Sunday, August 1, 2010

More Hollywood Economics: the Folly of World Box Office, Diversity, and Film Libraries

Several recent events show how Hollywood is both afflicted with deep stupidity, and chasing bubbles about to burst. The Miramax sale puts a dollar amount on what films are worth past their recent release. Which is not much. The Television Critics Association revealed deeply stupid broadcasting networks more concerned about "diversity" than finding an audience and making money. And finally, the Wall Street Journal reports on the folly, of chasing foreign box office.

First, the Miramax sale to private investors, which the Hollywood Reporter notes is $660 million, by Disney to a consortium of private investors. Including, bizarrely, actor Rob Lowe, best known for his TV role in "the West Wing" and a sex scandal involving a threesome during the 1988 Democratic Convention, which included a 16-year old girl. The deal, includes the 700 odd films in the Miramax library. Which puts a dollar amount on the films, including "Chicago," and "Pulp Fiction," and "Shakespeare in Love" at roughly $942,000 per film. That is how much the rental revenue, including DVD, TV rights, foreign DVD, and foreign TV rights, are worth. Taking, say, "Shakespeare in Love" and the running time of 123 minutes per average, that amounts to about $7,600 per minute. For an equivalent TV series, running at a nominal 42 minutes per episode, that would amount to $321,000 per episode, or roughly $7 million for each 22 episode season. That's back of the envelope calculations, but interesting. Since this was how the deal was valued, it is the best guess for what movies (and likely TV as well) are worth, globally, into the future, discounted back to the present (i.e. the deal represents in aggregate about the expected value of all future revenues from the film library, which are the only assets Miramax has).

Its interesting that Disney chose to sell off the company and the library, instead of simply keeping them for its own use. The answer is of course, that Disney is choosing to make expensive toy commercials, rather than movies, because that is one of the few reliable ways to make money (and as astute commenters noted in the post Toy Story Economics, revenues don't have to be shared for product placement OR toy / licensing dollars). Meaning Robert Downey Jr. does not get a cut of Iron Man toys, nor will Tom Hanks get any money from Toy Story 3D bedsheets, despite voicing the character of "Woody."

Disney didn't think Miramax was worth keeping around, and the valuation of the library is instructive. Under a million per movie, and using the same metrics, about $7 million per TV season. This despite an explosion of Satellite TV channels and services aimed at the Middle East, India, China, Latin America, including Brazil. Which are some of the fastest growing parts of the world.

As the story in the Hollywood Reporter notes:

A number of earlier potential buyers valued Miramax at only $550 million to $600 million, so the $660 million value is seen as top of the market. Investor Ron Burkle, working with brothers Harvey and Bob Weinstein, who first created Miramax and built it into a force in film, earlier this year lost out on Miramax when a bid of $565 million was rejected by Disney, which had indicated that it wanted $700 million.

So the top of the market valuation may be a bit optimistic. Prices may be indeed lower, as we will see later on.

Meanwhile, Deadline Hollywood Daily reports on the Television Critics Association presentations by the Networks. Diversity is first and foremost in critics and executives minds. Not enough gay characters, in shows aimed at families. Not enough Black characters, and self-satisfied boasting by "Undercovers" star Boris Kodjoe that his series is the "first" to feature two Black leads. As if "Sanford and Son," "Tenafly," "Good Times," "Franks Place," "the Jeffersons," "In Living Color," "Gabriel's Fire," never existed. Redd Foxx was making White audiences laugh in 1972, and the show during its six seasons was always a top 30 show, for the first five a top 10, often ranking #2.

America just a few years out of the Civil Rights era had made Black actors among its TV favorites. Americans of all backgrounds could repeat catch phrases, and comic bits. More recently, Dennis Haysbert, has played the lead in CBS's "the Unit" for a number of seasons before that show's cancellation. But the bizarre focus on "diversity" guarantees the failure of shows like "Undercover" or whatever clone of "Glee" is being cooked up.

First, in 1972, America was a lot different than it is today. For example, America in 1970 was 87% White, with Whites far more open to adopt non-Whites as cultural icons. It is striking that "I'm so pretty," and "Dyno-mite!" and "I'm coming to join you, honey," and "What you talkin bout Willis?" all stem from the 1970's to 1980's. Quick, what was George Lopez's catchphrase on his sitcom? Moreover, with only three television networks, Blacks were not able to watch Black-only television as they can now with BET. Making Blacks as small but significant portion of the audience, as opposed to today where their impact is mostly on Cable.

But the biggest change in TV from the 1970's to today is the total absence of men as a core audience. TV back as recently as the 1970's, was a mostly male affair, on network TV. Today, it is a female-gay ghetto, with shows from "Glee" to "American Idol" featuring singing, dancing, and other female and gay obsessions. While non-Whites do play a role in that, it is a minor role, to the glittery princess fantasies that TV serves up, from Desperate Housewives to "Real Housewives of New Jersey." Making broadcast TV a narrow audience, mostly upscale women in the End of the Brandon Tartikoff Strategy.

