Item 1. Business
Item 1. Business
The Company
NCM, Inc., a Delaware corporation, was organized on October 5, 2006 and began operations on February 13, 2007 upon completion of its IPO. NCM, Inc. is a holding company that manages its consolidated subsidiary, NCM LLC. NCM, Inc. has no business operations or material assets other than its cash and ownership interest of approximately 48.0% of the common membership units in NCM LLC as of December 31, 2020. NCM LLC’s other members, Cinemark, Regal and AMC, the three largest motion picture exhibition companies in the U.S., held the remaining 52.0% of NCM LLC’s common membership units as of December 31, 2020. NCM, Inc.’s primary source of cash flow from operations is distributions from NCM LLC pursuant to the NCM LLC operating agreement. NCM, Inc. also receives management fees pursuant to a management services agreement with NCM LLC in exchange for providing specified management services to NCM LLC.
Our Business
We are America’s Movie Network. As the largest cinema advertising network in North America, we unite brands with the power of movies and engage movie fans anytime and anywhere. NCM’s Noovie ® pre-show is presented exclusively in 56 leading national and regional theater circuits including AMC, Cinemark, Regal and 50 network affiliate theaters as of December 31, 2020. NCM’s cinema advertising network offers broad reach and unparalleled audience engagement with over 20,400 screens in over 1,650 theaters in 190 Designated Market Areas® (“DMA ® ”) (including all of the top 50). NCM digital products go beyond the big screen, extending in-theater campaigns into online and mobile marketing programs to reach entertainment audiences.
We currently derive revenue principally from the sale of advertising to national, regional and local businesses in Noovie , our cinema advertising and entertainment pre-show seen on movie screens across the U.S., on our LEN, a series of strategically-placed screens located in movie theater lobbies, as well as other forms of advertising and promotions in theater lobbies. We also sell digital online and mobile advertising through our Noovie Audience Accelerator product (formerly known as Cinema Accelerator ) and across our suite of Noovie digital properties, including Noovie.com, Noovie Trivia ( including Noovie Shuffle and Name That Movie), and Noovie Arcade in order to reach entertainment audiences beyond the theater.
NCM LLC has long-term ESAs with the founding members and multi-year agreements with our network affiliates, which grant NCM LLC exclusive rights in the founding member and network affiliate theaters to sell advertising, subject to
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limited exceptions. In September 2019, NCM LLC entered into amendments to the ESAs with Cinemark and Regal (collectively, the “2019 ESA Amendments”). The 2019 ESA Amendments extended the contract life of the ESAs with Cinemark and Regal by four years, resulting in a weighted average remaining term of the ESAs with the founding members (based upon pre-COVID-19 attendance levels) of approximately 18.7 years as of December 31, 2020. The network affiliate agreements expire at various dates between March 31, 2021 and July 22, 2031. The weighted average remaining term (based upon pre-COVID-19 attendance levels) of the ESAs and the network affiliate agreements together is 16.3 years as of December 31, 2020.
We believe that the broad reach and digital delivery of our network provides an effective platform for national, regional and local advertisers to reach a large, young, engaged and affluent audience on a targeted and measurable basis.
COVID-19 — Following the World Health Organization’s declaration of the COVID-19 virus as a pandemic in March 2020, the United States’ government and other state and local governments issued precautionary restrictions on travel, public gatherings and other events and issued social distancing guidelines. Beginning in mid-March 2020, each of our founding members and all of our network affiliates announced that their theaters would be temporarily closed and almost all of the theaters within our network remained closed until late August 2020. During this time, the Company generated no in-theater advertising revenue. Major motion picture releases were also delayed into 2021 or have been released directly to alternative delivery methods bypassing the theater entirely.
On September 4, 2020 we resumed advertising within the theaters that were open in our network; however in-theater advertising revenue continued to be adversely impacted as attendance at the reopened theaters has been less than normal given COVID-19 restrictions around patron capacity limitations and a continued lack of new major motion picture releases. In October 2020, Regal announced the re-closure of its theaters in the United States. Many of the open theaters are operating at reduced hours and offering a limited number of movie showtimes and attendance at open theaters has not returned to historical levels. As of December 31, 2020, 40.5% of the theaters within our network were open. As of the filing date, multiple COVID-19 vaccines have been developed and immunizations have commenced throughout the United States and cases of the COVID-19 virus are decreasing from the peak numbers experienced in late 2020. However, the COVID-19 virus does continue to spread in the United States, and there can be no assurance when theaters within our network will return to normal operations, that the theaters that have reopened will remain open or that patrons will return to theaters at historical levels. These developments will be referred to as the “COVID-19 Pandemic.” Certain information herein is provided through 2019 to reflect more normalized operations prior to the temporary theater closures due to the COVID-19 Pandemic.
Noovie ® On-Screen Advertising
Noovie On-Screen —Our on-screen Noovie pre-show provides an entertaining pre-movie experience for theater patrons while serving as an incremental revenue source for our theater circuit partners. Noovie gives movie audiences a reason to arrive at the theater early to discover what's next, with exclusive entertainment content, in-theater gaming, and engaging advertising from national, regional and local brands, as well as long-form entertainment and advertising content provided to us under exclusive multi-year arrangements with leading media, entertainment, technology and other companies (“content partners”).
Beginning in November 2019 following the completion of the 2019 ESA Amendments, we now present two different formats of our Noovie® pre-show depending on the theater circuit in which it runs. In Regal, Cinemark and certain affiliate theaters, Noovie includes advertising inventory after the advertised showtime consisting of (1) a lights down segment that runs for five minutes after the advertised showtime with trailer lighting and (2) a 30- or 60-second Platinum Spot, as further described below (“Post-Showtime Inventory”). As of December 31, 2020, theaters presenting the updated Noovie format with Post-Showtime Inventory made up approximately 58% of our network based upon pre-COVID-19 attendance levels. All other NCM network theater circuits, which make up the remaining 42% of our network based upon pre-COVID-19 attendance levels, present the Classic Noovie pre-show, which ends approximately at the advertised movie showtime when the movie trailers begin. The movie trailers that run before the feature film are not part of Noovie .
