Thursday, October 8, 2009

Hollywood's Financial Collapse

Hollywood's finances are collapsing, along with other parts of "legacy media" including newspapers, magazines, television (particularly network television) in addition to the falling revenues at movie studios. Part of this financial collapse among all legacy media is the influence of the internet, offering alternatives from piracy to original content, part of it due to the recession with tapped consumers closing stressed wallets, but much of the collapse is due to legacy media's content being pretty miserable. Magazines are nothing but elitist propaganda with little to say to huge segments of the potential readership, newspapers have done their best to alienate their core readers (older White men), television long ago chased away males and older viewers, and movies consist of a few, highly profitable, but hugely expensive action-adventure tales, with myriad unprofitable "art" movies aimed at winning Academy Awards or hit-or-miss "chick flicks."

Hollywood for decades assumed the good times would roll, and the speed in which it is collapsing is catching everyone by surprise. None of their moves seem to indicate any indication of the central problem: their content is not very attractive beyond a thin elite, and the failure of the "Brandon Tartikoff Strategy" has not penetrated Hollywood's or legacy media's management. Leaving ample opportunities for new players outside Hollywood, Los Angeles, and New York, to create broadly appealing content for relatively few dollars and sell it at a profit. In the process, changing American culture the way deeply assimilated Jews who founded Hollywood did from Charlie Chaplin movies to Casablanca and It's a Wonderful Life.



As the Australian notes, Walt Disney and Universal changed studio heads, with Universal being shopped to Comcast by parent GE. The LA Times notes that DVD sales have collapsed as much as 25% for some studios.

For years, DVD sales, coupled with the growth in international markets, compensated for box office losers. On a typical movie, DVD revenue accounts for about half of a film's income, with the remainder split evenly between theatrical receipts, both domestic and international, and television, both pay and free channels.

But as the global economy tanked, so did DVD income. According to Digital Entertainment Group, DVD sales fell 9% in 2008 and were off 13.5% in the first half of 2009. The DVD ledgers are equally bleak overseas; owing to widespread piracy, some studios essentially have closed DVD operations in the once-profitable Spanish and South Korean territories.

Though new businesses such as digital downloads and video-on-demand are growing fast, they have come nowhere close to making up for the decline in disc sales. At the same time, foreign monopolies in paid television have driven down the formerly generous license fees paid to American studios for cable and satellite reruns, while increasingly popular local language productions (movies in Japanese made for Japan, in other words) have cut into the international box-office returns for U.S. productions.

Paramount Pictures, the only movie studio to report its finances separately, has seen its profits fall consistently. While revenue was growing until this year, Paramount's operating income has fallen like a boulder, down 22% in 2007 and 75% in 2008 until it swung to a loss of $148 million in the first half of 2009.


Without cash flows from DVD sales or foreign TV sales, Hollywood loses its main revenue model. Note how the influence of piracy killed Spanish language and South Korean DVD sales, in line with Eli Roth's observation that his movies were on sale in Mexico City for the equivalent of 25 cents. Hollywood for years simply assumed that DVD sales would continue, with at worst slower growth in revenue. Piracy, and simple disinterest in buying DVDs for such films as "Land of the Lost" or "Funny People" put that assumption to the test, where it failed.

Meanwhile, new capital has been almost unobtainable. Wall Street is not pouring billions into movies anymore, nor are the Germans (it was the closing of tax loopholes in Germany that helped kill "V.I.P." the syndicated Pamela Anderson television show) or Japanese. Hollywood had traditionally raised capital from outside sources, and now with rising production budgets faces severely reduced cash flows to finance their own continuing operations. Thus, built-in "sales hooks" of movies based on Baby Boomer to Generation X games and toys and comic books, from Viewmaster, Battleship, Monopoly, Transformers, to Spider-Man and Iron Man, with a smattering of tween girl and mother vampire movies and TV series (New Moon, Vampire Diaries), Harry Potter movies, and Da Vinci Code movies.

