Economics 101: Saudi lifting cinema ban can help boost region’s entertainment sector

While neighbours may be worried about falling demand for their own offerings, such fears could well be misplaced

(FILES) This file photo taken on October 20, 2017 shows Saudis attending the "Short Film Competition 2" festival at King Fahad Culture Center in Riyadh. Saudi Arabia on December 11, 2017 lifted a decades-long ban on cinemas, part of a series of social reforms by the powerful crown prince that are shaking up the ultra-conservative kingdom. / AFP PHOTO / FAYEZ NURELDINE

The Saudi government recently announced an end to its multi-decade ban on domestic cinemas.

While citizens and businesses in the kingdom rejoiced, many cinema operators in the neighbouring Arabian Gulf countries, especially Bahrain, Kuwait and the UAE, expressed concerns about falling demand for their own services, as their business models were partially predicated upon offering greater social freedoms - including cinemas - than Saudi Arabia. Are such fears well-founded?

Yes and no.

Let’s start with the obvious argument, which is what economists refer to as the “substitution effect”. If you are consuming two commodities that are substitutes, when the price of one falls, then its relative attractiveness increases and you will shift demand from the other commodity towards it: if Pepsi becomes more expensive than Coke, I buy less Pepsi, and more Coke. Applying this simple logic to cinemas, the Saudi government’s decision has effectively made a service that was priced infinitely (Saudi cinemas) available at a much lower cost, and so we should see demand for it increase at the expense of substitutes, such as cinemas in Dubai or Kuwait City.

Why might this simple parable fail to capture the actual results of allowing cinemas in Saudi Arabia? Because going to the cinema more frequently in Saudi Arabia might make Saudi Arabians into cinema lovers, and therefore make them go to cinemas everywhere more frequently. Before you dismiss this as wishful thinking, let us look at the instructive illustration provided by live transmission of sports events.

Commissioners of sports leagues with large stadiums have been ambivalent towards TV broadcasting of their games because they fear an adverse substitution effect. For example, in England, Premier League football games that start at the traditional time of 3pm on Saturday are still banned from being shown on TV live, as a way of boosting stadium attendance. Similarly, in the National Football League in USA (American football), if a stadium does not sell out, the game might not be shown live to those in the city where the game is being played, in an effort to force people to go to the stadium. In both the English and American cases, live transmission elsewhere is permitted, as they do not envisage the possibility of a Frenchman or Canadian cancelling a trip to a stadium because they can watch the game on TV, ie, authorities only fear the substitution effect within a close vicinity.

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However, what we find is that showing sports on TV increases people’s interest in sports, including capturing the interest of those who might otherwise have no desire to see a game. In fact, in the aggregate sense, live transmission actually boosts stadium attendance - and hugely so - because people can become attached to the sport without having to go to the stadium frequently. In 1900, it would have been impractical to be a supporter of Liverpool Football Club while only going to one game a season. In 2017, there are millions of Liverpool fans in the world who would love to go to one game a season, while watching the rest at home. They generate huge revenues via TV advertising and merchandise sales - both absent from the Liverpool accounts at the turn of the 20th century.

Returning to the case of Saudi cinemas, the previous 30-year ban dramatically dampened Saudi demand for cinema. If you only go to the cinema once or twice a year, when you have the opportunity to go abroad, then it becomes an exotic luxury, rather than a part of your weekly or monthly routine. But when you are able to develop a love for cinema - as many westerners do - then you may seek cinemas when you travel with greater frequency.

This logic also extends to the issue of related sectors. Saudi filmmakers have been highly restricted since the 1980s and they are the people who have the ability to make the films that most inspire and entertain Saudis. Now that they have an outlet, over time, we may see that Saudis become a lot more excited about the medium of cinema, increasing their aggregate demand for the service by several orders, to the benefit of Saudi and non-Saudi cinemas.

For countries like the UAE, whether this channel will be enough to offset falling visits due to the substitution effect is unclear. Moreover, it will take time for new trends to emerge. Therefore, the prudent course of action would be for tourism authorities in countries such as Bahrain and Kuwait to think about how to improve the quality of the services that they offer Saudi visitors, to ensure robust demand.

But we should not be surprised if allowing cinemas in the most populous country in the Gulf leads to increased demand for cinemas in the rest of the region. Marketing executives have long known that exposure and awareness can have transformative effects on the demand for your product.

Ask yourself the following: does allowing McDonald’s in Saudi Arabia mean Saudi Arabians seek it more or less when they go abroad?

Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.