Because Noovie is customized by theater circuit, theater location/market, film rating, film genre and film title, we produce and distribute many different versions of Noovie each month. We rotate Noovie ’s long-form content segments between theaters approximately every two weeks to ensure that frequent moviegoers are entertained by fresh content. This programming flexibility provides advertisers with the ability to target specific audience demographics and geographic locations and ensure that the content and advertising are age-appropriate for the movie audience. In 2019, we launched NCM LuxeNet, which is a specialty cinema network to connect luxury brands with cultured, affluent movie audiences. NCM LuxeNet is a carefully curated network of premium movie theaters in the top 25 DMAs ® featuring contemporary lobbies, state-of-the-art auditoriums, luxury seating, expanded amenities including bars and dine-in options and a sophisticated movie slate ranging from the best independent and Oscar-nominated films to Hollywood’s biggest blockbusters.
All versions of Noovie are produced by our internal creative team, which is cost-effective and gives us significant flexibility. We also offer pre- and post-production advertising creative services to our clients (primarily local clients who may not have their own creative agency), as well as branded content creation for national brands for a fee.
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Classic Noovie Show Structure —Classic Noovie is comprised of up to four segments, each approximately four to ten minutes in length. The Company revised the structure beginning November 1, 2019 and the structure below incorporates the changes made. The following graphic is for illustrative purposes and is not to exact scale.
• Segment four is the first section of Noovie and contains the entertaining content that is a core element of Noovie. NCM programs exclusive Noovie content at the beginning of the show that gives audiences a look at “what’s Noovie?, ” including movies ( Noovie Backlot and Noovie Genius ), music ( Noovie Soundcheck ), trivia ( Name That Movie ) and more.
• Segment three features a long-form entertainment content segment from one of our content partners and advertising from local clients.
• Segment two features primarily local and regional advertisements, which generally range between 15 to 90 seconds, as well as a long-form entertainment content segment from one of our content partners. This segment also typically includes a spot for Noovie programming, such as Noovie Arcade or Noovie Trivia where audiences have the opportunity to play our featured interactive games on the big screen using their mobile phones.
• Segment one runs closest to the advertised showtime and features primarily national advertisements, which are generally 30 or 60 seconds, as well as a long-form entertainment content segment from one of our content partners. Segment one also includes an advertisement for the founding members’ beverage supplier and a public service announcement (“PSA”).
Noovie Show Structure Including Post-Showtime Inventory —The Noovie with Post-Showtime Inventory format is comprised of substantially the same segments included within the Classic Noovie pre-show , each approximately four to ten minutes in length, as well as two additional advertising segments after the advertised showtime as described below. The total length of the Noovie pre-show including Post-Showtime Inventory is the same as the Classic Noovie pre-show as the amount of time displayed prior to the advertised showtime is reduced by the sum of five minutes plus the aggregate length of time of the Platinum Spot, if any. The following graphic is for illustrative purposes and is not to exact scale.
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• The Showcase Segment features a post-showtime lights down segment with trailer lighting beginning at the advertised showtime with approximately 5 minutes of national advertisements which generally range between 30 or 60 seconds, followed by a PSA and one or two 30 second advertisements for the founding members' beverage supplier; and
• The Platinum Position features an additional single advertising unit that is either 30 or 60 seconds of the Noovie pre-show deeply embedded within the movie trailers at trailer level lighting and at similar volume levels, directly prior to the last one or two trailers preceding the feature film, which we refer to as the “Platinum Spot”.
References to the Noovie pre-show relate to both the Classic Noovie and Noovie including Post Showtime Inventory formats, unless specified otherwise.
National, Regional and Local Advertising —Our cinema advertising business has a diverse customer base, consisting of national, regional and local advertisers. National and regional on-screen advertising in Noovie is sold on a CPM basis to national and regional clients. We generally sell our national advertising units across our national network by film rating or groups of ratings, or by individual film or film genre grouping. This ability to target various groups of films offers national advertisers a way to target specific audience demographics at various price points and overall cost levels, which we believe expands the number of potential clients. Local advertising is typically sold on a per-theater, per-week basis.
Noovie pre-show inventory is also available in the FreeWheel Strata and Mediaocean systems, media buying and selling software which allows advertising agencies to buy cinema advertising in the “National Spot TV” marketplace where advertising is purchased by national advertisers in several markets of their own selection. Being able to buy both TV and cinema locally in the National Spot TV marketplace makes it significantly easier for agencies to include cinema in the media mix for their clients and allows us to tap into the pool of advertising dollars budgeted for National Spot TV.
As with other premium video mediums like TV, we sell our Noovie pre-show inventory in both the upfront and scatter markets. Upfront is a term that describes the practice of buying advertising time “up front” on an annual basis for the upcoming year, purchasing inventory in advance and locking in the advertising rates (CPMs). Consistent with the television industry's upfront booking practices, a portion of our upfront commitments have cancellation options or options to reduce the amount that advertisers may purchase that could reduce what is ultimately spent by clients that have made upfront commitments. Scatter refers to the buying of advertising on a shorter-term basis closer to when the advertisements will run, which often results in a pricing premium compared to upfront rates. The mix between the upfront and scatter markets is based upon a number of advertising market factors, such as pricing, demand for advertising time and economic conditions. The demand in the scatter market impacts the pricing achieved for our remaining advertising inventory not sold upfront and can vary throughout the year.