This comes as the Wall Street Journal reports that Wal Mart, the world's largest retailer, is scaling back DVD displays and inventory, in anticipation of a dismal Christmas retailing season. DVDs are not selling, according to Wal Mart execs (who have among the best inventory management software and reporting in the business) and are not driving traffic or sales. The article further states that:

As for DVDs, the Digital Entertainment Group estimates that overall U.S. retail sales fell 13.5% to $5.4 billion during the first half of 2009. At the same time, DVD rentals rose by 8.3% to $3.4 billion. Digital sales and rentals from services like Amazon.com Inc. and Apple Inc.'s iTunes rose 21% to $968 million.

Video on-demand revenue from pay-TV service providers, like Comcast Corp., is also rising. Comcast spokeswoman Jennifer Khoury says the company served 368 million total views on its VOD platform in July, up 11% from last year.

Meanwhile, studios have cut deals with services like Netflix Inc., the mail-order DVD rental service.

Meanwhile, Wal-Mart and other major retailers, along with several fast-food chains, have been adding low-cost DVD rental kiosks near store entrances provided by Redbox Automated Retail LLC, a division of Coinstar Inc.

Redbox's prominent placement and its overnight rental price of $1 are viewed by film studio chiefs as a threat to sales. Three major studios -- News Corp.'s 20th Century Fox, Time Warner Inc.'s Warner Brothers and General Electric Co.'s Universal Pictures -- are locked in a legal battle with the company and refuse to make their new titles available to Redbox until 28 days after their release. News Corp. owns The Wall Street Journal.

Starting with just 12 kiosks in 2004, Redbox is now expected to have 22,000 machines across the country by year-end.


This equates to a loss of $840 million of DVD sales for the first six months of 2009, as opposed to whatever fraction of revenues studios can obtain from DVD rental outfits. Business Week reports that studios receive around $16 for every DVD a retailer sells and only $12 for one Netflix buys, with 30-40% of each rental transaction (rental fees) from Netflix shared with certain studios, but only within the first six weeks of release. Older movies such as the Die Hard movies produce only the (lesser) DVD sale to Netflix. Redbox, offering DVD rentals for $1, is engaged in lawsuits with various studios over proposed terms, including blackouts and higher prices. Best Buy and Borders, decimated by DVD sales declines are clearing them off retail space.

At Borders Group, stores in the second quarter that had been open at least a year saw DVD sales plunge 48% compared with the same period in 2008, the company disclosed in an earnings call with analysts last month. Music CDs were also down dramatically, continuing a long trend, and Borders Chief Financial Officer Mark Bierley proudly told analysts last month that both categories will be a less important part of the company's business in the years ahead.

"The good news is that we've made the right strategic moves in this category...and multimedia now represents just 8% of our sales compared to 2002 when the category was at its peak of over 23% of sales," Bierley said during a conference call.

Owned by Coinstar Inc. (CSTR), Redbox kiosks charge $1 a day for movie rentals at supermarkets, drugstores and other retail outlets with significant foot traffic. The company has 15,000 of the kiosks in place and plans to have 20,000 in operation by the end of 2009.

According to Nathanson, Redbox presents "the most extreme risk" to the studio business model. Bernstein estimates that Redbox generates about 15 rental transactions, or turns per disk, compared with nine to 10 turns for Netflix and 6.5 turns for Blockbuster Inc (BBI).

"It is impossible to measure the potential loss of sell-through from each Redbox rental," he wrote. "But, by any simple math, Redbox is the worst cannibalization outcome of the three rental options given its higher turns per disc."

This has spurred the studios to go after Redbox. So far, Time Warner Inc.'s (TWX) Warner Bros., News Corp.'s (NWSA) Twentieth Century Fox and General Electric Co.'s (GE) NBC Universal have gone on record as demanding that Redbox wait about 30 days after a DVD is released to the public before offering it for rental. (News Corp. also owns Dow Jones, publisher of this newswire.)


While the Belmont Club at Pajamas Media has noted this financial collapse, and cited a PriceWaterhouseCoopers report on new media as evidence that the studios and legacy media face challenges primarily through the challenge of alternative content created and distributed cheaply through the internet, there is more than ample evidence to suggest an entirely different reason: value.