Diversity as such may make Maxine Waters, soon to be irrelevant one way or another, given her corruption and ethics trial in the House of Representatives, and upcoming Republican take-over of the House, happy but it will not gain viewers. The only way to gain viewers is an ever-more "shocking" and "Twilight" based appeal to various Princess fantasies, a losing bet, or a concerted effort to win back male viewers, and families, as "cheap but good" entertainment that is not a waste of time, and a good alternative to cable fare and repeat viewing of DVDs. There is no evidence that "diversity" puts people in front of TV screens, and the WB's ill-fated "Want Blacks" strategy of "Black-coms" such as "Moesha" failed miserably compared to the #2 ranking of "Sanford and Son" during most of its run. Somewhere, Redd Foxx is laughing, along with Fred G. Sanford. So too did some of UPN's more ill-conceived sitcoms, including "Homeboys in Outer Space" (as bad as it sounds) and "Secret Diary of Desmond Pffeifer" (a "comedy" about a slave in the White House during the early days of the Civil War). Even well regarded dramas such as UPN series "Kevin Hill" (starring perhaps one of Hollywood's most handsome men) have not fared well in the "diversity era."

And just as notably, "Diversity" does not sell well overseas. Buried in the Wall Street Journal article about Hollywood Foreign Box Office, is the gem that:

Fox Searchlight was recently developing "Baggage Claim," which chronicles a young flight attendant's search for Mr. Right and stars an ensemble of African-American actors, including Oscar nominee Taraji P. Henson.

But that film ended up in "turnaround," the Hollywood term for when a studio abandons the rights to a project and allows others to acquire it. It was heavily targeted to an African-American audience, a factor that often means the film won't play well abroad.

Indian, Chinese, Middle Eastern, European, Japanese, and Latin American audiences do not like Black actors and characters. Will Smith is not an international draw, he remains an American only movie star, while Brad Pitt, with questionable US appeal, is an international star whose presence has up till recently meant good paydays for films abroad.

Emphasizing "Diversity" may make TV critics (who are irrelevant) and Maxine Waters (who is also irrelevant) happy. It is likely to make sales of "Undercovers" assuming it makes it to a full season which is doubtful, far less than $7 million (for combined DVD profits, foreign rights fees, etc.) as revenue from abroad is likely to be very low. I doubt Indian broadcast or satellite networks will be keen to pick up on it.

Finally, we have the meat of the Wall Street Journal article. Which states, that the bulk of film revenues and profits now come from foreign sources, as DVD revenues have dried up drastically:

Decades ago, a movie's foreign box office barely registered with studio executives. Now, foreign ticket sales represent nearly 68% of the roughly $32 billion global film market, up from roughly 58% a decade ago, according to Screen Digest Cinema Intelligence Service.
The rise of the international box office has as much to do with a shifting global economy as with the evolution of the movie business. For years, Hollywood's bottom line was propped up by double-digit growth in DVD sales. From 2000 to 2005, for example, home-video sales increased by 91% in the U.S. But during the tough economy of the past two years, home video—which used to account for the bulk of a film's profits—fell more than 20%, according to Screen Digest U.S. Video Intelligence Service. Dwindling in-theater audiences in North America also have contributed to the shift.

Another factor: Regions from Asia to Eastern Europe went on a credit-fueled building boom, erecting shopping malls—often with multiplexes attached.

Hollywood is in panic mode. The easy money off DVD sales, which were easy and did not require much overhead, or back-office staff to track and hound for payment, is over. So too, domestic box office, with relatively honest reporting and revenue sharing.

Now Hollywood is betting on credit fueled, rather than organically grown, foreign theater growth. Built by dice-rolling cheap credit, instead of savvy and experienced theater managers with their own money in the game, who expect to make money. It is the equivalent, globally, of Dubai's Palm Island or other boondoggles characterizing a wild, out of control bubble.

Hollywood faces four main challenges in emphasizing foreign box office over domestic. None of which it is equipped to face.

The first, is that by "de-Americanizing" films, it makes them repellent or simply not interesting to US moviegoers, particularly those willing to buy toys, bedsheets, and the rest. Superman standing for "Truth, Justice, and … all that" means disappointing US box office, lackluster DVD sales, and not much in the way of toy sales and bedsheets sold to 11 year old boys because the Euro-Asian friendly global product had as much appeal as a lecture from "South Park's" guidance counselor. M'kay. In other words, the commercial for the toys will suck, making the toy sales pretty low.

The second, is that foreign markets are developing their own, sophisticated movie industries, notably in South Korea, and existing industries are riding increased domestic demand. Who can make movies that appeal to Mexicans the most, Americans or Mexican movie-makers? This challenge is already eating into Hollywood "global" exports.

The third, is that piracy is rampant in the movie industry, made easier by "digital" projection which is an open invitation to piracy. As noted in the post Life on the Blue Line, DVDs of "Iron Man 2" which was playing in theaters, were being sold openly for $5. They are probably considerably cheaper in places like Beijing, or Shanghai, or Bombay. Precisely the places Hollywood plans to make a lot of money at, by box office and DVD sales. Warners has closed its Korean and Spanish language DVD operations due to piracy. Eli Roth found his (loathsome) "Hostel" torture-porn series sold in Mexico City on the streets for the equivalent of 25 cents US.

