• NATO Executive Board Approves Resolution to Begin Exhibitor-Led Testing of Digital Cinema Technologies

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    Reel Blog   


    (Beverly Hills, Calif. – October 1, 2019)  The Executive Board of the National Association of Theatre Owners (NATO), at the association’s annual Membership and Board Meetings at the Beverly Hilton, 23-24 September 2019, approved a resolution (attached) laying out aspects of a digital cinema technology evaluation program.

    “Digital cinema has opened up the door to a wide range of technological advances,” said NATO Technology Committee chairman John D. McDonald, Executive Vice President, Operations at AMC. “Exhibitors – the primary consumers of these technologies – along with other industry stakeholders, need an open, rational testing program to determine which of these technologies will work in the cinema space.”

    In the early days of the digital cinema transition, major film distributors formed Digital Cinemas Initiatives, LLC (DCI) to establish a standard architecture for digital cinema systems known as the “DCI Specification”. Its mission was to create a uniform level of security, technical performance and quality.

    DCI member studios subsidized the purchase of digital cinema equipment through Virtual Print Fees (VPFs). With VPFs in most cases ended, or nearing termination, in the domestic market, the costs of new technologies will fall on exhibitors. The pace of technological advance has increased. It is, then, necessary and proper for exhibitors to take the lead in evaluating the impact of light levels, contrast and colorimetry on their patrons and the exhibition environment.

    NATO seeks to create an open process to understand and evaluate digital cinema technologies and create metrics to analyze future technologies, and to open this process to include various stakeholders including filmmakers, distributors, manufacturers, service providers and exhibitors.

    NATO’s Technology Committee, led by NATO’s technology consultant Jerry Pierce, have already begun initial measuring to prepare for industry-wide testing. The Technology Committee will report its initial findings to membership at NATO annual meetings in 2020.

    ABOUT NATO

    The National Association of Theatre Owners is the largest exhibition trade organization in the world, representing more than 33,000 movie screens in all 50 states, and more than 32,000 additional screens in 103 countries worldwide.

    Headquartered in Washington, D.C., with a second office in Los Angeles, California, NATO represents its members in the heart of the nation’s capital as well as the center of the entertainment industry. From these vantage points, NATO helps exhibition influence federal policy-making and work with movie distributors on all areas of mutual concern, from new technologies to legislation, marketing, and First Amendment issues. www.natoonline.org

     

    CONTACT

    Patrick Corcoran
    Vice President & Chief Communications Officer
    818-506-1778
    [email protected]


  • John Fithian Delivers 2019 State of the Industry

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    Reel Blog   


    During his annual speech at CinemaCon, John Fithian celebrated a record, year in 2018, the importance of moviegoing, and directly addressed the dynamic between theatrical and streaming.

    “We understand that some movies will continue to go straight to the home and skip theatrical. There is nothing revolutionary about that idea. All we ask is that powerful movies in all genres, made by content creators who want their work on the big screen, be given the time to reach their full potential in theaters before heading to the home. Theatrical exhibition is the keystone of this industry, and there is no replacement—both artistically and commercially—for the impact of a break-out hit.

    Theatrical and streaming are two completely different experiences that have their time and place. A recent study by Barclays looked at the value of opening streaming titles theatrically before releasing them to the home, and plenty of other financial analysts and content creators stress that the two should exist peacefully.

    Read the full speech here.


  • Ernst & Young Study Shows Positive Relationship Between Moviegoing and Streaming

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    News Reel Blog   


    EY QUEST conducted a survey of 2,500 respondents, 80% of whom saw at least one movie in theatres in the last 12 months. The primary data collected in the survey was: (1) movie theatre attendance in the last 12 months, (2) streaming consumption in the last 12 months, and (3) demographic characteristics of the respondents.