Or more specifically, loss of value to consumers by Hollywood and legacy media. Because consumers in hard times will not shell out $20 or more for "Land of the Lost" or "Funny People." They will rent the DVDs, for about $1, if it is convenient. Or buy pirated copies for about the same. None of this involves the internet, excepting the convenience of managing Netflix queues, or piracy, or video on demand, or downloads from Itunes or Amazon, or Hulu.com and its enormous library of old TV shows and movies. Hollywood's worst enemy is itself, and the mostly superior run of movies and television shows produced from say, 1939 through 1992 or so. Available cheaply, sometimes free, in a more convenient way than expensive purchases through retailers. People like to watch movies, together, on screens ranging from theaters to living room televisions. It took sustained, concerted effort by Hollywood to produce movies and television shows to wean people of this habit, but Hollywood's creative and executive ranks were fully equal to that task.

This is similar to the LA Times drop in circulation, from 1.1 million in 1989 to 739,000 in October 2008. As I noted in my post Failure of the Media Part Two: The Lingering Death of the LA Times this was due to the same factors that is hurting Hollywood now. Consumers were not willing to pay the price for a product they did not feel gave them value. The LAT changed from a middle of the road newspaper dedicated to serving its mostly White, Older, and Male readership to one dedicated to serving a thin veneer of wealthy, politically correct yuppies, the "Brandon Tartikoff strategy" that was also employed by NBC with the same trap. Which is the inability to create broadly appealing content to a mass audience.

Hollywood, newspapers, magazines, television, all fell into the same trap. Pursuing a highly educated, upscale demographic with lots of disposable income. Magazines such as Gourmet, Cookie, Modern Bride, and Elegant Bride are being closed by Conde Nast due to falling ad sales. The graphic below from the article shows the failure of targeting high income people when a recession hits.


[Click Image to Enlarge}


NBC has been unable to generate any audience for its shows, and is reduced to running low cost Jay Leno comedy-talk at the 10 pm hour. This is a problem shared, to varying degrees, by other networks.

What is clear is that the overall strategic advantages of legacy media, including Hollywood, has changed. Due to the recession and the difficulty of obtaining capital. Legacy media can no longer count on size being an advantage to raise capital from outside sources and "crush" through attrition various competitors. Low cost internet distribution and the personal computer revolution allowing content to be created cheaply means the legacy media, all of them, have huge cost structures that are disadvantages, while having cumbersome corporate and cultural layers that prevent agile and timely responses to economic and cultural conditions. Obama's approval ratings are at 50%, for example, meaning that there is little benefit from praising him as a living God, yet Magazines at the checkout counter and news channels and broadcasts (with the exception of ratings leader Fox News) present Obama as "bigger than Jesus." Complete with hagiographic coverage, and "debunking" of SNL skits that gingerly criticize the "savior." At least half their potential readership and audience does not approve of "the One" making this a dumb business move appropriate to a forced monopoly not a business scrapping for customers.

This sort of thing happens, not because the people in the legacy media, or Hollywood, are inherently bad, but because their system has rewarded orthodoxy and not had any immediate connection or feedback mechanisms for audience/readership responses. Newspaper and magazine writers and reporters don't get paid extra if their articles generate more reader responses, purchases of the newspaper or magazine on the newstand, and the like. Chris Matthews of "Hardball" does not get less money when his ratings go down and more money when they go up, from week to week. Instead, in a nepotistic, and often rife with casting couches, such as David Letterman's, getting ahead meant not performance related to the bottom line but adherence to group PC orthodoxy of the often inbred, second or third generation elites who comprised management of the legacy media. From the Harvard Mafia in the Simpsons and Conan O'Brien writing staff to the preponderance of the Ivy Leagues and second/third generation Hollywood among writer/producers, relationships not production has dominated legacy media, and left the media unable to adapt to the recession and permanent lower prices consumers will pay for information and entertainment.

