Question

First Saudi cinema in 35 years to open on April 18 AMC plans to open its first new movie theater in the Saudi capital of Riyadh on April 18 Some 350 cinemas with more than 2,500 screens will be opened by 2030. The Saudi Ministry of Culture and Information has signed an agreement with AMC to open around 40 cinemas in 15 cities in Saudi Arabia over the next five years. The license, the first of its kind, will allow one of the world’s largest film companies, to operate cinemas in the Kingdom. Under the license, AMC plans to open its first new movie theater in the Saudi capital of Riyadh in April 18. The company signed a memorandum of understanding with the Public Investment Fund in November 2017 to discuss potential trade cooperation opportunities. Saudi Arabia, with a population of 32 million, mostly under the age of 30, is expected to be the region’s largest market for movie theaters. Last December, the Ministry of Culture and Information announced that commercial cinemas would be allowed to operate in the Kingdom starting from 2018, for the first time in more than 35 years. Dr. Awad bin Saleh Al-Awad, Minister of Culture and Information, said that granting the first license provides important investment opportunities for the cinema industry. He pointed out that the Saudi market is large and most of the population is under the age of 30, so they are eager to watch their favorite films in their country. He added that the goal of the Kingdom’s Vision 2030 is to improve the quality of life by providing additional leisure opportunities. He pointed out that the opening of cinemas will help support the local economy and contribute to the creation of new jobs. The cinemas will not require men and women to sit separately, a source told Reuters on Wednesday. Vision 2030 has set a target of raising Saudi Arabia’s annual spending on cultural and recreational activities from 2.9% of total Saudi household spending to 6% by 2030. Adam Aron, CEO of AMC, said the company is following with great admiration the creative movement of development projects in the Kingdom to open new economic sectors. “We are looking forward to providing entertainment services that will enable everyone to spend an enjoyable time playing world-class film shows across the Kingdom. AMC’s entry into the Saudi Arabian market comes in partnership with the Public Investment Fund (PIF) through its wholly-owned Leisure Development and Investment Company. The move to allow movie theaters to open up a local market with annual ticket sales of up to $1bn is what makes other leading movie chains keen to enter as the largest market in the Gulf region. AMC Theaters is an American movie theater chain owned and operated by Wanda Group. Founded in 1920, AMC has the largest share of the American theater market ahead of Regal Entertainment Group and Cinemark Theaters.

Conduct SWOT and PESTLE (Political, Economic, Social, Technological, Legal, Environmental) Analysis for the Cinema Industry.

Discuss the challenges of Saudi Entrepreneurs to enter Cinema Industry in KSA

Answer 1

Swot analysis of Cinema Industry :

STRENGTHS :

• High level of customer satisfaction – the company with its dedicated customer relationship management department has able to achieve a high level of customer satisfaction among present customers and good brand equity among the potential customers.
• Highly skilled workforce through successful training and learning programs. AMC Networks is investing huge resources in training and development of its employees resulting in a workforce that is not only highly skilled but also motivated to achieve more.
• Highly successful at Go To Market strategies for its products.
• Strong Free Cash Flow – AMC Networks has strong free cash flows that provide resources in the hand of the company to expand into new projects.
• Strong Brand Portfolio – Over the years AMC Networks has invested in building a strong brand portfolio. The SWOT analysis of AMC Networks just underlines this fact. This brand portfolio can be extremely useful if the organization wants to expand into new product categories.
• Superb Performance in New Markets – AMC Networks has built expertise at entering new markets and making success of them. The expansion has helped the organization to build new revenue stream and diversify the economic cycle risk in the markets it operates in.
• Successful track record of developing new products – product innovation.
• Automation of activities brought consistency of quality to AMC Networks products and has enabled the company to scale up and scale down based on the demand conditions in the market.