    • Those who attended movies in theatres more frequently also tended to consume streaming content more frequently. For every race and age demographic, average streaming hours per week was higher for respondents who visited a movie theatre 9 times or more than respondents who visited a movie theatre only once or twice. Moreover, respondents who visited a movie theatre only once or twice in the last 12 months reported an average of 7 hours of streaming per week versus 11 hours of streaming per week for those who visited a movie theatre 9 or more times.
    • Those who did not attend a movie in a theatre in the last 12 months were more likely to report less streaming activity than those who did attend at least one movie in the same period. Of those who didn’t visit a movie theatre in the last 12 months, nearly half (49%) didn’t stream any online content. Of those who did not visit a movie theatre at all in the last 12 months, only 18% streamed online content for 8 or more hours per week.

    Download the executive summary here and the full report here.


  • Taxation, Depreciation, and Legislation: NATO Takes to Capitol Hill to Lobby on Tax Policy

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    News Reel Blog   


    At NATO, one of our most significant priorities in Washington is acting as an effective voice for our members with the government.  Favorable laws and regulations are essential to keep movie theaters in the United States healthy, prosperous, and sustainable.

    But no successful legislative campaign is complete without business owners talking directly to their elected officials about issues of concern to their industry.  It is key for Senators and members of Congress to hear directly from their business constituents, the people responsible for job creation and economic investment within their communities and cities, about how policies and laws impact their ability to remain community anchors and conduct business.  When movie theater owners and operators answer the call to project the voice of exhibition in our nation’s capital, not only are they acting as advocates for their own businesses, but they are ensuring that the industry has a seat at the table when Congress or a regulatory agency is deciding on a policy that will impact all theaters.

    NATO members from across the industry gathered in Washington, DC in mid-November to lobby Congress on tax legislation.  Exhibitors met with 35 House and Senate offices to discuss qualified improvement property (QIP) depreciation, urging them to fix the 39-year depreciation schedule for property improvements.  In addition to meetings with members of Congress who represent their theaters, exhibitors teamed up with representatives of the restaurant industry to talk about this issue with House and Senate leadership offices and press them to put this legislation on the list of bills that need to pass during the lame-duck session.  As of this writing, Congress has yet to pass technical corrections legislation to fix the QIP depreciation error in tax reform.

    But what’s QIP, and why did exhibitors care enough about this issue to lobby Congress?

    QIP:  A Deep Dive

    Before tax reform was enacted in December 2017, the tax code treated various kinds of property differently when it came to depreciation.  Section 168(e) of the tax code allowed certain kinds of properties to depreciate over 15 years, including:

    –Qualified leasehold improvements: Improvements made to the interior portion of a nonresidential building by a leaseholder.  The improvements had to be made more than three years after the building was first placed into service.

    –Qualified restaurant property: Defined as a building, or improvement to a building, of which more than 50% of the square footage is dedicated to preparing or serving meals.

    –Qualified retail improvements: Improvements made to the interior portion of a nonresidential building used for retail.  The improvements had to be made more than three years after the building was first placed into service.

    Unless otherwise specified in the tax code as having a shorter depreciation schedule, other property changes were subject to 39-year depreciation.

    In 2015, Congress passed legislation creating a new category of property: qualified improvement property, or QIP.  QIP was defined as interior improvements made to nonresidential real property after the building was placed into service.  QIP improvements did not need to be made pursuant to a lease (as was the case with qualified leasehold improvements), and could be made the same year that the building was placed into service.  QIP improvements weren’t subject to the shorter 15-year depreciation schedule, so Congress made these improvements eligible for bonus depreciation.  Under Section 168(k) of the tax code, properties eligible for bonus depreciation can immediately deduct a percentage of the acquisition cost of certain assets.  So while QIP improvements depreciated over the longer 39-year schedule, business could take advantage of immediately expensing some of their costs.  The costs of certain kinds of improvements, like adding an escalator or elevator, enlarging a building, or changing a building’s internal structural framework, could not be depreciated.  But other assets, like new seats, for example, would be subject to depreciation.

    In other words, a lease-held movie theater making interior changes—like installing new reclining seats, updating a concessions area, or putting in new lighting systems, for example—to a property that was at least three years old could depreciate those improvements over 15 years, but could not be eligible for bonus depreciation.  Movie theaters that were owned outright could make improvements to newer theater properties and depreciate those over 39 years, but could qualify for bonus depreciation.

