Toy Story Economics: Death of the Movies

The biggest thriller in Hollywood is not the Angelina Jolie movie "Salt" (Domestic Box office as of July 26, 2010, of $36 million, production budget of $110 million and likely promotional/marketing budget of $30 million). Nope. It is the changing economics that have killed the movies. Making them into mere advertising for the real profits: toys and merchandising, while Hollywood makes unprofitable movie after movie to amuse themselves and win awards. Nothing better shows the change in how the money flows than Toy Story 3D.


Disney has high hopes for Toy Story 3D. The Financial Times on Monday, July 19, on P. 16 (Dead Tree Edition, sorry no link) wrote that Disney hoped to beat "Finding Nemo" which at $868 million was Disney's highest grossing (worldwide) animated film. Dreamworks "Shrek 2" posting slightly higher gains. But ABC News reports that Disney expects to gain $2.4 billion in gross retail sales worldwide. That's 2.8 times the gross worldwide box office. The story from ABC also notes that "Cars" has posted $2 billion in retail sales and merchandising since its release in 2006. As Reuters notes in its story, the figure of $2.4 billion is roughly comparable to the entire turnover of Disney's Consumer Division every year.

This means power, slowly but surely, will shift from movie stars and directors, to writers-creators, and folks like Pixar's John Lasseter (CEO and creative force behind all its movies). While this might seem a good thing, it is more akin to Ford, GM, and Chrysler relying solely on gigantic pickup trucks for profits in the 1980's and 1990's and 2000's. After finding it could not build cars consumers wanted and make a profit. Just as striking as the money made on merchandising is the troubles Hollywood has in what should be its core business — making movies and collecting the ticket sales and DVD sales and rentals.

Consider a movie like say, "Salt." It cost a lot, $110 million. Perhaps Jolie took $20 million or so, probably less, but lets just assume she did. Absent a "star" like Jolie the movie would still cost $90 million or so. That's a lot. The budget for 1999's "the Limey" according to Box Office Mojo was a measly $10 million. It only grossed $3 million in limited box office release, but was a magnificent movie that belied its tiny budget. It had stars like Terence Stamp and Peter Fonda, and well known character actors like Luis Guzman. Soderbergh proved you could make a movie that had some action (not a lot, but enough), well-written plot and character development and tension, and have something that looked great on screen. John Carpenter once estimated that for most movies, about $30 million or so was about the lowest you could go, for any type of action film, consistently and not be skin of the teeth. Part of Hollywood's problem is just like Detroit's Big 3 — spiraling costs moving upwards every year with no way to control them. For Ford, GM, and Chrysler, it was unions and the reluctance to engage in a political fight with them (since they had powerful Capitol Hill allies who regulated heavily the Big 3), for Hollywood it is the habit of finding work for cronies, the in-crowd, and so on that make film budgets bloated.

But even worse are the films that are made just to make films. A movie like "Salt" is not even remotely possible to make a decent profit for the studio. Nor is it the kind of Oscar-bait, self-congratulatory bit of idiocy such as "the Reader" or "the Ghost Writer" (the latter by Roman Polanski starring Pierce Brosnan and Ewan McGregor). Made solely to pat Hollywood insiders on the back. A movie like "Salt" is not even that. It was made to keep cronies busy and employed, instead of making a profit for the studio.

Hollywood has turned into a really, really debased and freaky version of NPR. Most of the films don't make money, any more than NPR's radio shows make money (or PBS's broadcasts make money). Unlike PBS, which at least broadcasts Opera, Symphonies, and educational programming, Hollywood does not even function as a fine-arts institution keeping alive the works of Mozart or Beethoven or more obscure folks like Bartok. Of course, the most tame night at the most tame Hollywood star would beat the wildest night at the wildest NPR or PBS executive. Garrison Keilor's idea of going a little crazy is two trips to the salad bar. Lindsay Lohan's involves commandeering an SUV, jail time and custom tattoos.