With these permanent lower prices, be it Redbox rentals for $1 at convenient supermarkets, or piracy on the internet or street corners, or ad supported free Hulu.com views of say, "LA Dragnet" or "Married With Children" the ability to wring billions out of consumers wallets for specialized content is over. High prices for content means specialization, the upscale market pioneered by Brandon Tartikoff and spread throughout the media world, including magazines, newspapers, and Hollywood. The ability to supplement theatrical revenue for movies with foreign TV sales, DVD sales, and so on is simply gone. As is other people's money from Wall Street or foreign tax shelters.

Instead, new content creators, based outside of Hollywood, will have to create broadly appealing content because the amount of money they get from each sale or view will be small. The way to get rich in media is no longer being highly specialized, serving only segments of the market, like tween girls and moms, or upscale yuppies wanting an extra dose of PC from say, "Crash." It is by serving everyone, tween girls, their moms, young men, boys, adult men and women, married, single, divorced, middle aged or senior. Everyone. And in this case the future of media resembles the past: highly entrepreneurial men like Sam Goldwyn or Louis B. Mayer, who have a deep love for America and its people, and make entertainment aimed at getting the broadest possible audience. Since margins on each view or sale will be low. Probably, much of the content will be integrated, with content available on websites for free (ad supported) viewing, downloaded for free with embedded ads, downloaded for a modest cost with no ads but extras, and available for rent or purchase in DVD or Blu-Ray format for modest costs in mass retailers like supermarkets or online ala Amazon.

This is critical, because the sneering yuppie-ism, which at its worst contributes to an elitist, fractured culture that produces elitist, fractured politics, is no longer sustainable. The internet has accelerated this change, but fundamentally, the audience has simply concluded that paying $11 per ticket at the theater, or $22 for the DVD of "Land of the Lost" is simply not worth their money.

23 comments:

Anonymous said...

Broadly appealing content? Like anime? There are several Asian countries hopping on Japan's coat-tails and trying to get famous for their broadly appealing content, which is mostly animated.

Anonymous said...

Nice post, Whiskey.

One obvervation: If DVDs of Eli Roth's movies are on sale for 25 cents in Mexico, it's because that's where they belong and what they're worth.

Zhombre

Stan said...

Whiskey, this is one of your best. The media will simply not accept the fact that they are producing an overpriced, inferior product, with overpaid, inferior performers.

It is also obvious that these insular, arrogant people have no interest in changing a thing.

Cannon's Canon said...

Your mention of Hollywood's nepotism interested me in terms of a relation to the economic trajectory of post-WWII Japan. With more grand consequence, Japanese banks and businesses overextended capital to an inner circle without accurately assessing risk. This lack of underwriting due diligence seems to mirror the thick-headedness of American cinema's faucet of crap media.

In Japan, the third generation of this system was ultimately met with a wall of stagflation. I assume that Hollywood's downward spiral can last longer, perhaps an extra 20 years, because it is leveraged to a lesser extent with what are ultimately public funds (i.e. a failed bank is more nationally impactful than a failed studio). The death may come slowly if a reform is not made.

There is some hope though within this nepotistic decline. Japan's longstanding stagflation has been prolonged by a refusal to shame failed ventures with such dishonors as firings, foreclosures, and bankruptcies. This is somewhat unique to Japanese culture; a business might prefer to suffer with a toxic asset on its books than to purge it and move forward. As soon as Hollywood is willing to abandon a failed business model, reform and, to an extent, profitability can be implemented.

Truth(er) said...

Speaking of Hollywood disasters, has anyone seen "NCIS: LA".

Awful.

The "NCIS" model of an older white guy leading a team of young poeple responsibly has been completely dropped. An old woman leads the group. A black lead shares power with a white lead. Plots are PC and predictable.

Oh...get this. The latest episode of NCIS: LA had a cougar scene and a plot modification that insisted a woman gets a man by playing "hard to get."

Awful...just awful.

Anonymous said...

The problem is that with the people currently in Hollywood and its entire culture, Hollywood cannot adapt to the new age.

The people who are there did not get there because they were capable of providing what people wanted, they are there because at the time people and the heads of Hollywood wanted what they provided.

Even those who were not initially yuppies had to adapt to the prevalent culture in Hollywood.

The culture feeds the people and the people feed the culture, which is why it is so hard for anything to change.

