EXCLUSIVE: Note to the folks who develop the Harvard Business School’s famous case studies: Keep an eye on what Carmike Cinemas CEO David Passman is doing with alternative content at his 276 movie theaters with 2,901 screens in 41 states. Like most exhibition industry execs, he has longed to fill his mostly empty seats on weekdays by swapping out Hollywood movies to show sports, concerts, and other fare that appeal to niche audiences. It’s a big deal: Movie theaters have “the largest amount of excess capacity of any industry we could find in the free world.” Bernstein Research analyst Todd Juenger has observed. Technology was supposed to change that; satellite dishes and digital projectors make it economical to juggle content and offer live events. But the early results are uninspiring: Financial, marketing, and bureaucratic obstacles have kept alternative content a once-in-a-while novelty in most theaters.

Carmike Cinemas logoPassman just made a high-profile bet that he can change that. In August, Carmike bought a 21-venue theater chain, Digiplex, in part to land its founder: Bud Mayo, the leading apostle for alternative content. Non-Hollywood fare accounted for about 5% of Digiplex’s box office revenue, an eye-catching figure. The company also belongs to a joint venture called DigiNext that rounds up independent films and documentaries for theaters. “Bud has made the secret sauce for alternative programming,” Passman told analysts.

Now it’s show time for the duo. If Passman and Mayo can make alternative fare a serious revenue generator at the No. 4 domestic chain, then it could create a playbook for the entire exhibition industry. That, in turn, might transform the way consumers and investors look at theaters. I caught up with Passman last week to discuss the business, his plans, and how alternative content could affect Hollywood. Here are his thoughts, edited for length and clarity.

DEADLINE: We’ve been hearing about alternative content for years. When’s this going to become a meaningful business?
PASSMAN: I had hoped that two years ago we’d hit a 3%- to-4% of box office revenue financial target, not only for Carmike but for the industry. But I was way overly optimistic. It’s been much slower to get kicked off than any of us had hoped.

DEADLINAuburn University footballE: What’s the problem?
PASSMAN: There are three or four major roadblocks. Let’s talk about sports. Showing sports on the big screen has a lot of appeal. When we show Auburn University football anywhere in the state of Alabama or Georgia, we literally pack the auditoriums. When we show Penn State up in the state of Pennsylvania, it packs every single location. Here’s the problem: Each of those colleges are members of conferences, and each of those conferences are members of the bowl championship series or just the NCAA. Each of those have contracts with major television networks and each of those, in turn, have, for lack of a better term, sub-licensing agreements. Negotiating through those is a real pain in the tail.

DEADLINE: You have to negotiate with the broadcasters and cable networks?
PASSMAN: Yes, to both. In some cases it might even be major sponsors like Nike. The same is true for professional wrestling, kickboxing, mixed martial arts. In the arts the same would be true for organizations like the Metropolitan Opera or the London Symphony. Some of it is naïveté on the part of exhibitors in the early days about how to get that on screen.

DEADLINE: What’s the solution?
PASSMAN: Some of that needs to be aggregated into a content provider mechanism similar to what distributors do today for the major studios. So a Sony or a Fox, for instance, needs to negotiate those kinds of contracts and — once those license agreements are all struck — then we as exhibitors subscribe to it the same way we do for future [movie] releases.

DigiNextDEADLINE: Is anyone doing that?
PASSMAN: No, not very well. There are companies like Fathom Events that are very good at negotiating very specific, finite contracts. Other companies like DigiNext, which we own, are good at contracting documentaries like The American Nurse or Running America. But no one has emerged as a strong content provider.

DEADLINE: Who’s going to lead the charge to get you the content that you need?
PASSMAN: I’m hoping a Sony, Disney, Warner Bros., Fox – somebody, honest to God, at the Hollywood level – who decides that’s a nice revenue stream to pursue and fix it up. I’ve not seen a clear leader yet.

DEADLINE: Could it be someone from the exhibition community?
PASSMAN: Probably not. If it is, then Carmike has a big interest in it. My DigiNext is just a little tick on the great big elephant that I think exists. What I think ends up happening in a new industry such as this is, you have a lot of players and a lot of failures, and someone picks up some of those failures and creates enough critical mass to actually become a big-time distributor. I don’t know who that’s going to be yet.

DEADLINE: What’s another roadblock?
PASSMAN: Alternative programming requires a different model to make the audience aware that you’ve got it. The type of events we’re talking about are usually single events with a very limited number of showings. Spreading [promotion and advertising costs for a mainstream movie] over a five-week period, five times a day showing, in 3,500 screens is a little bit different model than a Florida vs. Tennessee football game on Saturday, October 4. One of the solutions that I see for us as an industry is to create more serial type of events. If we can do it in sports — such as college football, baseball, basketball, or professional sports — then we’ll be much better off as an industry. The more screens that we can sign up for that type of thing would lower the unit costs of promoting and advertising it.

DEADLINE: If you make such a big investment in an event then you’d want local exclusivity, wouldn’t you?
PASSMAN: Do we have local exclusivity on, say, Transformers? Do you need it? No. I think exclusivity is sort of a red herring — and I know that there are several providers who really believe in it, like Fathom for one. I’m hoping that Fathom will transform itself now that it’s spun off of National CineMedia and begin to offer more things to more exhibitors. That will be creating more opportunities for attendance across the industry. It’s like having car dealerships next to each other. For some reason, when they congregate across the street from each other, they do better. And I think this same is true for exhibition.

