More on Hollywood's Declining Profitability

In his book, "The Big Short," Michael Lewis details the key attributes of a bubble about to burst: lots of fraud, sudden cost cutting, and other shady dealings. By these measures, Hollywood has had a bubble for decades. New York Magazine reports two key details: Paramount, the studio behind Tom Cruise's new Mission: Impossible 4 movie, will pay Cruise a very reduced up-front salary and money after "cash break even" and that the movie itself is receiving about half the production budget of around $135 from David Ellison, heir to Oracle billionaire Larry Ellison.


Cruise's "Knight and Day" movie has pulled in only $74 million domestically, and less than $190 million world-wide (most of which due to market fragmentation will be hard to recover). Clearly Paramount has little confidence in Cruise, seeking outside financing (and the involvement of Ellison who is desperately seeking an acting career alongside nascent mogul status) and limiting Cruise's payout. What Blogger/Commenter Furious D calls a "self-fulfilling idiocy" is more likely the sign of hidden, but real declining profits, as studio execs frantically try to shore up declining bottom lines. Box Office Mojo has the all time inflation adjusted box office rankings.

The box office champs are relatively evenly distributed throughout the decades. The 1980's and 1990's being slightly lower than the other decades, but not terribly lower. What's notable is how the "self-fulfilling idiocy" (of screwing over actors/producers/directors in "Hollywood accounting") only came to the fore when Hollywood was having problems making money away from hit movies.

Hit movies are great, but don't pay the bills day-to-day. Hits are erratic, often coming from over-the-hill "has-beens" (The African Queen, in 1951, from "has-been" John Huston) or "never-were" types (Star Wars in 1977 with fairly new director George Lucas). Outside of Pixar, few studios or divisions within studios have been able to create them after the fall of the old line studio system. It was only when Hollywood ran into trouble, studios being sold to giant mega-corporations, with declining profits even though the studios invested heavily in TV, that the attitude of "screw the talent" became widely practiced. Actor James Garner fought with Universal for years over money due him for "the Rockford Files." Perhaps the most famous incident being the David Begelman embezzlement and black-listing of Cliff Robertson for reporting said embezzlement.

Needless to say, that's not the type of thing you'll find in money-making industries and companies.

If you compare, for example, the software and computer industries, episodes of fraud and mis-reporting (ala Dell's SEC fine for not reporting Intel payments not to use AMD chips represented 76% of Dell earnings) come when software and hardware companies are not making much money. Thus, the need to book say, AOL subscriptions at some enormously inflated rate during the 1990's (when AOL was seeing little real subscriber growth compared to the cost of mailing out those CDs or disks), or SAP's adventures in accounting in the mid 2000's. The same is true for Hollywood. During the mogul days, of course, stars were paid straight salaries. During the collapse of the mogul system in the 1950's to 1960's, the aftermath of the Federal lawsuit requiring the studios to spin-off their wholly owned theaters and the competition from TV, earnings were still high enough that there was no real need for widespread cheating of the talent through questionable accounting.

It was only when the deep pockets of acquiring mega-corps (such as TransAmerica, purchaser of United Artists) ran out of patience that the David Begelman strategy came into play. That the studios were sold in the first place of course was a sign of trouble, in that they could not generate enough cash on their own to stave off acquisition or become big enough so that acquiring them would be fairly rare.

Hollywood's day-to-day films were becoming less profitable. Films like "Dog Day Afternoon" or "Taxi Driver" might have been artistically superior to say, a Doris Day movie, but Doris Day movies made money, while the likes of "Dog Day Afternoon" did not. Cumulatively, the drag on Hollywood from most of the movies being unprofitable and relying on hits led to funny accounting, in a bid to keep most of the declining profits for insiders.

Then, the VCR and Video Cassette revolution hit, allowing first sales of recent (and old) films and then the lucrative Blockbuster rental model (where Hollywood traded lower cost for the cassette in return for about 40% of the rental revenues). The introduction of the DVD, and soaring revenues from both sales and rentals merely extended the life of the VCR/Video Cassette revolution. But all things have an end, and a combination of tight consumer shelf space ("Do I need a 101st movie in my collection?"), tight budgets as recession-strapped consumers pay down debts, and declining movie quality (who is going to buy "I Now Pronounce You Chuck and Larry" or "Green Zone?") meant the drop of up to 25% in revenues from video rentals and consumer sales.

Edward Jay Epstein notes that in 2003, roughly 83% of Hollywood revenues came from the combination of TV, and video/DVD money, with only 17% coming from theatrical box office. This is about where Marvel's operating revenues came from, with respect to comic book publishing (between 11-17%) compared to licensing and movies. Needless to say, revenue from TV rights (pay and free) are declining, as well as rentals (from Netflix and Redbox pressures) and direct consumer sales. Piracy too plays a part. When riders on LA's Blue Line can purchase $5 DVDs of movies running in theaters, openly, from regular vendors, there is a problem.

While Blu-Ray and 3-D TV will help with affluent consumers wanting immersive movie experiences, there are not enough of them, even in the global economy, to make selling 3-D versions of say, "High School the Musical" to make Hollywood profitable. Meanwhile cost-cutting, and shady accounting such as the Peter Jackson-New Line lawsuit over Lord of the Rings payments continue. Even Tom Cruise must forgo hefty up-front payments and lucrative "first dollar" gross payments from receipts of box office and video/video-rights sales. Epstein is wrong, Hollywood's Library money machine is breaking down, with the sale of Miramax valuing the individual film at less than a $1 million a piece. Foreign distribution rights, pre-sales, TV and DVD/Blu-Ray release money is declining rapidly in an economy that is over-stretched globally. A bad grain harvest in Russia? Perhaps global pressure on food prices. The bet that Hollywood was immune to recessions seems to have come up snake eyes, like that on the housing market never declining nationally.

Frantic cost-cutting. Reliance on shady accounting. Disputes with key talent over payment. A few hits carrying many turkeys. Lack of much of anything new and exciting. [Three D technology dates back to the 1950's and uses basically the same type of technology.] All paint a portrait of Hollywood in significant earnings trouble. Miramax, MGM, which studio will be next?