The Hollywood Economist (14 page)

When Hollywood movies fail to find audiences in America, it is often claimed that these movies redeem their losses overseas. The assumption here is
that the box office receipts abroad are pure gravy for the movie studios. For example, the usually financially-savvy
Wall Street Journal
reported on November 19, 2004, that three notable “duds” in America—
Troy, The Terminal
, and
King Arthur
—“ended up turning handsome profits” because “in each case, box office receipts from outside the US far outweighed domestic returns.” It then cited impressive sounding numbers:
Troy
“made” $363 million internationally;
The Terminal
, $96.3 million internationally; and
King Arthur
, $149.8 million abroad—as if these receipts represented their salvation.

THE RISE OF THE HOME ENTERTAINMENT
ECONOMY
Worldwide MPAA Studio Receipts
(Inflation-corrected, 2007 US Dollars)
Billions of dollars
Inflation-Adjusted in 2003 Dollars

In reality, however, these impressive-sounding receipts represented the foreign theaters’ revenue, not the studios’ share of them. In fact, the studios get an even smaller share of the foreign than of the American box office. In 2007, the studios’ share averaged about 40 percent of ticket sales. And from those revenues, studios have to pay for foreign advertising, prints, taxes, insurance, translations, etc. Once those expenses are deducted, the studios are lucky to wind up with 15 percent of what is reported as the foreign gross.

Consider, Disney’s
Gone in 60 Seconds
. Its reported “foreign gross” was $129,477,395. Of that sum, Disney got $55,979.966, of which it paid out $37,986,053 in expenses.

They included:

After paying these expenses, Disney was left with just $17,993,913—a far cry from the reported $129,477,395 “gross.” And the film is still over $153 million in the red. So while the foreign box office helps, it does not necessarily make a movie profitable.

The numbers—or at least the secret studio revenue numbers in the May 2008
All Media Revenue Report—
tell the story. As late as 1980, movie theaters provided the studios with 55 percent of their total revenues; in 2007, movie theaters provided only 20 percent of their total revenue (over half of which
came from overseas). The other 80 percent now came from the ubiquitous couch potato who was viewing his movies at home via DVDs, Blu-rays, pay-per-view, a digital recorder, cable channels, or even network television. A studio’s task in this new environment, as Sony Chairman Howard Stringer explained to me, “is to optimally leverage our product across all these [new] platforms.” The way studios achieve this “optimal leverage” is to give each of these platforms a discrete time frame, or window in which it could exploit the home audience.

A brief history is in order. Since the 1980s, the studios have managed their revenue by employing a system of “windows” to release their products to different markets. First, movies play in theaters, then, six months later, the video window opens, followed by the opening of the pay-TV and then free television window.

Then at the turn of the millennium the prospect of mass sales of DVDs in retail stores began opening cracks in the entire system. Warner Bros. led the way. To win critical shelf space in Wal-Marts, they needed to release their summer blockbusters such as
Harry Potter
and
Batman
on DVD during the hottest sales periods, Thanksgiving to Christmas, instead of waiting for an artificial window to open up later. So they shortened their
window. Other studios followed suit with a vengeance, shrinking the window to four, or in some cases even three, months. Then thanks to the Internet, studios began to announce an upcoming DVD while the movie was still playing in theaters. As a top studio executive explained to me, “It was a voluntary decision made for purely financial reasons by the major players … to satisfy quarterly profit goals, nothing more, nothing less.” To avoid losing audiences, multiplex chains, which need to maximize their popcorn sales to stay in business, cut the run of such movies. The consequence was a spiral that fed on itself: the shorter the run, the less money from the box office. This decrease, in turn, further increased pressure from the young Turks in the studios’s home-entertainment divisions to further collapse the window. The main resistance to this change came from the old-guard studio executives who fear that undercutting the movie-theater business will—even if it improves DVD sales—unravel the very foundations of Hollywood. They argued that the theatrical platform, to which most of the PR hoopla, magazine covers, TV talk shows, and the rest of the celebrity-worshiping culture is geared, is crucial to generate worldwide DVD sales.

Amidst this battle to devise a strategy for the DVD window, the entire window system began
to disintegrate as digital downloading and other new forms of delivery threatened to make irrelevant the artificial boundaries between pay-TV, network television and cable television. The $64 billion question for the studios is now: Does any barrier, no less a fragile window, make sense in the quest for the couch potato in an increasingly digital age?

In Hollywood, originality is anything but a virtue. Paramount rejected a recent project that had attached stars, an approved script, and a bankable director by telling the producer: “It’s a terrific idea, too bad it has not been made into a movie already or we could have done the remake.” This response, alas, is not untypical. Studios today, as a former executive explained, tend to green-light four types of movies for wide openings: remakes (such as
King Kong)
, sequels (such as
Star Wars: Episode III)
, television spin-offs (such as
Mission: Impossible)
, or video game extensions (such as
Lara Croft: Tomb Raider)
.

