general and administrative functions in an efficient manner which will ultimately result in higher returns to the bottom line. In addition, both venture partners will be able to take advantage of strong marketing departments and advertising relationships to ensure lower costs to the I-CADE circuit in this area as well. Finally, through its Sony Pictures Entertainment division, Sony will be able to supply the venture with high quality, creative content. As the standard for television approaches digital transmission, SPE will become more involved in the processes of digital content production. Because of the requirements that digital television is already putting on the SPE Division, it will be committed to developing the necessary facilities and the expertise to provide the content for the I-CADE entertainment requirements. 04/14/99 Page 11

12 Customer and Market Focus Customer and Market Focus The majority of the consumer base for the I-CADE Theatre venture will be the out-of-home movie going public. The I-CADE Theatre venture will combine the stable movie going audience with the increasing demand for interactive LBE by capturing the following niche segments of this overall market: It will target young, "hip", technology educated and innovative, densely populated areas of the country. This market segment will be more inclined to experiment with the new entertainment venue. This segment will include adults in the age group who are college educated and have above average household incomes. This segmentation will target those that are more likely to accepting of the more innovative, interactive entertainment element and also to be willing to absorb the higher admission costs. For the Sony Playstation element, the concept will target the current video arcade consumers. Namely young children in grammar and junior high school. Theatres will open in cities identified as having sufficient population and demographic parameters to increase potential for acceptance of the I-CADE concept. Following the launch of the venture, additional waves of theatre openings will take place in more cities identified as high potential locations. The key to success for the I-CADE venture will be to establish a large circuit of locations to spread out the production and operating costs of the digital content and theatres themselves. Sample cities may include the following: Initial theatre roll-out will include New York, Boston, Los Angeles, Las Vegas, Chicago, San Francisco, Phoenix, Washington, D.C., Baltimore, Dallas, Houston, Detroit and Seattle. International locations will include Toronto, Montreal, Vancouver, London and Tokyo. These locations coincide with the current Loews Theatres markets which will allow for efficiencies via shared resources. The company will evaluate new locations each year to determine feasibility in accordance with this business plan. Internationally, future sites will include locations in Australia and the Pacific Rim countries (which have been receptive to LBE concept in past ventures) "OOH - the Out of Home Experience", apcmag.com, April 29, /14/99 Page 12

13 The I-CADE Product The I-CADE Product Theatre Complexes The main vehicle in establishing the I-CADE complex as a high class entertainment experience will be the theatres. Each I-CADE theatre complex will contain multiple theatres containing 16 seats similar to 1st class airline seats -- complete with reclining seat backs and foot supports. Each theatre will have stadium style design to allow for unobstructed views and will utilize digital sound systems. The viewing device will be a digital screen approximately 16 feet wide by 9 feet tall. (See Technology section below for more detailed description of the elements of each theatre) Each seat will be outfitted with remote control units to allow the audience to vote for their choices for directions of the plot lines. A sample individual theatre layout is provided in Figure 2. To minimize the less profitable hours of the day (especially during summer and school vacation periods) the theatres will also be equipped with Sony Playstation platforms. This will allow the theatre to be used as a multi-media playroom for younger generation during the times of the day that are traditionally slow for movie viewing (10am to 6pm during vacation periods and 2pm to 6pm during school term weekdays). This will create a constant usage of the facility and reduce the number of show times during periods of the day that tend to be non-profitable for movie viewing. Between every two theatres will be the Playback Control Room. These rooms will contain the digital playback machines and will also house the bulk of the digital display unit as well as the Sony Playstation platforms. The complex itself will consist of the theatre area and a lobby area. The individual theatre layout will allow for two floors of theatres in the space that a traditional movie theatre would require, which will compensate for the additional space requirements of the individual theatre arrangement. As a general rule for each complex, the first floor will contain a lobby and 10 theatres. Each additional floors will contain approximately 20 more theatres, with a complex containing a minimum of 2 floors. For this sample layout, the theatre will be able to house an audience size of around 480 (30 theatres of 16 people each). The lobby of the theatre complex will resemble that of a typical multiplex theatre complex with the exception that the I-CADE lobby will have a more modern, interactive entertainment feel to it (i.e. virtual reality games, digital TV displays, etc.) A sample diagram of the first floor of a theatre complex is provided in Figure 2. 04/14/99 Page 13