During the year ended December 31, 2020, we derived 74% of our advertising revenue from national and regional clients (including advertising agencies that represent our clients) and 19% of our advertising revenue from local advertisers across the country (including advertising agencies that represent these clients).
Beverage Advertising. Each of the founding members has a relationship with a beverage concessionaire supplier under which they are obligated to provide on-screen advertising time as part of their agreement to purchase branded beverages sold in their theaters and we have a long-term agreement to exhibit the advertising of the founding members’ beverage concessionaires. Under the ESAs, up to 90 seconds of the Noovie® program can be sold to the founding members to satisfy their on-screen advertising commitments under their beverage concessionaire agreements. The time sold to the founding member beverage
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supplier is priced equal to the greater of (1) the advertising CPM charged by NCM LLC in the previous year for the time sold to the founding member beverage supplier and (2) the advertising CPM for the previous year charged by NCM LLC to unaffiliated third parties during segment one (closest to showtime) of the Noovie pre-show in the founding member’s theaters, limited to the highest advertising CPM being then-charged by NCM LLC pursuant to the ESAs. Beginning in 2020 and in accordance with the 2019 ESA Amendments, the price for the time sold to Cinemark and Regal’s beverage suppliers increases 2% each year. The time sold to AMC’s beverage supplier continues to be priced based upon the annual increase in CPMs as outlined above.
During 2020, we sold 60 seconds to two of the founding members and 30 seconds to one of the founding members to provide on-screen advertising for their beverage concessionaires. During 2020, the beverage concessionaire revenue from the founding members’ beverage agreements was approximately 7% of our total revenue. In the instance of certain theaters that are acquired by the founding members but are not incorporated into our network because of an existing on-screen advertising agreement with an alternative provider, we remain entitled to these encumbered theater beverage payments under the terms of the ESA which are treated as a reduction to the intangible asset and not classified as revenue.
Content. Beyond the Noovie -branded content at the beginning of the pre-show, the majority of our entertainment and advertising content segments are provided to us by content partners. Under the terms of the contracts, our content partners create original long-form entertainment content segments that are entertaining, informative or educational in nature exclusively for our Noovie pre-show and make commitments to buy a portion of our advertising inventory at a specified CPM over a one- or two-year period with options to renew, exercisable at the content partner’s option. The original content produced by these content partners typically features behind-the-scenes looks at the “making-of” feature films, upcoming media programming, or technology products. In 2020, the content partner segments were approximately 90 seconds in length.
PSA. In 2020, we had four agreements to exhibit a 40-second courtesy “silence your cell phone” PSA reminding moviegoers to silence their cell phones and refrain from texting during feature films which expired at the end of 2020.
Theater Circuit Messaging. The Noovie program also includes time slots for the founding members and network affiliates to advertise various activities associated with the operations of the theaters, including concessions, online ticketing partners, gift card and loyalty programs, special events presented by the theater operator and vendors of services provided to theaters, so long as such promotion is incidental to the vendor’s service or products sold in the theater. This time is provided to the theater operator at no charge.
Noovie ® Digital Products
Noovie is a fully integrated suite of products designed to innovate the moviegoing experience in ways that help brands tap into the excitement, emotion, and magic of the movies. NCM digital products take the Noovie experience beyond the big screen with editorial content on Noovie.com , our Noovie Trivia and Noovie Arcade gaming apps, and robust audience data and digital advertising capabilities to create the perfect immersive marketing solution for brands.
Noovie.com – Noovie.com, which launched in 2019, is the go-to digital destination for all things movies and is a discovery platform where audiences can discover new movies and watch the latest trailers. It features a smart movie guide and a place for fans to turn to decide what to watch next, whether in theater or at home, as well as a community hub for fans to connect, discover and share their love of movies.
Noovie Trivia – Noovie Trivia is a new app that launched in 2020 which now unites all of our popular movie trivia games into one place. Noovie Trivia lets fans level up their movie obsession and test their movie knowledge with multiple ways and games to play, including Name That Movie, Noovie Shuffle , and Noovie Motion Picks . New challenges are added on a regular basis.
Noovie Shuffle, a collection of card-based movie-trivia mini-games, initially launched in 2019. New games and card decks are added to Noovie Shuffle on an ongoing basis to match the current film slate and keep Shuffle fresh and challenging for players. We also work closely with movie studios to create custom games and card decks that highlight specific new movie releases. In 2020 we incorporated Noovie Shuffle into our Noovie Trivia app.
Name That Movie started in 2017 as a trivia segment for our Noovie® pre-show, social media channels and digital properties in order to further entertain and engage moviegoers. We also offer the opportunity for our advertising clients to sponsor the Name That Movie segments and incorporate advertising into the game. In 2019, we developed and released Name That Movie iOS and Android mobile apps, and in 2020 we incorporated the game into our Noovie Trivia app.
Noovie Arcade – Since 2018, movie audiences nationwide have been able to play big screen interactive augmented reality (“AR”) games on their mobile phones by usin g Noovie Arcade , the companion app for the Noovie pre-show. Noovie Arcade games and AR experiences have included the Ball Park® Brand Hot Dog Derby (our first-ever branded game), movie studio collaborations including Ralph Breaks the Internet and It: Chapter Two , Cinevaders ®, Emoji Escape , The Horror
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Experience and Hollywood Highway . Noovie Arcade games can be sponsored by advertisers or customized by brands to create unique and engaging experiences for movie audiences, and can also be played on Noovie.com .