Hollywood is faced with five problems. First, a significant portion, roughly half the country at least, despises its politics and the personal behavior and character of most of Hollywood. This is different. For a long time, Hollywood's actors have been pretty liberal. Dating back to Humphrey Bogart, and Kirk Douglas, liberalism ruled Hollywood and conservatives like John Wayne and Jimmy Stewart and John Ford were tolerated but did not set the tone. But conservative movie-goers did not care. Neither Douglas, nor Burt Lancaster, nor the late and lamented Paul Newman took to lecturing Americans on their original sins of … whatever. While living hypocritical lives of Nero-like debauchery and indulgence. They may have been plenty liberal, and they were, but they kept their personal lives private, did a lot of work for charity that drew respect, and never came out like a WWE "heel" to tell their audience how much "better they are than you."

Now their successors, Alec Baldwin, Jeanine Garofalo, Whoopi Goldberg, and Ellen Page, find it necessary to opine on the inherent racism, sexism, "anti-greenism" and many more sins held by most Americans. Even bimbo of the moment Megan Fox hoped one of her films villains would destroy Middle America. Only hemp-touter Woody Harrelson has refrained from constantly insulting the conservative side of the audience. Meanwhile conservatives have to "hide" their opinions just to get work, save for a few powerful and late-career enough who don't care or need to care, such as Adam Baldwin. Its notable that conservative actors and directors and writers take care not to insult the audience on the left, a practice not found on the other side.

This means "movie stars" cannot and will not be able to put butts in seats since they alienated half the audience. The conservative side just is not big enough. Tom Selleck is older, and past leading man status. Jon Voight was a leading man in the 1960's, not today. Only Adam Sandler, who is carefully apolitical, has been able to put butts in seats, and then only for "Adam Sandler Comedies" with lots of fart jokes. His "arty" movies are bombs. Hollywood pissed away good will just like Detroit did with cars like the Gremlin, the Pacer, and the Pinto.

Next, Hollywood cannot make films at a lower cost. Alienating half the potential audience, and as we will see later, not being able to connect with ordinary people, means Hollywood's current creative folks have to make movies a lot cheaper. Which they cannot do. Like Detroit, they are trapped in a high cost production environment. All the deals with Bollywood or moving production overseas will fix things only on the margins. A production might shave about 10-20% of the production cost, but Hollywood makes still, far too many movies, nearly all of them destined for financial losses. Making the loss making marginally less expensive will only delay the bleed-out.

Sales of DVDs, particularly libraries, won't help. The Financial Times on Saturday, July 24, "Life and Arts, page 1, Who Killed James Bond" noted (again dead tree edition, no link sorry) [note to readers — the Financial Times limits views on articles to one per month for those who don't register, and three per month for those who do, perhaps clearing cookies and such will allow you to read any Google search] reports that MGM, had revenues from its film library of more than 4,000 films, fall from $500 million to less than $250 million for the last fiscal year. Studio wide, DVD revenues have fallen (rentals and sales) by an average of 25% year on for the last three years, as consumers find shelves saturated and paychecks stressed. DVD sales for a while in the late 1990's and early 2000's, like the video tape revolution of the mid 1980's and early 1990's, had propped up Hollywood's failing business model. The way big profits on SUVs and trucks did for the Detroit Big 3. Clearly, with consumers strapped that support is at an end.

Third, Hollywood cannot make, reliably, films that make money by connecting to people. Hollywood has always had the problem that stardom, fame, enormous amounts of money, people telling creative folks they are like God, sycophantic behavior in the extreme, and so on removing any notion of reality or ability to understand and connect to ordinary people and the concerns in their lives. During the Golden Age, hard-bitten entrepreneurs like Mayer and Goldwyn and Warner kept Hollywood's creative people on a short leash. These men at least had enough memory to understand what ordinary people were like, and the famous "butt detector" (if they wriggled around in their seat during a screening the film was no good) acted to short-circuit stupid ideas. This is why Ed Wood was a laughable outcast figure, instead of say … the Wachowski brother who got the full sex change operation and looks like a melted wax candle. Jack Warner and Louis B. Mayer and Sam Goldwyn prevented a "Boxing Helena" or the world's most boring orgy (Matrix Reloaded) from being made in their era. Today's Hollywood, bloated by money and isolated, and filled with contempt for, its audience, finds those movies classics. From "Plan 9 from Outer Space" to the Wachowski's latest film, about a gay soldier in Iran in love with a gay Jihadi, the weird and debauched came from the fringes to center stage. In the same fashion that GM, Ford, and Chrysler stopped caring about making reliable, dependable cars of the highest quality, and focused on pushing out cheap, junk, because they didn't care much. People would buy anything, they figured, and who could figure out the consumer.