14 The I-CADE Product Figure 2 Sample Theatre Design Sample Complex Design Single Floor Only Screen Speakers Seats Theatre 1 Theatre 2 Theatre 3 Theatre 4 Theatre 5 Digital Playback Machine Rooms Theatre 6 Theatre 7 Theatre 8 Theatre 9 Theatre 10 Lobby / Interactive Games & Promotions Concessions Content The primary element of the I-CADE product is the use of digital films. Each film will contain 3 points of interactivity, spaced about 30 minutes apart. The films will begin with a 30-minute introductory segment, followed by the first interactive decision point, an additional 30-minute segment, and onward through the entire 1.5 hour film. This format allows for the interactive experience without overwhelming the audience with multiple interruptions. At each decision point, the audience will vote via a remote control device attached to their chair, for one of three possible directions for the plot. The digital playback technology will then determine from the majority vote of the audience which 30-minute segment to play next. In the event of a tie, a default course will be pre-determined by the filmmaker. In total, filmmakers will have to produce 13 different 30-minute segments for each film, which will allow for all the possible multiple plot lines. Compared to current filmmaking techniques, this requirement will not create excessive additional work, since most films currently edit out hours of additional footage during the post-production process. Segments will be allowed to re-use certain scenes within separate segments wherever feasible. The Figure 1 Ending #1 Ending #2 Ending #3 Ending #4 Ending #5 04/14/99 Page 14 Ending #6 Ending #7

15 The I-CADE Product multiple plot line format will increase creativity in the filmmaking process by allowing filmmakers to explore additional creative elements to a story and not have to conclude on a single plot line. See Figure 1 for a sample diagram of the multiple plot line format requirement. The multiple segment/ending format will allow for longer runs of single productions as compared to traditional movie productions by utilizing the "never the same movie twice" promotional aspect. The Company estimates that a typical run will range from around two to three months. In addition, releases of new films will be timed to avoid competition with blockbuster releases from the major production studios. Because of the longer runs of the films, the exact release date will not be imperative to success of the individual films. Finally, Sony can start to build a library of digital movie content in preparation for the digital TV standard required by law by As network and cable TV moves to the digital format, Sony will be in a prime position to supply these outlets with quality product while its competitors are scrambling to fill the requirements. TV releases will be based on the most popular plot-line choices from the theatre run of films, however multiple versions can also be sold based on demographics of particular networks and cable stations. Technology The first technological element to the theatre is the viewing screen. Each theatre will be equipped with a large screen digital monitor. The screen will be approximately 16' X 9' so each seat in the theatre has an adequate view. Each screen will have the appearance of the current HDTV style with the wide horizontal set-up. Sony Corporation will be able to utilize the strength of its electronics divisions to create a cutting edge viewing device with ultra high clarity and definition for both movie viewing and multi-media gaming activities. Each theatre will also be equipped with a digital surround-sound speaker system. This system will enhance the movie going and multi-media gaming experience by immersing the participants in the story lines or games. Participants will enjoy higher quality sound than the traditional movie theatre due to the high quality sound system coupled with the smaller theatre design. The most complex technological device for the I-CADE Theatre system is the digital playback device. Sony Electronics will need to develop a storage and playback device similar to a DVD player that will be able to store the required 13 different 30-minute segments and playback each segment as the audience votes at each decision point. This device will most likely utilize optical storage technologies to allow for the high storage and the fast replay requirements. Each theatre will be equipped with Sony Playstation equipment for slower movie patronage times. Playstation equipment will be placed in the Digital Playback Machine Rooms and patrons will plug into each machine with control devices received from the main lobby. Each complex will have a central game server which will house all titles available for the Playstation platform which will be available to all players in the complex. 15 Digital D-Day, Businessweek, October 15, /14/99 Page 15