Digital Advertising
NCM’s consumer-facing digital products all feature advertising opportunities that allow brands to continue to reach movie audiences across multiple platforms, including sponsorships, digital ad inventory such as leaderboards, skyscrapers, banner ads, half- and full-page ads, and a variety of digital video ad inventory. Our Noovie digital products are designed to not only provide digital advertising inventory to further enhance the marketability of our cinema advertising product offerings, but also to capture exclusive first-party data. As of December 31, 2020, approximately 5.1 million movie goers have downloaded our mobile apps. These downloads and the acquisition of second party data, including from geo-location services and micro-event data for moviegoers that enter theaters in our network, have resulted in first and second party data sets of over 170 million as of December 31, 2020.
Noovie Audience Accelerator – In addition to our ad-supported consumer-facing digital products, our Noovie Audience Accelerator digital product, formerly known as Cinema Accelerator , expands cinema advertising campaigns beyond the big screen to reach movie audiences wherever they seek out movie content online and on mobile devices. Noovie Audience Accelerator identifies moviegoers through our first- and second-party data sets. We can target specific demographics, genres or layer on other data to provide our clients with a match against their target audience. Digital ads are then distributed through multiple channels, including online and mobile banners, online and mobile pre-roll video and social media newsfeeds through our owned and operated ad inventory as well as third party ad inventory across multiple platforms including OTT/CTV to reach moviegoers wherever they may be seeking entertainment information and content.
We sell NCM’s digital products through a digital sales group that is embedded as part of our national and local sales organizations to enable collaborative, integrated selling. We believe that our new and upcoming digital products can be sold in combination with in-theater advertisements as integrated marketing packages as discussed in “Business—Our Strategy”. We plan to continue to invest in our digital platform in 2021 and beyond.
Lobby Advertising
Lobby Entertainment Network —Our LEN is a network of video screens strategically located throughout the lobbies of all digitally equipped founding members’ theaters, as well as the majority of our network affiliates’ theaters. As of December 31, 2020, our LEN had 2,913 screens in 1,499 theaters in our network. The LEN screens are placed in high-traffic locations such as concession stands, box offices and other waiting areas. Programming on our LEN consists of an approximately 30-minute loop of branded entertainment content segments created specifically for the lobby with advertisements running between each segment. We have the scheduling flexibility to send different LEN programming to each theater through our DCN, and the same program is displayed simultaneously on all LEN screens within a given theater, which we believe provides the maximum impact for our advertisers. We sell national and local advertising on the LEN individually or bundled with on-screen or other lobby promotions.
The LEN programming includes up to two minutes for founding members’ advertisements to promote activities associated with the operation of the theaters, including concessions, online ticketing partners, gift card and loyalty programs, special events presented by the theater operator and vendors of services provided to theaters, so long as such promotion is incidental to the vendor’s service or products sold in the theater. Additionally, subject to certain limitations, the LEN programming includes up to two minutes (one minute of which we provide to the founding members at no cost and one minute of which the founding members may purchase) to promote certain non-exclusive cross-marketing relationships entered into by the theater operators for the purpose of increasing theater attendance, which we call “strategic programs.”
Under the terms of the ESAs, the founding members also have the right to install a second network of additional screens in their theater lobbies which would not display our LEN programming, but would be used to promote strategic programs or products sold in their theater concessions, bars and dining operations, online ticketing partner promotions, gift card and loyalty programs and special events presented by the founding member and vendors of services provided to theaters, so long as such promotion is incidental to the vendor’s service.
Lobby Promotions —We also sell a wide variety of advertising and promotional products in theater lobbies. These products can be sold individually or bundled with on-screen, LEN or digital advertising. Lobby promotions typically include:
• advertising on concession items such as beverage cups, popcorn bags and kids’ trays;
• coupons and promotional materials, which are customizable by film and are distributed to ticket buyers at the box office or as they exit the theater;
• tabling displays, product demonstrations and sampling;
• touch-screen display units and kiosks; and
• signage throughout the lobbies, including posters, banners, counter cards, danglers, floor mats, standees and window clings.
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Under the terms of the ESAs, the founding members may conduct a limited number of lobby promotions at no charge in connection with strategic programs that promote motion pictures; however, such activities will not reduce the lobby promotions inventory available to us.
Our ability to provide in-lobby marketing and promotional placements in conjunction with our cinema advertising products allows us to offer integrated marketing solutions to advertisers that provide multiple touchpoints with theater patrons throughout the movie-going experience, which we believe is a competitive advantage over other national media platforms.
Digital Out-of-Home Products
NCM’s new Digital Out-of-Home (“DOOH”) group is embedded as part of our national and local sales organizations and was created in October 2020 to further unite brands with the power of movies by extending movie-centric Noovie® entertainment content, trivia, and advertising beyond movie theaters to a variety of complementary venues, including restaurants, retail locations, and office and residential buildings. NCM sells DOOH media inventory on a national, regional, local, and programmatic level in relationships with digital place-based properties including Coinstar, Captivate and Ziosk.
Our Network
Noovie® On-Screen is distributed across NCM LLC’s national theater network — the largest digital in-theater network in North America — through the use of our proprietary DCN and Digital Content Software (DCS). With the DCN and DCS, we are able to schedule, deliver, play and reconcile advertising and entertainment content for Noovie and the LEN on a national, regional, local, theater and auditorium level.
The DCN is the combination of a satellite distribution network and a terrestrial management network. We also employ a variety of technologies that aid in distribution where satellite delivery is not available to provide uninterrupted service to our network of theaters. The DCN is controlled by our Customer Experience Center located in NCM’s headquarters in Centennial, Colorado, which operates 12 hours a day, seven days a week to proactively monitor and manage our network. NCM's DCN dynamically controls the quality, placement, timing of playback and completeness of content within specific auditoriums, and it also allows us to monitor and initiate repairs to the equipment in our digital network of theaters.