William Goldman once said, reportedly, that in Hollywood, no one knows anything. Nothing more stunning its indictment of Hollywood has ever been said. Sam Goldwyn knew something. So did Louis B. Mayer. And Jack Warner. The films they presided over remain classics and are loved to this day. No one knows anything in Hollywood, because to borrow "Big Hollywood" Editor John Nolte's words, they are too busy doing lines of coke off the backside of an underage hooker. Exhibit A: Oliver Stone wants to put Hitler and Context and says the Holocaust wasn't that bad.

No one knows anything because they hire a known whack-job, like Stone (or the Wachowskis) and expect to make money. Stone has various rumors floating around his life, which may or may not be true, but his films outside Platoon and Wall Street have never made money. This includes: W, Alexander, World Trade Center (who thought having Stone direct this would make money?), Commandante, Any Given Sunday, U Turn, Nixon, Natural Born Killers, JFK, Born on the Fourth of July, Talk Radio, and the Doors. No one knows anything because no one wants to know anything. Instead they'd rather believe that a trans-sexual is the best person to film a kids movie (Speed Racer) or that Oliver Stone can remake one of the two movies he made money at, thirty years later, at a profit. Already a boycott Showtime movement (over Stone's "Lighter side of Hitler" documentary) is in the offing, with the ADL coming down hard on Stone. Forget Mel Gibson, Stone's views and beliefs are mainstream in Hollywood. And anathema in middle America.

If personnel is policy, Hollywood's policy is to choose the people with the least ability to connect to the audience (but the most like them) to make movies and then wonder why most of them fail. They'd be better off hiring Democratic Senatorial Candidate from South Carolina, Alvin Green, to make their movies. The failure rate would be less (since at least Green hasn't had a sex change nor played Kenneth Mars neo-Nazi, Hitler loving character in Mel Brooks "the Producers" for real instead of laughs). "I tell you, the Fuhrer could dance the pants off Churchill!"

Fourth, Hollywood cannot rely on the world box office for salvation. World box office is fairly new, as an obsession. Movie makers in the 1930's, 1950's, 1960's, 1970's, 1980's, did not obsess over it. World box office requires, essentially, foreign exhibitors to faithfully record box office receipts, and faithfully and truly give Hollywood studios their fair share of the receipts. Anyone see a problem here? Exhibitors in the UK, Australia, Canada, and parts of Europe such as the Scandinavian countries, the Netherlands, Germany, Austria, and Switzerland, are probably pretty faithful and accurate. Japan may or may not be accurate. Studios will be lucky to get much of anything back from places like China (where Walt Disney has complained for decades about piracy and illegal showings of Disney films to no avail). Much less South East Asia, Korea (notorious for piracy), Mexico, South America as a whole, or the Middle East. Warners has shut down its Korean and Spanish language DVD divisions due to piracy. As noted, the Blue Line story in the post previous, reported on the open sale of pirated DVDs of Iron Man 2, with vendors showing the copies on portable DVD players to show the quality of the copy. Prices were $5 each, with discounts for multiple purchases. At home and abroad, pirating is easy and profitable, eating into box office receipts, most of which in places lacking rule of law, a tradition of honest business, and the like, are iffy at best on how much significant box office revenue properly goes back to studios. After all, a savvy operator can simply screw the studio, and open up for business under a new name. Studio heads half a world away, speaking no Korean, or Spanish, or Cantonese, are not likely to squawk, and if they do, well the local powerful are paid off anyway.