So the only thing that will change Hollywood is a wholesale bankruptcy and a fading into irrelevance of the established stars. A rise from the ashes.

Whiskey said...

Yes, it's true that Roth's movies are worth maybe 25 cents. At the most. Even that is pushing it.

Cannon's Canon: Good points on Japan. The third generation has been unable to really compete on the global stage, for example Sony manufactures almost all of its stuff outside Japan, making its laptops and TVs and such overpriced (same cheap Chinese factories and questionable quality). For example, Sony, the creator of the Walkman, has nothing to rival the Ipod. Nothing that connects to any computer, will play nearly any format (Ogg, FLAC, MP3, AAC, etc.) and with an easy-to-use interface.

Apple, manufacturing almost nothing (its done in China by contract manufacturers) has become a huge consumer device player with the Ipods and Iphones by simple human interface design and marketing. [The last time I was in an Apple store it was packed -- almost entirely with young women too.]

NCIS: LA is awful. At one point a guy stops from shooting another guy to let him take a phone call. LL Cool J plays an ex-Navy SEAL. Only one problem, there are very few Black Navy SEALs. Or Black Spec Ops guys in the first place, generally. For whatever reason it seems to attract White guys the most, with a smattering of Hispanic guys.

Watching the two NCIS variants makes one realize how much of the original depends on the byplay between Harmon and Weatherly in the original, the older, gruff mentor and the younger version of himself. With a "light" touch of humor and bantering that turns on a dime to toughness upon occasion.

Neither show will blow anyone away with the writing, but the first has far more capable actors than LL Cool J and Chris O'Donnell, who simply cannot carry the show.

Anonymous said...

Whiskey, with Hollywood being such a target-rich environment, why repeatedly single out Land of the Lost? Did Will Ferrell steal your girlfriend or something?

Tarl said...

Nice post.

Hollywood's financial collapse... can't happen soon enough!

Die Monster Die!!!

Talleyrand said...

Hollywood will continue to lose more money because they're unable to change their PC ways, they're a dinosaur and the smaller, nimble mammals that are springing up (the internet, internet games, content in different locations) will survive.

Good riddance.

Anonymous said...

whiskey, you may have already reported on it, but here is an article from the la times discussing the rapid decline of the porn industry:

http://74.125.155.132/search?q=cache:6Ze8E0BZUEQJ:www.latimes.com/entertainment/news/business/la-fi-ct-porn10-2009aug10,0,4269185.story%3Fpage%3D2%26FORM%3DZZNR3+porn+decline+la+times&cd=2&hl=en&ct=clnk&gl=us&client=firefox-a

the porn industry blames free internet content and piracy. music, newspapers, movies, porn... are all affected by these two factors.

you may be right that there are other (anti-male, politically correct) cultural factors at work as well. however, the confluence of all such etiologies is resulting in the hastened demise of the old media.

it is by no means clear that the old media will be able to find a successful mechanism to transition to new media offshoots- given the digital constraints which would still affect them.

-freak show

Anonymous said...

first page of la times's porn article- it's cached, but clearly even this info is free and available in the internet age such that no la times subscription is necessary:

http://74.125.155.132/search?q=cache:ML8vdULt0I0J:www.latimes.com/business/la-fi-ct-porn10-2009aug10,0,4788614.story%3Ftrack%3Drss+porn+decline+la+times&cd=3&hl=en&ct=clnk&gl=us&client=firefox-a

virgil xenophon said...

An old life insurance salesman wrote once some thirty years ago: "If you sell to the masses you eat with the classes--If you try to sell to the classes you starve."

Jamaicafest said...

Very interesting post. The Hollywood community has to adapt if it is to remain viable.

Moggy said...

Have you seen this?v

Anonymous said...

Supercop,
About half the TV is black. Flip through channels 2-80 sometime. About half the channels have a black face on them (if not several). Wait a few seconds on the rest and usually you'll see someone black. From watching TV, you would think the USA is 50% black.

Anonymous said...

You don't need TV for that.

Just look at corporate ads or university brochures.

Out of 10 people, maybe 4 will be white, and the rest will be, depending on geographic location of the university, black, hispanic and asian. Regardless, at least 1 member of the aforementioned minorities needs to be depicted.

dienw said...

