Friday, August 6, 2010

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?


Astute Commenters said...

Whiskey wrote, "Three D technology dates back to the 1950's and uses basically the same type of technology."

And will fail for the same reason it always has. In real life 3D vision only occurs for small, close objects. Anything your brain perceives in 3D will automatically be classified as small.

Find some of those 3d images you can see on your computer. (You have to cross your eyes to make them work.) The resulting 3d image seems much smaller than either of the 2d images it's conjured from.

This may be the reason that the most recent attempt to revive the 3d gimmick used it on IMax screens.

As for Hollywood recovering, it's not going to happen. In the first place, they're stuck on stupid, like Newsweek. Like Thelma and Louise they're in love the with the notion of their own relevance and will glory in their self-immolation.

In the second place, they've poisoned the well. As was pointed out in
Feminized TV: How PC Kills Revenue

"And somewhere around the country somebody says, I’m not going to watch what Hollywood does anymore. ... Anytime we sign a petition that says let’s ignore the fact that Roman Polanski raped a 13-year-old, we lose viewers. And I think that has reached a critical mass."

In the third place they've conditioned their audience to hate modern movies. I think it's Breitbart's Big Hollywood that talks about the "liberal sucker punch" that's been jammed into every movie for the past two decades. That's done a great job of training people to dread watching movies. I don't see any practical way to reverse that kind of sustained Pavlovian conditioning.

Kinuachdrach said...

OK - now look ahead to the next stage.

Hollywood is failing (or moving to Canada, which amounts to the same thing). But the human desire for entertainment remains. What/where/how will be the new shape of entertainment?

We are probably not going to go back to vaudeville. And on-line gaming is a large but nevertheless niche market, probably already close to saturation. The technical capability to make images is only going to improve. The real limit is creativity -- an a business model that promotes creativity.

Mexican TV seems to do a nice line in prime time soaps that start, tell a story, and end. Some of them are quite compelling, and don't necessarily turn off the male audience.

Russian TV has a fair number of what seem like relatively cheap but very professional variety programs, with real talent singing their hearts out. They also do a nice line in jaw-dropping ice skating performances, without the annoying high-priced play-by-play that has made ice skating unwatchable in the US.

There are probably some relatively low-cost programming options that could attract a much larger audience than current fare -- whether that programming is delivered via cinemas or broadcast TV or internet. Economies abhor a vacuum, so what will fill it?

Astute Commenters said...

Kinuachdrach said... " OK - now look ahead to the next stage. Hollywood is failing (or moving to Canada, which amounts to the same thing). But the human desire for entertainment remains. What/where/how will be the new shape of entertainment?"

It's already here. Video Games. Look at the sales of StarCraft II. The numbers compare to a Hollywood blockbuster, and the game has hundreds if not thousands of hours of entertainment.

People who want a shared entertainment experience are playing online, or on the Wii.

Video games aren't just for nerds any more. I understand Bejeweled was a big hit with women, even older ones. There's also news that Farmville has a larger userbase than World of Warcraft.

Why watch a movie with a hero when in a video game you can be the hero? And you can win every time.

Kinuachdrach said...

No question that video games are where many of the "missing males" have gone.

But video games are already here. They have already achieved a high penetration in their most targetable market. As Whiskey has pointed out previously, video games have grosses comparable to good movies -- with much lower production costs. But the grosses on good movies are not enough to keep Hollywood going.

I wonder about the possiblities for seeing more Indian, Russian, Chinese programming dubbed into English at low cost. We might be surprised at the popularity among those who have been turned off by the Politically Correct drivel from the Hollywood left.

Hinckley said...

Whiskey, you mentioned that Dog Day Afternoon and Taxi Driver, while being quality movies, made relatively little money when compared to hit movies. Is it possible that the future of Hollywood is likely many smaller studios making smaller (cheaper) movies as opposed to giant studios that NEED a huge selling movie to remain in business? A smaller studio making 3 or 4 $10 -15 million dollar movies per year would be wildly successful if they profited $30 or 40 million.

I dont know much about the business end of Hollywood. Is it even possible for this to be done? Do the big studios control the distribution networks? Does the internet open possibilities for distributing and playing movies, akin to how some musical acts have bypassed record labels and now issue their own mp3s etc??

Astute Commenters said...

No form of movies is going to replace the missing audience, because Hollywood doesn't want to replace the missing audience. In fact, they'll fight tooth and nail against it.

That's the point I tried to make with references to Newsweek, etc. in my first comment.

Here's the evidence for that.
The Era of Big Cinema Is Over

"In 1965, 44 million Americans went out to the movies every week. A mere four years later, that number had collapsed to 17.5 million"

45 years ago the number of tickets sold every week dropped by 60%. Rather than seeing this as a problem, Hollywood seemed proud of that failure.

Just like Newseek and Thelma and Louise, they see the yawning crevasse in front of them and floor the accelerator to reach it quicker.

Whiskey said...

Hinckley -- Distribution is key, and yes the big studios are the barrier in distributing.

Its my understanding from Edward Jay Epstein aka "the Hollywood Economist" [He is a reporter, author of several books on the business side of Hollywood.] that most movies go into the black only via DVD/foreign rights/TV rights. He breaks down a Harry Potter accounting report to illustrate the charges, some correct, some probably bogus, that screw over profitability.

Intriguingly, a number of studios sell their production slate in "presales" to foreign distributors, taking lump sums and forgoing foreign box office. This revenue gets reported generally later.

So theatrical remains a small percentage, even globally, because of the marketing expense (around 30-40 million) that is basically there to sell DVDs/TV rights, or now just toys.