Advertising and entertainment content for our Noovie pre-show and LEN is uploaded from our Customer Experience Center to our satellite distribution network and is delivered via multicast technology to the theaters in our network and received by our Alternative Content Engine. The Alternative Content Engine holds the content until displayed in specified theater auditoriums and lobbies according to contract terms. Each theater auditorium and lobby has a hardware and software architecture that controls the content to be shown. After playback of content, confirmation of playback is returned via satellite to our Customer Experience Center to be included in “post” reports provided to our advertising clients.
Prior to the COVID-19 Pandemic, more than 650 million moviegoers annually attended theaters that are currently under contract to present the Noovie pre-show, including the founding members and 50 leading national and regional theater network affiliates. A summary of the screens and theaters in our advertising network is set forth in the table below:
Our Network
(As of December 31, 2020)
As of December 31, 2020, our Noovie pre-show was displayed on network movie screens using digital projectors. Almost all screens within our network receive content through our DCN and are equipped with more powerful digital cinema projectors, with the remainder comprised of LCD projectors. Those screens not connected to our DCN display national and
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regional advertisements on digital projectors with content delivered on USB drives that are shipped to the theaters via overnight delivery services.
Human Capital Resources
We had 418 full-time employees and one part-time employee as of December 31, 2020. Given the limited attendance levels and expected delay in new movie releases since September 2020, 91 of our full-time employees were reduced to a 50-60% schedule and 71 of our full-time employees were temporarily furloughed as of December 31, 2020. Our employees are located in our Centennial, Colorado headquarters, in our advertising sales offices in New York, Los Angeles, Chicago and Detroit, our digital development offices in Los Angeles and New York and our software development office in Minneapolis. We also have many local advertising account executives and field maintenance technicians that work primarily from their homes throughout the U.S. None of our employees are covered by collective bargaining agreements. We believe that we have a good relationship with our employees.
Diversity, Equity and Inclusion (DEI) —We are committed to diversity, equity and inclusion in the workplace. We are focused on building diverse talent at all levels of the organization by recruiting high quality diverse talent and have taken steps to align our policies with recommendations promulgated by national organizations to ensure that our business practices are aligned with other top employers. We have also established a DEI Committee which is made up of a diverse set of employees and is focused on identifying and helping to implement initiatives intended to improve areas such as recruitment, retention, brand awareness and community outreach.
Organizational Development —Our Human Resources team is focused on providing training to our local sales team to provide our salespeople with the skills and confidence to sell larger contracts at a faster pace. With the exception of the current year due to the COVID-19 Pandemic, this training consists of in-person instruction. Managers and supervisors also participate in specialized training to develop management skills, encourage employee development and retention and assist the Company with succession planning by identifying top talent to be developed into future leaders. Our Human Resources department also regularly provides employees with mandatory compliance training regarding workplace diversity, our code of conduct, password management, cyber security and other personnel related courses to help them with their daily responsibilities. Compliance with mandatory training requirements is tracked by our Human Resources department and management is notified when the requirements are not met.
Total Rewards —We invest in our employees by providing comprehensive benefits and compensation packages. Our benefits packages include: comprehensive health insurance with a wellness program for all employees working 30 hours or more, parental leave for all new parents for the birth or adoption of a child or placement of foster care, 401k plan with a comprehensive financial wellness component and voluntary benefits employees can tailor to their specific needs ranging from additional life insurance to pet insurance.
Seasonality
Our revenue and operating results are seasonal in nature, coinciding with the timing of marketing expenditures by our advertising clients and to a lesser extent the attendance patterns within the film exhibition industry. Historically, both advertising expenditures and theater attendance tend to be higher during the second, third, and fourth fiscal quarters. Advertising revenue is primarily correlated with new product releases, advertising client marketing priorities and economic cycles and to a lesser extent theater attendance levels. Seasonal demand during the summer is driven by the absence of alternative attractive advertising mediums and during the winter holiday season due to high client demand across all advertising mediums. The actual quarterly results for each quarter could differ materially depending on these factors or other risks and uncertainties. Based on our historical experience, our first quarter typically has less revenue than the other quarters of a given year due primarily to lower advertising client demand and increased inventory availability in competitive advertising mediums. Given the temporary closure of our theaters due to the COVID-19 Pandemic, our 2020 quarterly results varied from the historical trend. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future.
The following table reflects the quarterly percentage of total revenue for the fiscal years ended 2018, 2019 and 2020:
First
Quarter Second
Quarter Third
Quarter Fourth
Quarter
FY 2018 18.2 % 25.8 % 24.9 % 31.1 %
FY 2019 17.3 % 24.8 % 24.8 % 33.1 %
FY 2020 71.6 % 4.4 % 6.6 % 17.4 %
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Government Regulations
Currently, we are not subject to regulations specific to the sale and distribution of cinema advertising. We are subject to federal, state and local laws that govern businesses generally such as wage and hour, worker compensation and health and safety laws as well as federal and state privacy, information security and consumer protection-related laws and regulations. We have been and are currently in compliance with all government mandated and environmental regulations.
Competition
Our advertising business competes in the estimated $260.0 billion U.S. advertising industry with many other forms of marketing media, including television, radio, print, internet, mobile and outdoor display advertising. While cinema advertising represents a small portion of the overall advertising industry today, we believe it is well-positioned to capitalize on the continuing shift of advertising spending away from traditional media, in particular television where consumers can skip advertisements through DVRs and other technology, to newer and more targeted forms of media.
Our advertising business also competes with many other providers of cinema advertising, which vary substantially in size. As the largest cinema advertising network in the U.S., we believe that we are able to generate economies of scale, operating efficiencies and enhanced opportunities for our clients to reach an engaged movie audience on both a national and local level to allow us to better compete for premium video dollars in the larger advertising marketplace.