DEADLINE: How well are providers of alternative content doing?
PASSMAN: Content providers are not taking on enough projects, or they try to own a particular segment of the market. There are companies that specialize in fine arts and there are some that specialize in music. I don’t believe that those specialties give them enough diversity to survive as entities. It’s almost like taking Sony or Disney or Warner Bros. and saying they’re only going to make movies with Johnny Depp, or movies that are just comedies. It just doesn’t work.

Metropolitan OperaDEADLINE: Your theaters are mostly in small to mid-sized markets. What content works best?
PASSMAN: Sports is the golden ticket. If we can crack the business model, I believe sports will far outpace even fine arts. But the next one has to be fine arts: the opera, ballet, symphony and that type of thing. You can’t get that in small-town America. The value proposition is unbelievably patron friendly. To go to Broadway play is $100 a seat. To go to the London Symphony is far more than that, plus transportation and everything else. To be able to watch a world class performance on the big screen with a better viewing angle than you would have if you were really there is very reasonably priced – the prices for that type of thing go from $20-$30 a ticket.

DEADLINE: Sounds like you’re targeting empty-nesters.
PASSMAN: And the retired. We have a fairly big concentration in the Southeast – retirees from the city who really miss their Broadway plays, their ballet, the opera and the symphonies. While you don’t generate world leading box office receipts off of it, it’s very solid incremental income.

DEADLINE: You’ve said that Carmike needs to change the way managers think. What did you mean?
PASSMAN: The type of people that we have running our movie theaters grew up loving movies, but not necessarily specializing in business courses or marketing courses. A manager, especially in large circuits, historically is responsible for opening the theater and making sure things work properly in servicing customers — but not necessarily attracting customers. That historically has been the job of the studios.

DEADLINE: What, specifically, should they do differently?
PASSMAN: A theater manager may be literally across the parking lot from a day care center but doesn’t necessarily equate a day care center with running a theater. So think about things like taking all of the kids that are in the day care center once a week to an animated show at the movie theater. Or maybe it’s a Mom’s Day Out, with the kids watching cartoons and the Moms watching Sex And The City or whatever they would watch in a separate auditorium.

DEADLINE: What are you doing to help managers make that leap?
PASSMAN: They will get from us a template. That template will talk about the things they can do with a day care center and they can take that over to the day care center and go through a program – here’s what we can do for you over the summer, for the toddlers and here’s how it would be mutually beneficial. And then they sign up for programs.

the American NurseDEADLINE: You’ve also done some guerrilla marketing.
PASSMAN: Bud Mayo gets the credit for this:  He took the world premiere concept for releases like the Harry Potter movie — when it opens at midnight on a Wednesday or Thursday night and people come dressed up as Harry Potter characters. He has done that with alternative programming. For The American Nurse we went out and purchased hospital garb for all of our theater staff. For a period of two-to-four weeks we had our people serving popcorn in surgical gear. That creates an awful lot of buzz and anticipation and discussion with patrons who come in. The attendance when we premiered that was phenomenal. Now you have to keep in mind, we’re talking about phenomenal for a one-time show on a Wednesday or Thursday night so it’s not a full week of five-times-a-day events. But that kind of thing generated an oversold auditorium for us. And we’re doing the same thing with other documentaries and/or alternative programming. Marketing cannot be national, network advertising for single event on one day. It’s got to be this more viral, more localized more specialized and personalized marketing.

DEADLINE: Are Hollywood studios your friend or your foe? Why should they want to help you replace their movies in the middle of the week?
PASSMAN: The answer is yes – they are our friends and our foes. We have a mutually dependent relationship. But in virtually all of our theaters, at any point in time except for the very busiest part of summer we have one, two, or three screens available midweek that are not committed. We may just choose to show the highest grossing movie from the previous week, or maybe leave it dark. We don’t intend to ever compete with our studio partners for attendance. But we believe this is all incremental and will add to our financial stability.

DEADLINE: How long will it take before alternative content accounts for 5% of your box office?
PASSMAN: I would hope that, within three years, circuits that concentrate on this will either approach or be at 5%. We certainly want to be a leader in that. Frankly, though, until we dive in and see what we can do, it’s just impossible to predict with any kind of certainty. But I keep telling my people, if Bud Mayo can do it with 21 theaters, there’s no reason we shouldn’t be able to do it with at least 250 or 260 to 300.

DEADLINE: How do profit margins for alternative content compare to those for feature films?
PASSMAN: About the same. The gross margins are little bit higher. In most cases the average ticket price is significantly higher. In some cases 25 or 30% higher. But the net margins are about the same because of marketing and advertising.

DEADLINE: If 5% of your box office comes from alternative, what would that mean for your concession sales?
PASSMAN: You can almost straight-line a 5%. In some cases we’ll do better on concessions – for example my kid shows during the summer. In some cases we’ll do quite poorly, such as the opera. For whatever reason, people who like the opera don’t seem to enjoy popcorn and Coca-Cola. However, as we are looking at alternative concession items like beer and wine, we think opera lovers might be white wine drinkers. We’re trying to make sure we coordinate that as well.

DEADLINE: There’s a Wild West feeling here – no rules.
PASSMAN: There is. And that’s what’s exciting about it for me. I’m not a maintenance guy. I really like innovation and experimentation. We have 280 locations, and that means 280 laboratories.