Avatar Is More And Less Than It Seems

James Cameron's epic, "Dances with Smurfs," er "Pocahontas in Space," oh wait, "Avatar" is on its way to make astonishing amounts of money world-wide and domestically. Avatar as of this date has made 1.1 Billion in world-wide box office revenue. According to Box Office Mojo the figures are $393.8 million domestically and $781.8 foreign. This is serious cash. Why then, aren't studios desperate to sign James Cameron for another film? An "Avatar 2" or whatever he wanted to make? Jon Favreau with "Iron Man," Bryan Singer with "X-Men," and Christopher Nolan with "Batman Begins" all were quickly signed to sequels, with money thrown at them.

The reason for the "dog not barking in the night-time" is that Avatar is not expected to be that profitable, despite the gobs of money it is making at box-office. Part of the reason is the high cost, but the other is that the movie really is not poised to reap a home video and TV rights sales, where Hollywood makes most of its money. Avatar is however, important in that it points out how Hollywood can make a bit more money: by releasing movies in 3-D, getting marginally more money from box-office receipts, and re-issuing movies that already exist in 3-D.


First, the cost of Avatar is reported by the Financial Times as $430 million, for production and US marketing. This makes the movie one of the most expensive ever made. Foreign marketing, including likely assistance for foreign exhibitors, who are financially pressed, to install IMAX 3-D systems likely impacts quite a bit of the otherwise impressive foreign box office (do note, that Avatar has about a 2-1 ratio of foreign to domestic receipts, an interesting point itself). It is likely that the net result is a lesser amount than the 40-45% range assumed for foreign box office grosses, when either "give-backs" or assistance in installing IMAX 3-D systems are included. Avatar netted approximate $57.75 million to the studio opening week-end (studios keep about 75% of the opening week-end box office) and about $158 million thereafter domestically. Avatar probably did less than $312.7 million net to the studio from foreign receipts. That should still be somewhere south of $528.47 million, so why aren't studios lining up to throw money at Cameron? Likely, real receipts from foreign box office are far less than even 40% of the $781.8 million currently reported. And things are not looking up for home video sales.

The Daily Beast reports that Avatar is showing on 3,600 screens, with 2,200, or 61% of them, 3-D IMAX. The 3-D IMAX tickets are about 36-40% more expensive than the ordinary movie tickets. This means that while the movie is popular, it is not as popular as people might think. And sales of home video, and TV rights, are still a mass-popularity game.

Edward Jay Epstein, author of "the Big Picture" maintains that Hollywood makes about 18% of its profits from theater box office, and 82% from home video (both sales and rentals), and TV rights sales (foreign and domestic). These also have much lower marketing costs, as well. In many cases, Studios use the theatrical roll-out as merely an extended marketing campaign for the DVD and pay-per-view releases.

Well, what of Blu-Ray? After all, the format is far more expensive, with say, "the Hangover" listing at $35 for Blu-Ray and only $29 for DVD. That's 20% more. Shouldn't "Avatar" on Blu-Ray be a natural sale? Making lots of money? Video Business reports that Blu-Ray for 2009 accounted for only 10% of home video purchases. Obviously there is a recession on.

To really enjoy Blu-Ray, you obviously need to pay (at least 20%) more for the Blu-Ray disc. You then need a Blu-Ray player (which list from $200 and up, though they can be discounted), and then of course, a Hi-Def TV. Those can be pricey, still around $500 and up. Though again careful shopping can find discounts.

If consumer incomes were rising as they were in the late 1990's, this would not be a problem. Hollywood would ride a wave consumer purchases of new players and high definition TVs to even greater heights of profitability. But it is not the 1990's. It is not even George Bush's economy. December job losses rose to 85,000 with the official unemployment rate at 10%, and the Labor Dept. "U-6" underutilization (those unemployed not looking for work, or underemployed) at 17.4%. This is in line with lower consumer spending for the Holiday season, with consumers purchasing mostly items on sale not spending as in past, pre-Recessionary holidays.

The economy is bad, and likely only to get worse. New health-care legislation (ObamaCare), Cap and Trade, Amnesty, are all likely to add new regulations and taxes on top of employers, making adding employees a pipe dream. Expansion that does happen will happen overseas, with fewer taxes and regulations. Due to population growth, the economy needs to add 1.9 million jobs every year. Since the onset of the December 2007 recession, the private sector employment which peaked at 115.8 million, has declined to 108.5 million. A loss of 7.3 million jobs, or around 6%. Public sector employment fell less than 1%, basically unchanged, at 22.5 million jobs. Most states are in severe budget trouble, with tax receipts tanking in ways not seen since the Great Depression. States are seeing double-digit tax revenue declines, contradicting the Obama Administration predictions of 3% growth for the economy.