Competitive Strengths
We believe that several strengths position us well to compete in an increasingly fragmented media landscape. We believe that our cinema advertising network is an attractive option for advertisers on a national, regional and local level and delivers measurable results for our clients that are comparable, and preferred, to the television, online and mobile or other video advertising options that we compete against in the marketplace.
Extensive national market coverage —Our contractual agreements with our founding members and network affiliates provide long-term exclusive access (subject to limited exceptions) to sell cinema advertising across the largest network of digitally-equipped theaters in the U.S. This allows us to offer advertisers the broad reach and national scale that they need to effectively reach their target audiences.
• Our advertising network consisted of 20,450 screens (16,515 operated by the founding members) located in 1,656 theaters (1,231 operated by the founding members) in 47 states and the District of Columbia, including each of the top 25 and 50 DMAs®, and 190 DMAs® in total, as of December 31, 2020;
• Over 650 million people attended theaters in our network in 2019 and 69%, 65% and 65% of the total theater attendance in theaters that present advertising in the top 10, 25 and 50 U.S. DMAs®, respectively and 61% of all DMAs® nationally, providing an attractive platform for national advertisers who want exposure in larger markets or on a national basis;
• The average screens per theater in our network during 2020 was 12.3 screens, 1.7 times the U.S. theater industry average; and
• The aggregate annual attendance per screen of theaters included in our network during 2019 was 30,714, versus the U.S. theater industry average attendance per indoor screen of 28,209, using metrics reported by the National Association of Theatre Owners.
Over 138 million people attended theaters in our network during the portion of 2020 that the theaters were open.
Scalable, state-of-the-art digital content distribution technology —Our use of the combination of satellite and terrestrial DCN network technology, combined with the design and functionality of our DCS and Customer Experience Center infrastructure, makes our network efficient and scalable and also allows us to target specific audiences and provide advertising scheduling flexibility and reporting. National, local and regional advertisers are generally able to run their ads in the Noovie®
pre-show less than 72 hours following the proposal which is comparable to the lead time of television advertising, giving businesses that rely on time-sensitive promotional advertising strategies the opportunity to take advantage of the power of cinema. The Company plans to further decrease this lead time following the upgrade of our end-to-end order management and scheduling system, as further discussed below.
This scalability of our distribution technology has allowed us to expand our cinema advertising network with minimal additional capital expenditures or personnel, and we expect to benefit from this scalability in the future as we add new theaters from the founding members, our existing network affiliate relationships and the addition of new network affiliates.
Access to a highly attractive, engaged audience —We offer advertisers the ability to reach highly-coveted target demographics, including young, affluent and educated “Millennial” and “Gen Z” moviegoers. According to Nielsen Cinema Audience Reports for 2019, 53% of the NCM LLC audience were between the ages of 12-34, compared to 53% in 2018, with a median age of 28 in 2019. Further, 45% of our moviegoers have a household income greater than $100,000 (versus 34% of the
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general population), with a median moviegoer household income of $92,100 in 2019, and 42% have received a bachelor’s degree or higher (versus 31% of the general population) according to the 2019 Doublebase GfK MRI Study .
Because of the impact of cinema’s state-of-the-art immersive video and audio presentation, we also believe that movie audiences are highly engaged with the pre-show advertising and entertainment content that they view in our theater environment. According to Nielsen, cinema advertising has significantly higher recall rates than advertising shown on television, and cinema is one of the few advertising mediums where the ability to bypass marketing messages is limited. Attribution studies conducted in 2018 and 2019 for the Company by Foursquare, a location-based services company, demonstrated that cinema advertising resulted in a 17% increase in store visits for a cellphone retailer, 20% increase in store visits to a quick service restaurant, and a 12% increase in store visits to a holiday retailer. Further, an attribution study conducted for the Company by Comscore and PlaceIQ, media management and analytics companies, demonstrated that cinema advertising resulted in a 12% increase in the intent to view a cable program. Based upon an intercept study conducted by eWorks, a market research company, in 2019, Platinum Spot advertisers experienced between a 32% and 96% increase in brand recall for a retailer, a car company and a cellphone manufacturer.
World-class entertainment and innovative, branded pre-feature content —The film content created by Hollywood studios is considered by many to be the finest entertainment content in the world, which creates a highly-desirable advertising environment for brands. We believe that our Noovie pre-show program provides a high-quality entertainment experience for theater audiences and an effective marketing platform for advertisers. By partnering with leading media, entertainment, technology and other companies, we are able to provide better original content for our audience and more impact for the advertiser. Because we offer local and national “pods” within our Noovie pre-show, we are consistent with the placement of ads on television networks, which allows us to be more easily integrated into traditional sight-sound-and-motion media buys.
Prime movie audience data, measurability and targeting —As with many other advertising mediums, we are measured by third-party research companies. Prior to September 2020, Nielsen measured our audience. Beginning in January 2021, Epicenter Experience LLC will measure our audience, including the total attendance that are in their seats during our Noovie pre-show. Additionally, unlike some other advertising mediums, we also receive attendance information by film at least monthly, by rating and by screen for all of the founding member theaters, and by location for the theaters operated by our network affiliates at least monthly, which allows us to report the actual audience size for each showing of a film where our Noovie pre-show played. We believe that the ability to provide detailed information to our clients gives us a distinct competitive advantage over traditional media platforms whose measurement is based only on extrapolations of a very small sample of the total audience.
In 2020, we continued to invest in the development of our cloud-based Data Management Platform (DMP) which we believe will allow us to provide even more robust audience insights and analytics to our clients. To further enhance the connection between brands and movie audiences, we accumulate exclusive first and second party audience data from several sources within our DMP. This audience data is then leveraged for the targeting of ad campaigns and can also serve to deliver closed-loop attribution reporting. We expect to continue to enhance the capabilities of the platform in 2021 by continuing to gather first and second-party data through our Noovie digital products, as well as additional second-party data sources and segments.