Yes, NCIS: LA is unwatchable.

I will say the same for the new Stargate show: SGU has been turned into Battlestar Galactica; the males have been weakened; those who should be leaders are uncertain; The scientist called "Rush" is BSG's Gaius: the traitorous scientist. I knew the writers had ruined the franchise within the first fifteen minutes when one of the female civilians manhandles a military officer demanding to know where they are.

In the first two series, the scientists where held in check by responsible military authority. the shows made clear that exploration of the unknown is best undertaken in a disciplined manner. The clearest example of this is the SG1 episode where in the Dr. Cater character undertakes the mentoring of a genius Air Force cadet by taking her off world; where the group comes under attack by energy creatures because a rogue scientist who refused to obey protocols.

Lawful Neutral said...

njartist:

My god, SGU stinks. It's a naked attempt to replicate BSG, but they somehow managed to leave out everything that made that show bearable. I know I won't be watching another minute of it after that first episode.

Mil-Tech Bard said...

Whiskey,

You hit spot on when you called out major media bureaucracies in media, but you are missing the other end -- American consumer product companies.

Large organizations provide niches for value-subtracted idiots to hide in, and bureaucracies to protect them.

The US economy is a consumer-driven economy.

American consumer products companies no longer know how to appeal to the 40% of their market composed of straight males because their in-house advertising departments seem to be dominated by people for whom straight males are a threat, i.e., women and gay males. (See also "value-subtracted idiots.")

How that came to be is not pertinent.

What is pertinent is that the people who make the advertising buys for American consumer products companies are now entrenched and, since they are not straight males, they can't be fired without violating lots of state and federal employment laws.

The only people who can be lawfully discriminated against in employment are straight white males, so they are. This is particularly true in the advertising business and most especially Hollywood.

Thus ensuing the inability of American consumer products companies to appeal to 40% of their market will reduce economic growth, as the US economy is consumer driven.

In order to renew their ability to aspeal to 40% of their market, you have to have American consumer products companies replace their marketing departments at the same time as the new small Baen-like internet entertainment companies create broad based internet hits with pro-male and women neutral media content.

This double coincidence will be hard to come by as it is far easier to fire (and not hire) straight white males in Hollywood, Big Media and big American consumer product companies in the current legal and economic environment.

Mil-Tech Bard said...

Whiskey,

You hit spot on when you called out major media bureaucracies in media, but you are missing the other end -- American consumer product companies.

Large organizations provide niches for value-subtracted idiots to hide in, and bureaucracies to protect them.

The US economy is a consumer-driven economy.

American consumer products companies no longer know how to appeal to the 40% of their market composed of straight males because their in-house advertising departments seem to be dominated by people for whom straight males are a threat, i.e., women and gay males. (See also "value-subtracted idiots.")

How that came to be is not pertinent.

What is pertinent is that the people who make the advertising buys for American consumer products companies are now entrenched and, since they are not straight males, they can't be fired without violating lots of state and federal employment laws.

The only people who can be lawfully discriminated against in employment are straight white males, so they are. This is particularly true in the advertising business and most especially Hollywood.

Thus ensuing the inability of American consumer products companies to appeal to 40% of their market will reduce economic growth, as the US economy is consumer driven.

In order to renew their ability to aspeal to 40% of their market, you have to have American consumer products companies replace their marketing departments at the same time as the new small Baen-like internet entertainment companies create broad based internet hits with pro-male and women neutral media content.

This double coincidence will be hard to come by as it is far easier to fire (and not hire) straight white males in Hollywood, Big Media and big American consumer product companies in the current legal and economic environment.

Anonymous said...

"The scientist called "Rush" is BSG's Gaius: the traitorous scientist"

Amusing to think that the model of the scientist in "Who Goes There?" (er... I mean "Thing from Another World" (1951), should be chosen by the SciFi (er, SyFy) channel as the most skiffy, most popular, most relevant model of scientist.

Oppenheimer is more influential than Teller after all, at least artistically.

muebles madrid said...

Quite worthwhile information, thanks for your post.