WEAKNESSES :

• Investment in Research and Development is below the fastest growing players in the industry. Even though AMC Networks is spending above the industry average on Research and Development, it has not been able to compete with the leading players in the industry in terms of innovation. It has come across as a mature firm looking forward to bring out products based on tested features in the market.
• The profitability ratio and Net Contribution % of AMC Networks are below the industry average.
• Not very good at product demand forecasting leading to higher rate of missed opportunities compare to its competitors. One of the reason why the days inventory is high compare to its competitors is that AMC Networks is not very good at demand forecasting thus end up keeping higher inventory both in-house and in channel.
• Need more investment in new technologies. Given the scale of expansion and different geographies the company is planning to expand into, AMC Networks needs to put more money in technology to integrate the processes across the board. Right now the investment in technologies is not at par with the vision of the company.
• Financial planning is not done properly and efficiently. The current asset ratio and liquid asset ratios suggest that the company can use the cash more efficiently than what it is doing at present.
• There are gaps in the product range sold by the company. This lack of choice can give a new competitor a foothold in the market.
• Organization structure is only compatible with present business model thus limiting expansion in adjacent product segments.

OPPORTUNITIES :

• Opening up of new markets because of government agreement – the adoption of new technology standard and government free trade agreement has provided AMC Networks an opportunity to enter a new emerging market.
• New environmental policies – The new opportunities will create a level playing field for all the players in the industry. It represent a great opportunity for AMC Networks to drive home its advantage in new technology and gain market share in the new product category.
• Lower inflation rate – The low inflation rate bring more stability in the market, enable credit at lower interest rate to the customers of AMC Networks.
• Organization’s core competencies can be a success in similar other products field. A comparative example could be - GE healthcare research helped it in developing better Oil drilling machines.
• The market development will lead to dilution of competitor’s advantage and enable AMC Networks to increase its competitiveness compare to the other competitors.
• Economic uptick and increase in customer spending, after years of recession and slow growth rate in the industry, is an opportunity for AMC Networks to capture new customers and increase its market share.
• The new taxation policy can significantly impact the way of doing business and can open new opportunity for established players such as AMC Networks to increase its profitability.
• Stable free cash flow provides opportunities to invest in adjacent product segments. With more cash in bank the company can invest in new technologies as well as in new products segments. This should open a window of opportunity for AMC Networks in other product categories.

THREATS :

• Intense competition – Stable profitability has increased the number of players in the industry over last two years which has put downward pressure on not only profitability but also on overall sales.
• Increasing trend toward isolationism in the American economy can lead to similar reaction from other government thus negatively impacting the international sales.
• Changing consumer buying behavior from online channel could be a threat to the existing physical infrastructure driven supply chain model.
• Growing strengths of local distributors also presents a threat in some markets as the competition is paying higher margins to the local distributors.
• Imitation of the counterfeit and low quality product is also a threat to AMC Networks’s product especially in the emerging markets and low income markets.
• Rising raw material can pose a threat to the AMC Networks profitability.
• The company can face lawsuits in various markets given - different laws and continuous fluctuations regarding product standards in those markets.
• Shortage of skilled workforce in certain global market represents a threat to steady growth of profits for AMC Networks   in those markets.

PESTLE (Political, Economic, Social, Technological, Legal, Environmental) Analysis for the Cinema Industry :

​​​​​​POLITICAL FACTORS:

• Political stability and importance of Entertainment - Diversified sector in the country's economy.
• Risk of military invasion
• Level of corruption - especially levels of regulation in Services sector.
• Bureaucracy and interference in Entertainment - Diversified industry by government.
• Legal framework for contract enforcement
• Intellectual property protection
• Trade regulations & tariffs related to Services
• Favored trading partners
• Anti-trust laws related to Entertainment - Diversified
• Pricing regulations – Are there any pricing regulatory mechanism for Services
• Taxation - tax rates and incentives
• Wage legislation - minimum wage and overtime
• Work week regulations in Entertainment - Diversified
• Mandatory employee benefits
• Industrial safety regulations in the Services sector.
• Product labeling and other requirements in Entertainment - Diversified.

ECONOMIC FACTORS :

• Type of economic system in countries of operation – what type of economic system there is and how stable it is.
• Government intervention in the free market and related Services
• Exchange rates & stability of host country currency.
• Efficiency of financial markets – Does AMC Networks Inc. needs to raise capital in local market?
• Infrastructure quality in Entertainment - Diversified industry
• Comparative advantages of host country and Services sector in the particular country.
• Skill level of workforce in Entertainment - Diversified industry.
• Education level in the economy
• Labor costs and productivity in the economy
• Business cycle stage (e.g. prosperity, recession, recovery)
• Economic growth rate
• Discretionary income
• Unemployment rate
• Inflation rate
• Interest rates.