Integrated marketing and digital products —Our ability to bundle our on-screen advertising opportunities with integrated lobby, digital marketing and digital out-of-home products allows us to offer advertisers multiple touchpoints to reach movie audiences anytime and anywhere to execute true 360-degree marketing programs. We believe these multiple marketing impressions throughout the entire entertainment experience allow our advertisers to extend the exposure for their brands and products and create a more engaging relationship with movie audiences in every stage of their movie journey. Additionally, our digital products provide us with valuable, exclusive first party data which can be utilized by our advertising clients through our Noovie Audience Accelerator product to better reach their target audience with higher degrees of accuracy and measure business outcomes more accurately.
Contractual theater circuit partner and advertiser relationships —Our exclusive multi-year contractual relationships with our founding members and network affiliates allow us to offer advertisers a national network with the scale, flexibility and targeting to meet their marketing needs. Our exclusive multi-year contractual relationships with our content partners and PSA sponsors, as well as our agreements to satisfy the founding members’ on-screen marketing obligations to their beverage concessionaires, provide us with a significant upfront revenue commitment, accounting for approximately 27% and 23% of our total revenue for the year ended December 31, 2020 and December 26, 2019, respectively. In addition, our participation in the annual advertising upfront marketplace has allowed us to secure significant annual upfront commitments from national advertisers looking to secure premium cinema inventory. These upfront commitments accounted for approximately 28% and 14% of our total revenue for the year ended December 31, 2020 and December 26, 2019, respectively.
Strong operating margins with limited capital requirements —Our annual operating income and Adjusted OIBDA margins from our IPO through the year ended December 26, 2019 have been consistently strong, ranging from approximately 33.1% to 38.7% and 46.5% to 51.5%, respectively, over the previous five years. Our annual operating income and Adjusted
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OIBDA margins were (67.5%) and (21.5%) for the year ended December 31, 2020 due to the impact of the COVID-19 Pandemic on our operations. Refer to “Item 6. Selected Financial Data-Notes to the Selected Historical Financial and Operating Data” for a discussion of the calculation of Adjusted OIBDA margin, which is a non-GAAP financial measure, and a reconciliation of Adjusted OIBDA margin to operating income.
Our capital expenditures have ranged from approximately 2.9% to 3.5% of revenues over the five years through December 26, 2019. Our capital expenditures were 12.5% of revenue for the year ended December 31, 2020 due to the impact of the COVID-19 Pandemic on our operations. For the year ended December 31, 2020 our capital expenditures and other investments were $11.2 million, of which $4.6 million was related to investments in our digital infrastructure, $2.4 million related to certain implementation and prepaid costs associated with cloud computing arrangements related to the planned upgrade of our end-to-end order management and scheduling system that was implemented in the first quarter of 2021 and $2.0 million associated with upgrades to our existing systems related to the planned upgrade of our end-to-end order management and scheduling system. Given the impact of the COVID-19 Pandemic on our operations, our current focus is on cash containment and non-essential capital expenditures were reduced in 2020 accordingly. Following the normalization of our operations, we believe our historical level of Adjusted OIBDA and capital expenditures should provide us with the strategic and financial flexibility to pursue the further expansion of our national theater network, invest in our digital products and other growth opportunities, opportunistically repay NCM LLC’s debt and continue to make dividend payments to our stockholders. Further, due to the network equipment investments made in recent years by our founding members and network affiliates in new and acquired theaters, ESA provisions requiring founding members to make future investments for equipment replacements, and the scalable nature of our Customer Experience Center and other infrastructure, we do not expect to need to make major capital investments to grow our operations as our network of theaters continues to expand. As we continue to move our technology to cloud based Software as a Service (SaaS) platforms, we will continue to reduce our annual capital expenditure spending. However, operating expenses associated with the SaaS licenses will continue to increase. Certain implementation costs of our SaaS platforms are capitalized during the implementation period and will be recognized within operating income over the term of the SaaS contract after the systems are fully implemented.
Our Strategy
We are continuing to pursue a growth strategy that we believe will create significant stockholder value following the normalization of our operations, making NCM a unique investment vehicle by delivering a substantial dividend driven by long term revenue and free cash flow growth. Our strategy includes the following five pillars of growth:
Increase the Quality and Value of Our Media Inventory
We intend to continue to increase the quality and value of our media inventory. Achieving one of our key initiatives in this strategy, we introduced new inventory in our Noovie® pre-show after the advertised showtime within Regal and Cinemark theaters following the 2019 ESA Amendments. This Post-Showtime Inventory consists of a total of five minutes between the lights down segment beginning just after the advertised movie showtime and including trailer lighting and the 30- or 60-second Platinum Spot deeply embedded within the movie trailers with trailer lighting and full trailer volume. We believe this inventory constitutes prized and impactful ad spots and expect these improvements to increase the value of the inventory that we can offer to our national clients. We believe our local and regional clients will also benefit from better inventory as their placement will now be closer to the advertised showtime. We introduced this new inventory at select network affiliate theaters beginning in early 2020 and plan to continue to work toward expanding the portion of our network including this new inventory. We believe this higher value inventory, combined with an entertaining and engaging pre-show program that is integrated with our Noovie digital ecosystem, provides a unique cross-platform premium video product that will stand out in the media marketplace. We also believe it will help mitigate the potential future impact of reserved seating on our business.
We are also actively continuing to work on new ways to reinvent our Noovie pre-show program to connect with today’s “Millennial” and “Gen Z” moviegoers to create an in-theater experience that will keep audiences coming back for more, as well as drive traffic to our digital properties.