Which brings us to the fifth problem. Hollywood's near total dependence on merchandising for the core of its profits. With merchandising, though illicit copies in the factories in China where toys and bedsheets and other items are made remain a fact of business life, the toy is sold or not. Hollywood takes its cut, first. The Distributor then has to sell the toys, or Buzz Lightyear bedsheets, or Woody lunchboxes, or not. A big hit with kids and families, like Toy Story 3D, can tide over a company like Disney for a couple of years. The revenue equal to selling toys from the Lion King, the Little Mermaid, Cars, Finding Nemo, Up, Peter Pan, Alice in Wonderland, Sleeping Beauty, Snow White and the Seven Dwarfs, Mickey, Pluto, Goofy, and the like in a non-hit year. That's pretty astonishing, the level of money, and the much lower level of risk (remember, unlike foreign box office, Disney takes the cut from the manufacturer/distributor, and then its up to them to shoulder the rest of the risk).

And it all rests on families. Or more precisely, the few non-debauched, non-corrupt, non-weird Hollywood creative people to make stories appealing to families. Then make those stories using computer animation. Which should, in theory, offer much lower costs, since the entire movie is created on cheap (compared to cast and crew on location or sound stage) render farms. Skilled animators still need to create "living" (and not "undead" ala Polar Express or other scary/icky animation jobs where the characters look like undead zombies) characters that express emotion in ways to evoke it in the audience. But that’s still cheaper than paying a big crew to film, even say Amber Tamblyn instead of Angelina Jolie (btw, Tamblyn's a better actor) in an action film.

But there is a risk. The barrier to entry is so cheap — anyone can do it. Leaving Hollywood vulnerable to say, Game companies looking to branch out or keep studios without a current hit employed, or effects houses such as New Zealand's WETA studios, or Lucas's Industrial Light and Magic, or any number of similar firms in the UK or Italy or France. All you would need is a story, a good script, and skilled animators. The render farms are cheap and can be constructed as needed. Game and effects companies already have them. Voice actors can be hired, easily. No one cares if the voice is done by say, Adam Baldwin versus Tom Cruise, or Christian Bale versus Kevin Conroy (the animated Batman voice actor). People are still looking at animation.

Then the next Toy Story 3D can generate all those licensing and merchandising revenues for someone else. Game companies, of course, probably lack the creative people able to make stories appealing to families with kids, as opposed to blowing stuff up. Effects people probably lack that too. But John Lasseter or someone like him could come in with the skills and emotional connection to ordinary people to provide that missing piece.

The other part of the risk is that aside from Lasseter, Brad Bird, and a few other writer/creator/director types, Hollywood is not over-run with normal people who would not be a freak or freak show among middle America. The few people able to make films that connect and do not offend ordinary people are Hollywood's vulnerable point. The movie "Fantastic Mr. Fox" directed and written by Wes Anderson, voiced by George Clooney and Meryl Streep, failed miserably at the Box office. It cost $40 million, with another $30 or so for marketing, and pulled in $21 million domestically and $25 million in foreign box office (grosses, the studio likely saw far less than that net). The movie just did not connect.

Kids don't care about George Clooney. Or Streep. They care about story, characters, an affirmation of their own, very middle class lives (that's also who buys toys and bedsheets and lunchboxes). If you wondered why the local mega-mart did not carry Fantastic Mr. Fox lunchboxes, well that's why. The movie tanked.

Hollywood probably hopes for a bail-out, at some point. "Don't let your favorite director lose his Malibu mansion!" "Keep hope alive, and the cocaine flowing!" Given the depth of disdain for Hollywood, and the lack of any credible reason to bail them out (few people will lose their jobs), that is probably only a coke induced daydream. The integrated mega-companies can run deep and lasting deficits for years, and probably will. They are very big. It took the Roman Empire, GM, and Chrysler a very long time to fall. For the latter two, about thirty years or so. Hollywood might have another ten to fifteen years left. But eventually, it too will fall.

Because Hollywood can no longer make movies cheaply enough, that people want to see.