16 Pricing and Revenues Pricing and Revenues Interactive film Individual ticket prices will be set at $10.50 each. Although higher than the traditional motion picture exhibition ticket price, this price will be attainable due to the interactive element involved in the product, the higher income target market and the first-class accommodations that the complex will offer. In comparison, the going pricing for 4-6 minutes of LBE attractions has fluctuated between $5.00 to $ , which equates to an hourly rate of $75 to $90. Currently, a ticket to the Sony IMAX Theatre in New York's costs about $9.50. As mentioned above, Loews Cineplex is already experimenting with "VIP Screening Rooms" which are priced at a premium of about $3 to traditional movie going tickets. According to this article, trials of the "VIP Screening Rooms" are running at around 62% capacity. Therefore, this plan's assumption of 24% attendance capacity (which drives revenue) appears conservative. Television rights revenues are assumed to begin to occur beginning in This assumption relies on the trend toward the standardization of digital TV platform in broadcasting by the year Current TV stations are already beginning to supply digital content during 1998, including NFL on CBS and certain episodes of ER. Revenue values are assumed at a similar TV to domestic theatrical ratio as a sample limited success film - Police Academy 4. DVD rental and sales of films have also been factored into the revenue stream beginning in These revenues are anticipated to occur prior to TV revenue due to the current availability of the DVD product in the market. Again, revenue values have been estimated based on the Police Academy 4 example of video rental revenue (with a slight reduction for the acceptance of the DVD platform). For the non-peak movie attendance hours during summer and winter/spring breaks and after school times, the Sony Playstation offering will cost $20 per hour with unlimited plays on all available titles for the platform. For a group of 2 to 4 youths in a theatre, the hourly cost is only $5 - $10 each. According to the APCMAG.COM article cited above, the going minimum price for multi-media interactive video games is $1 per play. At a few minutes per play, the total payout for a consumer would most likely exceed $10. Additionally, the availability of all titles for the Playstation platform will also command a premium price. Concessions stand prices will follow the standard exhibition industry prices as determined by Loews current exhibition industry management. Additionally, any lobby facilities (virtual reality video games, etc.) will be competitively priced as compared to the rest of the motion picture exhibition industry as determined by Loews management. Another "revenue" that the I-CADE Theatres will generate is in the form of free advertising for Sony products. In particular, products related to virtual reality, interactive gaming, Sony Playstations, DVD and Digital Technology will all be showcased in the lobby area of each complex. In addition, the use of Sony DVD and Digital TV product within each individual theatre will be promoted via trailers and advertisements before each show to remind the consumer of the innovation leading position of Sony Corp in these respective markets. This will reinforce in the mind of the consumer the Sony Brand Image which will have a positive impact on the performance of the Sony Electronics Division. 16 "Location Based Entertainment: Trend or Fad?", The Red Herring magazine, July /14/99 Page 16

17 Costs Costs Digital Playback Technology The technology required for the digital playback within each theatre very closely resembles the current technologies in Sony DVD products. Only minor adaptations will be necessary to account for the audience selection of content "tracks" at each of the decision points. This plan assumes estimated costs to supply this product at the current retail price of the DVPS7000 product ($799) 17 plus the cost of integrating a computer into the track selection to accommodate deciphering the multiple selection of the audience. Digital Monitor Technology Sony Electronics has entered into the digital TV market with its KW34HD1 high definition product. There will need to be some investment into the development of a large screen for the individual theatres. The 16 X 9 foot screen will require a digital TV screen of 220" vertical. Currently, the largest screen size for the KW34HD1 product is 32". Since the actual digital TV technology required has already been developed and the manufacturing process set up, the only investment required will be for the increased screen size. Although an exact investment figure is not known, this plan estimates the investment required to development this product at $5,000,000 up front and then uses current retail prices, in lieu of wholesale prices, to supply each unit to the complexes. After development is complete, this plan assumes estimated costs to supply this product at six times the current retail price of the KW34HD1 product ($8,999) for a total cost of $60,000 per unit. Digital Content Production Initially, the costs of production for these digital films may be higher than the normal format, however with the extensive operations of the SPE division and the imminent conversion of the standard TV format, costs will begin declining in the immediate future. Digital Production already presents some cost efficiencies as evidenced in an article in the Daily Telegraph dated September 24, "High-quality digital cameras and editing software which is intuitive enough for non-specialists to grasp mean that a small number of skilled people can do the jobs of a traditional production team." According to this article, an hour-long episode of the factual news program called "The Lounge" costs approximately pounds 6,000. Although the requirements of the I-CADE product will be much greater than an hour of news programming, this does indicate that digital production costs are within reason and could be controlled enough to make this venture viable. As SPE becomes more efficient in the digital production process, and the I-CADE Theatre circuit expands, the costs per screen of producing the interactive films will become more reasonable than in the initial investments. Low cost, high quality production budgets are not new to Hollywood. The rise of the "independent" production labels, including Sony Classics, Miramax (Disney), Fine Line Cinema (WB), under the major studio umbrellas demonstrates the recognition of the value of low cost 17 Current market price per 04/14/99 Page 17