Upgrade Our End-to-End Order Management and Scheduling System
We implemented the first phase of our upgraded end-to-end order management and scheduling system in the first quarter of 2021. We expect that once the system is fully implemented, we will be able to provide the more seamless digital buying experience required by today’s media buyers and solve the speed-to-market friction issues associated with our cinema product, making it easier and faster for advertisers to buy cinema advertising with NCM.
Invest in the Creation of Digital Entertainment Products and Digital Ad Inventory
We intend to continue to invest in the creation of compelling digital entertainment products and expand our Noovie digital ecosystem and user base of movie fans with NCM owned-and-operated products like Noovie.com, Noovie Trivia (including Noovie Shuffle and Name That Movie) and Noovie Arcade . These products create new ways for brands to engage with movie audiences beyond the big screen, reaching them anytime (before and after the movie) and anywhere with new
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higher-margin digital ad inventory and creating valuable addressable first-party customer data. We expect to then monetize this data through advertising sales and sponsorships, as well as by leveraging our Noovie Audience Accelerator product.
For the year ended December 26, 2019, integrated on-screen and digital campaigns resulted in a 33% higher contract value compared to onscreen only contracts and is expected to be a key to future growth.
Build a Data-Driven Business
Along with growing our digital products, we plan to build a data-driven business that will allow us to meet the needs of today’s modern video advertising marketplace. We had 106.5 million and 171.0 million first- and second-party data sets as of December 26, 2019 and December 31, 2020, respectively. These valuable data sets consist of both our own NCM first-party data from our owned-and-operated digital products, as well as a variety of key second-party data addressable consumer records, including location-based data that allows us to track when our audiences go to the movie theater to see our Noovie pre-show and where they go in the days and weeks afterwards. This initiative will allow us to re-target audiences with digital advertising through our Noovie Audience Accelerator product and increase the value and effectiveness of cinema campaigns for our advertisers.
It is important that we accelerate the growth and scale of our theater audience data to a critical mass to be able to effectively use that audience data to deliver value to our clients. It is that scale that we believe will make our NCM digital capabilities increasingly attractive to advertisers, and especially to national brands who buy both our national and regional inventory.
Expand Our Affiliate Network by Primarily Focusing on Adding Key Affiliates and Screen Counts in Select Markets
Our relationships with our exhibitors are a key focus of our business. Our Affiliate Partnerships team is dedicated to serving the needs of our founding member theater circuits and our 50 network affiliates nationwide as of December 31, 2020. We plan to continue to expand our affiliate network by primarily focusing on adding key affiliates and screen counts in select markets by strategically targeting priority exhibitors who are not currently part of our network and whose cinema advertising contracts we expect will be coming up for renewal in the next several years. This will allow us to increase our revenue by increasing the number of impressions we have available to sell to advertisers, extending our reach to additional markets to further improve our national footprint for brands looking to reach those audiences, and strengthening our reach in markets we are already in for greater saturation in those DMAs. In January 2021, we entered into an exhibitor agreement with Harkins Theaters, the fifth largest exhibitor in the U.S., increasing our network by over 500 screens and 33 theaters beginning in May 2021 through December 2037.
Another key part of our affiliate strategy going forward is the intention to increase the number of affiliate theaters in our network showing the improved Noovie pre-show format featuring the premium Post-Showtime Inventory. While adoption across our affiliate network is expected to take some time, 26% of our network affiliates are running our Post-Showtime Inventory as of December 31, 2020, which account for approximately 3% to 5% of our total network attendance based on 2019 levels.
Under the terms of the ESAs and common unit adjustment agreement with the founding members and our network affiliate agreements, all new theaters built or acquired (subject to existing advertising sales agreements) by the founding members or network affiliates will become part of our network. Including our founding members and network affiliates, our net screens have increased in nine of our last ten fiscal years prior to the year ended December 31, 2020. We believe this expansion continues to improve our geographic coverage and enhances our ability to compete with other national advertising mediums, which allows our exhibitor clients to maximize the advertising value of their audiences.
Diversify Our Media Assets by Offering Digital Out-of-Home Media Solutions Beyond the Movie Theaters
In October 2020, NCM's DOOH group was created to further unite brands with the power of movies by extending movie-centric entertainment content, trivia, and advertising beyond theaters to a variety of complementary Digital Out-Of-Home platforms. NCM is now able to combine the strengths and effectiveness of Cinema, Digital, and Place-Based media together to create innovative, integrated campaigns that engage movie fans anytime and anywhere.
Intellectual Property Rights
We have been granted a perpetual, royalty-free license from the founding members to use certain proprietary software for the delivery of digital advertising and other content through our DCN to screens in the U.S. We have made improvements to this software since our IPO and we own those improvements exclusively, except for improvements that were developed jointly by us and the founding members.
We have secured U.S. trademark registrations for NCM ® , National CineMedia ® and Noovie® . It is our practice to defend our trademarks and other intellectual property rights, including the associated goodwill, from infringement by others. We are aware that other persons or entities may use names and marks containing variations of our registered trademarks and
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other marks and trade names. Potentially, claims alleging infringement of intellectual property rights, such as trademark infringement, could be brought against us by the users of those other names and marks. If any such infringement claim were to prove successful in preventing us from either using or prohibiting a competitor’s use of our registered trademarks or other marks or trade names, our ability to build brand identity could be negatively impacted.
Available Information
We maintain a website at www.ncm.com , on which we will post free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports under the heading “Investor Relations” located at the bottom of the home page after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). We also regularly post information about the Company on the Investor Relations page. We do not incorporate the information on our website into this document and you should not consider any information on, or that can be accessed through, our website as part of this document. The SEC also maintains a website that contains our reports and other information at www.sec.gov .