My guess is that out of desperation, some studio, probably one without much money or "deals" like New Line had with HBO, will go the cheap route and distribute via Internet with either Amazon, or Redbox, or Netflix, or Youtube, as partners. Youtube has already experimented with $3 rentals of various Tribeca film festival flicks.

If you make a film, advertising and production, combined cost of $20 million (certainly achievable, the internet allows you to reduce marketing costs, and you can shoot non-Union, away from Hollywood, no-name actors), your break-even is 4 million views at $5 a pop. That's back of the envelope excluding partnership costs with whoever online you partner up with.

But the infrastructure is already there. You could probably also offer a slightly higher price point for a download of the DVD, or one mailed to you, via Amazon or Netflix. There'd be piracy, but you'd probably make enough to make it worthwhile.

The key though is not just cheaper production, but broader appeal.

I think we are at the end of de-massification and on the cusp of "remass" ironically driven by the Internet. Since it allows an end-run around costly distribution and marketing campaigns (the major financial barrier to new studios).

Actress Felicia Day has basically "rolled her own" in her own web-based, DVD for purchase series "the Guild." Not my taste, but a portent of things to come.

Truth(er) said...

This is already happening on a smaller scale:

These are both tv shows delivered exclusively on HULU.

Anonymous said...


I am sure the complete abandonment of the Motion Picture Production Code (Hays Code) had something to do with the precipitous drop off in ticket sales in the late 60s.

Can you imagine the normal husband and wife of this period sitting through the garbage produced today.

Attempting to make movies even more shocking, degenerate, and disturbing seems to be the name of the game these days. Not to mention the obvious attempt to brainwash the paying customer.

kurt9 said...

George Lucas said during the release of the last Star Wars movie that the blockbuster was becoming obsolete and that by 2015, most movies would be low-budget ($15 million or so) "Indie" productions. He said this back in 2005.

Avatar was significant in that avatars, rather than real actors, were used for several of the characters. Forbes magazine ran an article about the increasing use of computer-generated avatars in movies and how this, too, would radically change the economics of film production.

Hollywood's current business model is clearly unsustainable. I think Hollywood's current obsession with promoting 3-D technology is a desperate gambit to overcome the difficulties with their current business model.

Whiskey said...

Kurt9 -- Yes, I read that. Of course Lucas's fortune was built on ... toys. He retained, wisely, the merchandising rights for Star Wars, and so made billions off all those toys and games. Which is why the later Star Wars movies were nothing but giant toy and game commercials.

The problem with $15 million dollar Indie movies is that to make money on them, you have to pump out a lot of them, and you have to have a good "batting average" like well over 50%. That means the production entity churning them out must be finely attuned to the desires of the audience, particularly the American one (because its easiest to get PAID from American audiences).

That DID happen in Hollywood history. Republic and a few of the other lower rank studios churned out B picture after B picture, mostly Westerns, that made nice little profits. AIP made youth exploitation movies in the 1950's-1960's that did the same, and Universal was pretty good at making TV shows that hit.

But Hollywood's entire creative culture is oriented towards narrow audiences, the hip-erati so to speak. Not ordinary consumers. Most Hollywood folk are too weird and rich to be create anything that's popular.

Whiskey said...

Let me add that in a way, we are already seeing with Pixar's hit-list, pretty much wins (though of varying intensity) throughout their release schedule, based on story and technology (animation via computer) that makes actors fairly irrelevant. Finding Nemo, Toy Story, Up, Cars, and the rest could have been voiced by any number of actors.

I agree that 3-D won't save Hollywood. Chief among them, audiences already are conditioned and expect to see most movies at home, on DVD players/TVs or laptops or computers etc. Consumers just don't have the wealth to go out and buy home 3-D TV sets and players. Particularly with the drought in Russia pushing grain/food prices high globally (Russia has banned grain exports). Sony in particular has stupidly bet high on 3D TVs and that will hurt their bottom line, and the ability to carry the studio from electronics earnings (which have been down for years).

Astute Commenters said...

Blogger Whiskey said... "Of course Lucas's fortune was built on ... toys. He retained, wisely, the merchandising rights for Star Wars, and so made billions off all those toys and games. Which is why the later Star Wars movies were nothing but giant toy and game commercials."

Excellent summation missing only one thing. The StarWars movies also advertise LucasArts' special effects division, Industrial Light and Magic. Some of the trailers for Attack of the Clones look like a trailer for a computer game. Which, of course, they were.

And as for advertising StarWars video games, some players regard the StarWars games as better realizations of the StarWars stories than the prequel trilogy. Much better, even before the player interaction is taken into consideration.

So the StarWars prequel trilogy is the unified advertising that even Disney corp only dream of.

Anonymous said...

"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. "

Check your facts. Dog Day Afternoon was highly profitable and one of the biggest box office hits in 1975.

I disagree with your opinions most of the time, but I think sometimes you have an interesting view point. Unfortunately you frequently devalue your writings with such a wrong or dishonest empirical evidence.

Whiskey said...

Box Office Mojo puts Dog Day Afternoon all-time box office rank at 1,157. So no, I don't think it had much impact. Artful, winner of an Academy Award, a movie taught in film school, a movie that cinephiles love (like Abel Gance's Napoleon)?

Sure. But Box Office Success? Nope. In 1973, the Exorcist did $232 million ($879 inflation adjusted). Grease in 1978 did $188 million ($611 million inflation adjusted). The Sting in 1973 did $155 million (708 million).

The movie, in 1975, is about a couple of robbers who take hostages inside a bank, so one of them can pay for his trans-sexual girlfriend's permanent sex change. There was no way that would have ever been popular, back then (or now) and it wasn't. It sure wasn't the Sting, the Exorcist, or Grease.

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