The fourth major problem for Hollywood is the sheer overhead, required, to manage a "global" presence and the constant effort to ride herd on non-Western concepts of accounting, contracts, and enforcement. While places like Japan, the UK, Denmark, and Canada are likely to be fairly scrupulous in their accounting of receipts and honest profit-sharing, the same is unlikely in the extreme in the projected growth centers: China, India, Latin America, the Middle East, and Eastern Europe. None of which are exactly open, transparent societies dedicated to the rule of law, enforcement of contracts (much less with distant and unpopular foreigners), or honest accounting. Plus there is the sheer size of the effort. AVATAR, for example, made 27% of its gross box office ($749 million) in the US, compared to $1.98 billion overseas (73%). That makes revenues extraordinarily dependent on honest accounting from overseas exhibitors and actual payments, from many, many countries [see WSJ's article for the interactive graphic]:

Not even Honda Motorcycles is this ambitious. Honda, Toyota, GM, Ford, all have local partnerships in major countries they operate in, with manufacturing often done locally, providing jobs and patronage/protection, as well as a robust local dealership network that again provides incentives to locals to grow sales not cannibalize them. Global car and truck companies can act globally, because a sale of vehicle is just the beginning of a relationship with the nation, local business partner, and end-customer. Repair, service, parts, will all be required by the global manufacturer. Ongoing business with future sales of the same type of vehicle is expected. Meanwhile, Hollywood depends on basically, "one-off" cooperation from folks all over the world, far more nations than where the global manufacturers do business.

World-Wide Ticket Sales % by Nation:

South Korea1.83.1
Hong Kong0.70.5
New Zealand0.40.4
South Africa0.40.2
Czech Republic0.10.2

China and India, for all their vaunted population growth, and GDP growth, still account for less than 5% of Global Box office, each. There is no way Hollywood can make off global distribution like this, because the amount of people to manage the box office receipts, actually getting back to the studio, is simply too large. There is too much of a requirement for people on the ground, going to theaters personally, and building relationships with theater owners so the temptation to simply screw say, Fox and say "I got only this much from AVATAR showings" when the real number is five times that quoted, to make money. Because the order of effort will be too large for the payoff. Even in China and India, the "future" of global movie-going, the amount of tickets sold in dollar amounts is still too small.

How in the heck can anyone look at that table and think there is any way to make money with each nation being such a small part of ticket revenue? Each requiring its own unique advertising campaign, its own marketing materials, and accounting procedures? Without the dealership network model, which has extensive parts/service revenue (often shared) to build profitable cross-border relationships with global manufacturers and local dealers?

It makes no sense other than Hollywood is simply too stupid to read the numbers and realize that global business is not for everyone.

So how will this play out?

Already, with the sale of Miramax, and the planned sale of MGM, several "studios in name only" but with substantial libraries are being sold, likely to be shut down as failures, as is likely with Guy Hands and the ill-fated Terra Firma leveraged buyout of EMI. [Creditors want the company sold at auction piece by piece, artist catalog by artist catalog.] The studios that avoid "global" product and stick to American-driven toy commercials will do the best (that is, survive the longest under the current model of least stupid sticks around). That means probably Disney/Marvel, with princess fantasies and now, boy superheroes, if they can avoid screwing things up with Marvel which is probably a faint hope. Probably also Time-Warner, with massive corporate receipts and the ability to show re-runs of Law and Order into the next millenium. Not looking good are Comcast-NBC/Universal, and Sony, with its parent under earnings pressure from lack of good products, and lack of quality (almost everything is now manufactured in China, under fairly shoddy standards). Paramount is also questionable, with parent Viacom looking shaky.

Stupidity kills. In Hollywood, it just takes longer.


Astute Commenters said...

Whiskey wrote, "as astute commenters noted in the post Toy Story Economics, revenues don't have to be shared for product placement OR toy / licensing dollars..."

Thanks for the recognition. Thanks even more for giving me a blogonym.

Henceforth I shall be known as "Astute Commenters", (formerly "Anonymous @ July 28, 2010 5:44 PM")

Meanwhile, I'm working on why DVD sales tanked in recent years, after showing steady growth for so long. Best guess is that people were building movie libraries as a refuge from TV's "female and gay ghetto."

At this point TV's driven away as much of that audience as possible. TV will have to get worse in a different fashion to create new customers for large DVD purchase.

Truth said...

Hey Sport; this article actually wasn't bad.

Mr. Steed said...

True that movies with an african-american cast do not play at all outside the US.

Not true that Will Smith is not an international star. Actually, Mr. Smith is the only african-american actor to do the crossover with no problems. Take a look at BO figures for "Seven Pounds", "Hancock" and "I Am Legend". They all performed better overseas than in the US.

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