    During the 2017 tax reform process, Congress intended to simplify these different categories, give all types of interior improvements a 15-year depreciation schedule, and give businesses a further benefit by making these improvements eligible for 100% bonus depreciation.  But that’s not quite what happened.

    In the Tax Cuts and Jobs Act (TCJA), Congress amended the tax code to remove qualified leasehold, restaurant, and retail improvements as separate categories, and instead, consolidated all such improvements under the qualified improvement property category.  Congress then intended to make the necessary changes to put QIP in the category of properties eligible for a 15-year depreciation schedule.  But that never occurred.  In what is referred to on Capitol Hill as a “drafting error,” Congress made a big ole typo:  They forgot to copy and paste the language into the right section of the tax code so that QIP could be eligible for a 15-year depreciation schedule, thus defaulting these property improvements to the longer 39-year schedule.

    This mistake also meant that businesses could not take advantage of another intended benefit, 100% bonus depreciation.

    As described earlier, under Section 168(k) of the tax code, properties eligible for bonus depreciation could immediately deduct a percentage of the acquisition cost of certain assets.  To be eligible for bonus depreciation, a property had to have a regular depreciation schedule of 20 years or less—or, since 2015, be considered qualified improvement property.

    Before tax reform was enacted in 2017, bonus depreciation was scheduled to phase out completely by 2020.  In tax reform, Congress modified this aspect of the tax code to allow businesses to expense certain assets at 100% through 2022, and then phased out bonus depreciation from 2023-2026.

    Remember how QIP was added to the category of properties eligible for bonus depreciation?  Well, in the tax reform process, Congress removed QIP from the categories of properties eligible for bonus depreciation, because Congress intended to give QIP a regular depreciation life of 15 years—which would have automatically qualified such property for bonus depreciation, as it would meet the criteria of having a regular depreciation life of 20 years or less.  But since Congress never actually wrote the necessary language giving QIP the 15-year depreciation life, businesses had to wave goodbye to bonus depreciation too.

    Qualified improvement property: three little words that contain multitudes.  Just one small phrase left out of a 186-page bill has made an enormous difference in the way that a business can plan and execute major projects.

    Bimal Dattani of Touchstar Cinemas, right, meets with Rep. Mo Brooks (R-AL), left

    L to R: Mike Hagan of B&B Theatres, Mike Barstow of Main Street Theatres, and Brooks Rainer of AMC Theatres in the Longworth House Office Building

     

    Mike Barstow of Main Street Theatres, left, meets with Rep. Don Bacon (R-NE), right

     

    Deepak Keshani (L) and Purnima Keshani (R) of Bartlett Cinemas meet with Rep. David Kustoff (R-TN) (center)

     

    L to R: Mike Hagan of B&B Theatres, Falgun Patel of Royal Pooler Cinemas & IMAX, and Bimal Dattani of Touchstar Cinemas at lunch in the Longworth House Office Building

    What Now?

    Congress needs to pass technical corrections legislation amending the tax code to reflect their intended goal of a 15-year depreciation schedule for qualified improvement property.  (While no legislation has passed as of this writing, this author hopes that Congress passes a bill by the time this article is published.)  While there is bipartisan support for making this fix—16 Senate Democrats and 14 Senate Republicans have written to the Treasury Department asking that this issue be addressed through some kind of regulatory guidance—there are political power plays at work that could impact its quick passage.

    House Democrats, buoyed by their wins in the midterm elections and upcoming control of the House of Representatives, are keen to wait until the next Congress to pass their own version of tax reform to roll back some of the changes made under President Trump.  However, waiting until 2019 to make this fix could mean that businesses have an artificially inflated tax burden in 2018, miss out on crucial bonus depreciation, and face ongoing uncertainty about planning new projects.  In exchange for supporting QIP legislation passage before the lame-duck session ends in December, Democrats will likely force Republicans to come up with some kind of trade-off—but what the Republicans will be willing to give Democrats isn’t clear yet.  What we do know, however, is that the voice of exhibitors will remain essential as NATO advocates for this and other priorities of the industry.