With no wage increases and job gains in sight, and the economy terribly vulnerable to shocks, from oil supply (WTI and Brent Crude are both as of this writing above OPEC's $70-80 price band by considerable margins) to China, there seems little prospect of consumers rushing out and spending money on Blu-Ray players, Hi-Def TVs, and Blu-Ray discs. [The Financial Times is now comparing China openly to Dubai, noting that Tianjin has a development with buildings modeled after each continent, and an indoor ski slope, just like Dubai. Shanghai is filled with apartments and condos that are empty — wealthy Chinese lacking other investment opportunities and facing no property tax buy and hold luxury apartments. The skyline of Shanghai's residential districts are dark at night with empty buildings. This indeed echoes Dubai.]

Video Business again:

U.S. consumer spending on DVD and Blu-ray Disc rentals business rose 4.1% to $6.5 billion in 2009, according to Rentrak Corp.’s Home Video Essentials, which collects point-of-sale data. During the year, kiosk revenue grew 94%, with the Redbox-dominated channel approaching $1 billion in revenue, more than enough to offset a 3.2% decline in the bricks-and-mortar and online sectors combined.
Consumer sales of DVD and Blu-ray, in comparison, fell 13.7% to $12.2 billion, Rentrak estimates.

Redbox, the story notes, grew 94% (admittedly, from not very much to start with) in revenue for 2009. Clearly, consumers like entertainment cheap and convenient.

Which brings us to a wider point. Consumers over the decades have consistently chosen convenience, and cheapness, over high-quality sensory entertainment. In the 1980's, first cheap cassette tapes and then CDs won out over higher-quality vinyl, and the music machine of choice was the Sony Walkman and its imitators, not the high-quality home stereo. This followed over with personal CD players, and finally the Ipod and other MP3 players. People preferred music in portable packages, even if it meant giving up an immersive experience and superior sound. That the convenient packages were also cheaper, the Ipod really taking off when various models could be had for less than $170, was a bonus.

According to the Financial Times, Hi-Def TVs are less than 12% of the global market. See the picture below:


[Click Image to Enlarge]

This seems overly optimistic to me, as so far, the price point for adoption of new gadgets seems to be around $150 or so total cost. Apple's tablet device, whenever it reaches down to that level, is likely to be far more significant (given its rumored video capabilities) than fantasies of 3-D Hi-Def TVs, and ESPN's planned investment in a 3-D sports network. Consumers just don't have the money to spend, beyond that level. Unless consumer electronics companies can get the basic technology down to a very low level (i.e. a TV that costs around $150 and can play Hi-Def 3-D content with a built-in-player or high speed connectivity), 3-D at home is far away. People don't have the money.

What is potentially far more lucrative, is the technology Disney has, with "Keychest" that would authorize content to be streamed to any device, mobile phone, Ipod Touch, computer, internet-connected TV, and the like, from a central stored server. There, the technology is on the back-end, with compression and robust data networks not pricey consumer electronics being the key to content. Again, note the economics: mass-oriented content for cheap (this material is likely to be viewed on the equivalent of a Sone Walkman or Ipod for video) devices at cheap prices is likely to be the rule. The story of high-quality content devices and storage, such as Video Laser Disc, Mini Discs, and the like has not been a happy one compared to cheap and "good enough."

Avatar's true meaning is likely to be, instead of a rash of movies in 3-D IMAX, a few select movies in 3-D that eke out a few more dollars in extended, 3-D showings, that are a small margin for studios to transition (if they can) to the Itunes/Ipod world of cheap content anywhere, any time. Either purchased for cheap or rented even cheaper. With the "winner" whoever can provide consistently a high quality and low price mass entertainment line-up. A 3-D version of say, "the Goods" with Jeremy Piven is not going to save the movie industry, which faces a long-term decline in tickets sold (though this year had a partial recovery) and very high costs, with a few hits subsidizing the many failures.

Screenwriter William Goldman once observed that "nobody knows anything" with respect to profitability. Yet the golden age moguls, Warner and Mayer and did know something. Their movies almost always made money. Avatar might just be the last hurrah for the old-line Malibu Marxists before cheap, fast, anywhere, anytime media overwhelms their business model. Because it doesn't look like consumers will be shelling out $1,000 anytime soon just to watch a bunch of blue cats crossed with stilts, re-enact Pocahontas.