If Hollywood is originality-challenged, it is not because studio executives find particular joy in mindlessly imitating bygone successes, or lack
imagination. It is because they must take into account the underlying reality of today’s entertainment economy. In the prior system (1928-1950) each studio, was identified with a particular genre of movies: MGM (musicals and romantic comedies); Paramount (historical epics); Warner Bros. (gangster stories); 20th Century Fox (social dramas); Universal (horror movies); Disney (cartoons), and just the mention of a studio star like Clark Gable or Carole Lombard on a marquee was enough to guarantee a full house. To this end, a studio could rely on a vast habitual herd of moviegoers, to go to the movies in an average week. Most of these people went to see not just a new movie—the main attraction—but also a program of weekly entertainment that included newsreels, a slapstick short, a cliffhanger serial, a “B” feature, such as a Western, and needed no national advertising to prod it. That was before TV provided an alternative source of entertainment.

Today is a different story. The studio names mean little, if anything at all, to audiences. Nor can the weekly audience, which has shrunk to less than 10 percent of the population, be relied on to show up for any particular movie. Studios must therefore create audiences from scratch for each and
every film. For the studios, “audience creation” has become just as important a creative product as the film itself.

These multiplex owners know that the six major studios can supply not only a movie, but the publicity campaign capable of driving a herd of moviegoers from their homes to the theater on an opening weekend. The studios have this capacity because, unlike independent film producers, they control when, where, and how the movie will be released, starting from the day it goes into production. With this control, the studios can shape the movie to fit the requisites of the marketing campaign, fusing both product and publicity, like Siamese twins, into a single entity. This carefully calibrated movie product can then be used to recruit multimillion-dollar merchandising tie-ins, such as with McDonald’s. The studios can also insert “teasers” in the coming-attraction reels (which they control) to build audience awareness. Finally, the studios have the resources to commit up to $50 million in prerelease advertising on a single movie.

The marketing campaign has become crucial for theater owners because the names of big stars can no longer be relied on to draw a large audience unless it is incorporated into a studio-sized marketing
campaign. Consider two consecutive romantic comedies with Julia Roberts, one of the highest-paid actresses; one an independent release, the other a studio release. The first,
Everyone Says I Love You
, released by Miramax, brought in $132,000 on its opening weekend. The second,
My Best Friend’s Wedding
, released by Sony, brought in $21.7 million in its opening weekend. Both films had the same star actress, same genre, same romantic twist, but one film drew 150 times as many people to theaters as the other. Next, consider two consecutive movies starring Mel Gibson. The first,
What Women Want
, was released by Paramount and brought in $33.6 million in its opening weekend, while the second,
Million Dollar Hotel
, released three months later by Lion’s Gate, brought in $29,483. A thousand times as many people went to see the opening of the studio product, although both starred Gibson. Even if Roberts’
Everyone Says I Love You
and Gibson’s
Million Dollar Hotel
had been vastly superior movies to their studio counterparts (and I believe they were), the results would have been the same. These films played in only a handful of theaters, while
My Best Friend’s Wedding
opened on 2,134 screens and
What Women Want
opened on 3,013 screens. For the independent films to have opened “wide” as their studio counterparts did,
the distributors would have had to convince the theater chains that they had the wherewithal to provide the kind of massive marketing campaign that it takes to fill 2,000 theaters with popcorn-eating audiences—a next-to-impossible undertaking.

But, unlike its movies, the ending is not a happy one for originality. Since the publicity campaigns for these blockbusters have proven effective in the popcorn economy, studios recycle their elements into endless sequels, such as those for
Spider-Man, Pirates of the Caribbean, Shrek
, and
Mission Impossible
, which then become the studios’ franchises on which they earn almost all their profits. That is their unoriginal sin and, alas, salvation in the new system.

The momentous shift from theaters to homes proceeded from a series of decisions made not in Hollywood or New York, but in Tokyo and Osaka.

This reinvention of the film business began in the 1970s with the engineering by Sony and Matsushita of an affordable videocassette recorder. Through a process of ingenious compromises, Sony made its Betamax small enough to fit on top of a TV set and foolproof enough to be operated
by a child. The Hollywood studios led by Universal fought for seven years in the courts to prevent it from reaching the market.

If they had prevailed over Sony, the video rental market may never have developed, but, fortunately for the studios, they lost their case in the Supreme Court in 1984. (It was a bittersweet victory for Sony who, in the interim, lost the format war to the even more user-friendly VHS format developed by Matsushita.)

The VCR soon became a ubiquitous household appliance, video stores became a part of the urban landscape and the newfound flow of money from video rentals proved to be financial salvation for the very studios that had so bitterly fought the new technology. As a consequence, in deciding what films to make, studios approved projects that had greater potential for huge video rentals. These proved to be special-effects laden disaster and fantasy films that appealed to children and teenagers. Films that did not fit the requisites of video buyers were given a lower priority and, as it turned out, these included dramas, comedies and political exposés intended for an older, more diverse, and less predictable audience.

Next, in the mid-1990s, Toshiba and Sony changed the Hollywood equation even more radically by substituting a digital platform, the “DVD”
for the videocassette. As with the VCR, this digital future was resisted by most of the Hollywood studios who were concerned that it might kill the video business that had become their golden goose. But now Sony, which owned the Columbia Tristar studio, and Toshiba, which was a part owner (and strategic partner) of the Warner Bros. studio, had marshaled enough power in Hollywood to ensure that enough titles would be available for the DVD launch. The combined libraries of these two studios included over 24,000 titles. So, in August 1995, in a conference in Hawaii, Sony and Toshiba (and all the other Japanese manufacturers) agreed on a single format.