18 Costs productions. Other independents such as The Shooting Gallery have had financial success by following the low budget, high quality business plan. 18 Discussions with a principal at KJB Ventures, a film financing hedge fund in NYC, also indicate that films with budgets of less than $2 million can enjoy significant financial success when properly marketed and distributed. The I-CADE venture will produce 5 films per year with production budgets not to exceed $7.5 million each. Theatre Complex Costs Initial investment in the creation of the I-CADE Theatre Complexes will be in the form of leasehold improvements to create the individual theatres and lobby areas. These costs should be similar to the investment costs required for current Loews Theatre upgrades or build-outs. After this initial investment, this plan assumes that standard costs of running the theatres on a day to day basis will resemble that experienced by the current Loews Cineplex Theatres. Advertising and Promotion Advertising and promotion costs will run at a slightly higher rate than the normal Loews Cineplex rates -- more in line with the Sony IMAX advertising and promotion lines. Because this is a launch of an entirely new business, initial advertising and promotion costs will run high due to the launch awareness programs. Once awareness has been achieved, advertising and promotion spending will decrease to a level more on line with the Loews Cineplex spending. Because the venture is both production company and distribution channel, there will be some efficiencies realized in the advertising and promotion of the complex and the films themselves. This plan assumes an advertising and promotion to sales ratio of 7.5% of total revenues. 18 "Producing Profits", Los Angeles Times, July 3, /14/99 Page 18

19 Advertising and Promotion Advertising and Promotion The Sony I-CADE Theatre concept will rely on four main promotional campaigns. The first will be as trailer advertisements in current Loews Cineplex theatres and also attached to current SPE productions in other theatre circuits. The second will be in local cable and network TV advertisements within the geographical regions determined by the theatre roll-out. The third will be in newspapers within the geographical regions determined by the theatre roll-out plan. And finally an outdoor advertising campaign including billboards, bus stops and bus-side advertisements. Trailer Advertisements Similar to current Sony trailer advertisements for their Sony IMAX theatre, these 30 second trailer advertisements will educate audiences that are active out of home entertainment consumers. This medium will serve the I-CADE concept by alerting, educating and maintaining these customers. Because of the piggy-back method of attaching to SPE productions or showing in current Loews Cineplex theatres, this form of advertising will be inexpensive yet effective due to the targeted market reached. Television Advertising The majority of the television advertising campaign will utilize the local cable channels in the geographical regions as defined by the theatre roll-out plan. Initial TV advertising will also include network advertising in regional spot advertising as an awareness program, but will fall off after a short period. Based on the economics of cable to network TV, utilizing local cable advertising, will enable the I-CADE Theatres to target specific market segments that represent a significant portion of the TV viewing public, while spending less in advertising dollars. Currently, cable TV has acquired approximately 65% of the TV viewing public, while advertising rates are significantly lower than that of network TV rates. Newspaper Advertising Newspaper advertising will come in the form of initial awareness programs for the opening of new locations and then inclusion in the calendar sections of local papers (as determined by the geographical roll-out plan) along side the traditional motion picture exhibition advertisements. The buying power of the Sony Pictures Entertainment division will allow the I-CADE Theatres to keep rates to within a reasonable range. Outdoor Advertising Outdoor advertising such as billboards and bus stops has the lowest CPM of all the traditional advertisement programs mentioned above (excluding the trailers campaign). Outdoor advertising will allow an awareness program plus a maintenance program due to the longevity of the advertising contracts. 04/14/99 Page 19

20 Forecast and Valuation Assumptions Forecast and Valuation Assumptions Revenues Movie revenues are projected based on attendance figures per the following attendance analysis. Television rights revenue are projected utilizing television rights performance of the Police Academy 4 picture which is assumed to be a comparable production in terms of performance. DVD rental and sales revenue is also projected utilizing the video performance of Police Academy 4. Concessions revenue is based on current concessions to admissions performance of the Loews Cineplex Corporation. Other revenue is based on current other revenue to admissions performance of the Loews Cineplex Corporation. Expenses All operating expense items are based on the respective expense line items per the Loews Cineplex Corporation. Film production expense is based on current trends in independent film making costs per the Los Angeles Times, The Shooting Gallery and discussions with KJB Ventures, Ltd. 04/14/99 Page 20