SOCIAL FACTORS :

• Demographics and skill level of the population
• Class structure, hierarchy and power structure in the society.
• Education level as well as education standard in the AMC Networks Inc. ’s industry
• Culture (gender roles, social conventions etc.)
• Entrepreneurial spirit and broader nature of the society. Some societies encourage entrepreneurship while some don’t.
• Attitudes (health, environmental consciousness, etc.)
• Leisure interests.

TECHNOLOGICAL FACTORS :

• Recent technological developments by AMC Networks Inc. competitors
• Technology's impact on product offering
• Impact on cost structure in Entertainment - Diversified industry
• Impact on value chain structure in Services sector
• Rate of technological diffusion.

ENVIRONMENTAL FACTORS :

• Weather
• Climate change
• Laws regulating environment pollution
• Air and water pollution regulations in Entertainment - Diversified industry
• Recycling
• Waste management in Services sector
• Attitudes toward “green” or ecological products
• Endangered species
• Attitudes toward and support for renewable energy.

LEGAL FACTORS :

• Anti-trust law in Entertainment - Diversified industry and overall in the country.
• Discrimination law
• Copyright, patents / Intellectual property law
• Consumer protection and e-commerce
• Employment law
• Health and safety law
• Data Protection.

Challenges of Saudi Entrepreneurs to enter Cinema Industry in KSA :

Challenge 1 - The private sector isn’t doing enough

Over 50 percent of all the incubators in Saudi Arabia have some form of government affiliation. That may sound like a great thing, but it also highlights the level of passiveness on behalf of the Saudi private sector.

It seems the private sector here forgets that the American economy was built on the backs of entrepreneurs supported by some form of incubation or support entity. Giving out money and/or office space just isn’t sustainable. More efforts in knowledge building and information transfer are needed if entrepreneurs are ever going to receive significant value from the private sector.

Challenge 2 –Entrepreneurs need help from experienced entrepreneurs who have succeeded and failed

Most people working in incubators and accelerators in KSA are employees rather than entrepreneurs.

While they are all qualified to do their jobs, here’s where the value of what our entrepreneurs are getting gets diluted. Employees and entrepreneurs have very different mindsets. One is risk averse, afraid of failure, and works solely for a set salary and an incentivized bonus. The other is living a typical entrepreneur’s life where everyday is filled with risk and challenges at every corner.

Challenge 3 – 'Wantrepreneurs' are ignored

If your pitch is horrible, your business plan is all over the place, and your numbers are approximations, then chances are you’re probably not going to get admitted into an incubator or accelerator and you won’t secure funding.

There are many 'wantrepreneurs' in Saudi Arabia that expect to be spoon-fed in building the core skillsets to becoming effective entrepreneurs. Without such skills, we can expect poor performing accelerator events, weak growth in new ecosystem networks, and a lack of interest from the private sector.

Challenge 4 – For the last time, SME’s and startups are not the same

It has become almost comical how some entities continue to categorize startups with SMEs.

According to the Saudi Arabian Ministry of Commerce and Industry, an SME is a 50 to 500 employee operation that generates at least 10 million Saudi riyals ($2.6 million USD) a year. A startup is usually an operation that has less than 20 (and that’s on the large side) and hasn’t developed enough traction.

Challenge 5 – Knowledge economy or bust?

Everything starts with culture. Culture moves, empowers, and inspires people to create, build and hack a better world with their ideas.

However, importing proven operations and talent to work in Saudi Arabia without first building and harnessing a locally sustainable culture makes the long run tough.

Saudi culture is generally risk averse. As KSA is an emerging market, it would be easy to assume that the youth here face challenges similar to those in markets such as Mexico, Indonesia, Nigeria or even South Africa. We are all too aware of the need to become knowledge economies and shift our reliance from natural resource industries, but alienating all other sectors won’t help, especially when they too, are lacking necessary skills and mentoring.

Challenge 6 – There is no proper Kingdom-wide coverage

The Saudi ecosystem is made up of smaller ecosystems that don’t have much in common apart from market dynamics and target demographics.

Some incubators are doing a fantastic job at building a stronger national presence, such as Badir Incubator, which has bricks and mortar operations in five cities and has a consistent, sustainable model to assist startups. But the lion’s share of incubators enjoy the comfort of their own cities.