Movie studios are warily eyeing consolidation among US theater chains. During the past two years, a small number of finan-cial buyers have acquired several large ones, thereby gaining control over nearly a third of the nation’s 35,000 screens—and 44 percent of the box-office revenues (which totaled $8.4 billion in 2001).¹ More consolidation is likely, giving these emerging megachains the clout to demand a larger portion of the revenue from the sale of tickets and to influence how—and even whether—the industry shifts to digital cinema, as the studios would dearly like.

It was overexpansion by theater owners and the subsequent financial disarray that led to the present flurry of consolidation. The number of screens in the United States rose by 58 percent in the decade up to the year 2000, far outpacing the rise in admissions (Exhibit 1). The result was fewer tickets and lower revenues per screen. At the same time, the theaters’ share of ticket receipts shrank. The studios typically get 80 percent of first-week ticket revenues, a percentage that goes down as time passes—if the movie endures, that is—to bring the studios’ aggregate average closer to 50 percent. With a larger number of theaters, movie runs...