21 Joint Venture Valuation Financial Forecasts and Joint Venture Valuation Projected Results of Operations Number of Theatres Film Attendance Revenue $ 69,451 $ 138,902 $ 173,628 $ 187,518 $ 208,354 $ 208,354 Television Rights Revenue ,363 18,752 20,835 20,835 DVD Rental & Sales Revenue - 34,726 43,407 46,880 52,088 52,088 Concessions Revenue 24,308 48,616 60,770 65,631 72,924 72,924 Theatre Playstation Revenue 15,141 30,282 37,853 40,881 45,423 45,423 Miscelleanous Revenue 2,778 5,556 6,945 7,501 8,334 8,334 Total Revenue 111, , , , , ,958 Theatre Operations and Other Expenses 78, , , , , ,571 Cost of Concessions 4,254 8,508 10,635 11,485 12,762 12,762 Film Production Costs 22,500 37,500 37,500 37,500 37,500 37,500 37,500 Operating Profit (22,500) (8,250) 31,417 53,855 61,163 72,126 72,126 OPM -7.4% 12.2% 15.8% 16.7% 17.7% 17.7% Advertising & Promotion 2,792 5,584 12,904 16,998 18,358 20,398 20,398 General & Administrative 4,188 8,376 19,356 25,497 27,537 30,597 30,597 Net Operating Profit (29,480) (22,210) (843) 11,359 15,268 21,131 21,131 Cash 1,675 3,871 5,099 5,507 6,119 6,119 Accounts Receivable 1,400 3,235 4,262 4,603 5,114 5,114 Inventory 1,512 3,493 4,601 4,970 5,522 5,522 Other Assets 673 1,555 2,048 2,212 2,458 2,458 Automatic Sources 25,436 58,782 77,432 83,627 92,918 92,918 Net Working Capital (20,177) (46,627) (61,421) (66,335) (73,706) (73,706) Change in NWC (20,177) (26,451) (14,794) (4,914) (7,371) - Cap Ex 159, ,155 84,454 39,875 56,049 10,753 10,753 Depreciation 23,207 46,247 57,768 62,376 69,288 69,288 69,288 Net PP&E 136, , , , , , ,355 Change in Net PP&E 136, ,114 26,686 (22,501) (13,239) (58,535) (58,535) Free Cash Flow (165,843) (137,148) (1,079) 48,654 33,421 87,036 79,666 Terminal Value 612,813 NPV FCF (197,951) PVGO 267,866 PV of Venture 69,915 04/14/99 Page 21

22 Joint Venture Valuation Free Cash Flow Assumptions Revenue TV Revenue / Movie Revenue 0.0% 0.0% 10.0% 10.0% 10.0% 10.0% DVD Revenue / Movie Revenue 0.0% 25.0% 25.0% 25.0% 25.0% 25.0% Concessions / Movie Revenue 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% Miscellaneous / Movie Revenue 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Expenses Theatre Operations and Other 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% Concessions Expense 17.5% 17.5% 17.5% 17.5% 17.5% 17.5% Advertising / Sales 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% General & Administrative 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Film Production Films per year Average cost per film 7,500 7,500 7,500 7,500 7,500 7,500 7,500 Total Production Costs 22,500 37,500 37,500 37,500 37,500 37,500 37,500 Working Capital Cash / Sales 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Accounts Receivable / Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% Inventory / Sales 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% Other Assets / Sales 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% Automatic Sources / Sales 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% PP&E LHI per location Equipment per location Digital Equipment per location 1,824 1,824 1,824 1,824 1,824 1,824 1,824 Equipment replacement LHI & Useful life Equipment Useful life Digital Equipment Useful life Manufacturing Investment 5,000 Cost of Equity 18.00% Highest feasible discount rate in current market conditions. Growth Rate 5.0% 04/14/99 Page 22

23 Joint Venture Valuation Estimated Revenues per Theatre Complex Seats per Theatre 16 Theatres per Complex 30 Price per Ticket $10.50 Sunday Monday Tuesday Wednesday Thursday Friday Saturday Usage Estimate 25% 10% 10% 10% 10% 50% 50% Shows per Day Attendance Revenue per Day $5,040 $1,008 $1,008 $1,008 $1,008 $7,560 $10,080 Revenue per Week $26,712 Revenue per Year $1,389,024 Estimated Playstation Revenue Per Theatre Complex Theatres per Complex 30 Hours Available per Day 6 Total Available Playstation Hours 180 Expected Usage Rate 35% Expected Hours per Day 63 Price per Hour $20 Expected Revenue per Day $1,260 Summer Days 90 $113,400 Christmas Days 30 $37,800 Spring Days 7 $8,820 Other Weekdays during year 170 $142,800 Total Revenue per theatre / Year $302,820 04/14/99 Page 23