1905: the nickelodeon and the economics of five cents

The first purpose-built movie theaters were storefronts. The Nickelodeon that opened in Pittsburgh in June 1905 under Harry Davis and John P. Harris charged five cents for a program of short films that ran continuously through the day. The model spread with astonishing speed; by 1908 there were thousands across the United States.

What made it work was throughput. A short program, a low price and a continuous show meant a small room could turn its audience over many times a day. Capital cost was minimal: a rented store, some chairs, a projector. Douglas Gomery's history of American movie presentation, Shared Pleasures, notes that the nickelodeon's low barrier to entry is exactly why it was overrun by competition within a few years, and why the operators who survived were the ones who moved upmarket.

1910s to 1930s: the movie palace and the vertically integrated studio

Moving upmarket meant building. The 1910s and 1920s produced the movie palace: auditoriums seating two to six thousand, with orchestras, ushers in uniform and architecture borrowed from opera houses and, in the "atmospheric" style, from Mediterranean courtyards under painted night skies. New York's Roxy Theatre opened in 1927 with around 5,900 seats.

The palaces were expensive and were mostly built by the studios themselves. By the end of the 1920s the major studios owned or controlled the first-run theaters in most large American cities, which gave them control over the whole chain from production to ticket. That vertical integration is the reason the studios could guarantee their films a screen and the reason independent exhibitors spent the 1930s in litigation. The Supreme Court's 1948 Paramount decision ended it, forcing the studios to divest their theaters and, incidentally, creating the modern distributor-exhibitor negotiation.

1950s: widescreen as a weapon against television

When television arrived, exhibition responded with technology. The 1952 debut of Cinerama, with three synchronized projectors and a deeply curved screen, was followed a year later by CinemaScope, whose anamorphic lens gave a wide image from a single 35mm print. Stereo sound, 70mm formats and, briefly, 3D followed. John Belton's Widescreen Cinema argues that these were less about artistry than about differentiation: the theater needed to offer something the living room could not.

The economics were double-edged. Widescreen filled seats but required exhibitors to re-equip, and the palaces, with their fixed proscenium arches, were often the hardest to convert. The technology that saved the industry also started the palace's decline.

Interlude: the drive-in and the suburb

Before the multiplex followed the population to the suburbs, the drive-in got there first. The format was patented in the 1930s but exploded after the Second World War, peaking at over four thousand American screens in the late 1950s. Its economics were unusual: cheap land on the edge of town, minimal building, a single screen, and, crucially, a captive audience for a concession stand that often out-earned the box office by a wide margin. Drive-in operators were the first exhibitors to treat the snack bar as the business and the film as the draw.

The format declined as land values rose and the multiplex offered the same suburban convenience with air conditioning and a choice of films. But it left a lasting mark on the industry's thinking about where profit lives, and its lesson, that concessions are not a side line, became the multiplex's operating principle.

1963 onward: the multiplex and the suburb

The single most consequential architectural idea in exhibition history came from Kansas City. In 1963 Stanley Durwood of American Multi-Cinema, the company that became AMC, opened the Parkway Twin in a shopping center, two auditoriums sharing one lobby, one box office and one concession stand. The logic was that the overhead of a theater, staff, real estate, snack bar, could be spread across multiple screens while offering audiences a choice of films.

The multiplex followed the population to the suburbs and the shopping mall. Screens per site multiplied through the 1970s and 80s, and in 1995 the format was pushed further with the megaplex: twenty or more screens with stadium seating. By the late 1990s the industry had overbuilt so aggressively that several major chains went through bankruptcy.

Two economic lessons came out of the multiplex era. First, the concession stand became the profit center, because a shared lobby made every screen's audience walk past it. Second, the number of screens became a programming tool: a hit could be shown on several auditoriums at staggered times, and a failing film could be shrunk to the smallest room without being dropped.

2005 to 2015: the digital transition and the $100,000 projector

Film prints were expensive to strike and ship, and distributors had wanted digital delivery since the 1990s. The problem was who would pay. A DCI-compliant digital projector and server in the mid-2000s cost roughly $70,000 to $100,000 per screen, several times the cost of a 35mm projector, and the savings accrued mainly to the distributor.

The solution was the virtual print fee (VPF): distributors paid a fee, roughly the cost of a film print, for each digital booking, and the fees were used to pay down the exhibitor's equipment financing over a period of about ten years. The Digital Cinema Initiatives specification published in 2005 fixed the technical standard, and the VPF financing model drove conversion to near-completion in North America by 2013 and worldwide shortly after.

The transition had casualties. Small independent cinemas that could not secure VPF financing faced a choice between borrowing heavily and closing, and many closed. It was the clearest demonstration in decades that exhibition is a capital-intensive business first and a cultural one second.

Premium large format: the current bet

Once every screen was digital, differentiation returned as the strategic problem, and the answer was the premium large format, or PLF. IMAX, founded in 1967 and known for its giant film-format auditoriums, moved into multiplexes with digital and then laser systems. Dolby Cinema launched in 2014 with high-contrast laser projection and Dolby Atmos immersive audio. Chains built their own branded large formats, and independent operators installed laser projection and object-based sound to compete.

PLF economics work on a surcharge. A premium screen charges several dollars more per ticket, and distributors and exhibitors negotiate how that premium is shared. Against that revenue stands a very large capital cost per auditorium and, for branded formats, ongoing licensing. The decision an exhibitor faces today, whether to convert its largest room to a PLF and which one, is the direct descendant of the decision to install CinemaScope in 1953: spend heavily on a format the living room cannot match, and hope the surcharge pays it back before the next format arrives.

The sound race

Picture technology gets the headlines, but the exhibitor's capital decisions have equally often been about sound. The transition to synchronized sound in the late 1920s forced every theater in the country to re-equip within a few years or close; it was the digital transition of its day, and it wiped out thousands of small houses that could not afford it. Multichannel magnetic sound arrived with CinemaScope in the 1950s, Dolby Stereo in the 1970s made high-quality sound affordable for ordinary screens, and digital formats in the 1990s made surround sound standard.

The current phase is object-based audio, which places sounds in three-dimensional space rather than assigning them to channels. Dolby Atmos, launched in 2012, is the best known; it requires a large speaker array and a new processor, and it is one of the components that distinguishes a premium auditorium from a standard one. As with every previous sound upgrade, the question for the exhibitor is not whether it is better but whether the audience will pay enough more to cover the cost before the next standard arrives.

The constant: technology is a capital decision

Across 120 years the through-line is unmistakable. The nickelodeon's advantage was low cost; the palace's was scale; widescreen's was differentiation; the multiplex's was shared overhead; digital's was distribution efficiency paid for by financing; PLF's is a surcharge on scarcity. Every one required the exhibitor to decide what to buy, when, and how to pay for it, with the knowledge that competitors were making the same decision. That is the strategic core of the exhibition business, and it is what any serious cinema simulation has to model.