The Magical World of Disney (and 5 others)

Depending on who you believe, the business side of making movies is either heading into, or already waist-deep in the shitter. But didn't Avatar just gross $5 trillion smackaroos, you ask? Well yes, but in the zero-sum game of theatrical seat sales, Avatar's gain was 500 other film's loss, because the 2009 Hollywood Cream pie is still roughly the same size. Jimbo Cameron and 20th Century Fox just got a gigantic piece of it last year. Things are not rosy in the land of make-believe and Lamborghinis because individually and collectively, the big studios that rule Hollywood these days have painted themselves into a corner and they don't have many options - except to carry on down the Avatar path. To figure out how this came to be , you need to dig into the way in which studios operate these days.

Sometime during the last 20 years, the weekend box office grosses that we read and hear about on Monday morning turned into a news item. Even the most stunned of the humans, drones with $700 unpaid Rogers bills and new smart phones they can't afford, can tell you, to the dollar, what How to Train Your Dragon grossed yesterday ($4,803,028, btw). In the not-so-old days (say, circa-1990), box office grosses might have been mentioned at the end of the year in conjunction with some breakout blockbuster, but what a particular film grossed on a particular weekend went unreported because at the end of the day, it doesn't mean anything.

The seemingly huge takes reported on opening weekends are wildly misleading, as the cost of making, distributing and showing new movies almost always far exceeds what they earn during their theatrical runs. Strange as it might seem to the old studio honchos, theatres stopped being the place where movies made money years, if not decades ago. In 1947, 4.7 billion (yes, billion) movie tickets were sold in America. 100% of the money a studio earned from it's film properties came from the tickets sold at the theatre. The average film cost just $550,000 to make and distribute and $300,000 to market (expressed in today's dollars, before you ask).

If we slide forward to 2010, the U.S. population has doubled and yet the tickets sold last year totaled fewer than 1.6 billion. The average movie now costs $4.2 million to make and an astonishing $35 million to market. So in real terms (and expressed in today's adjusted dollars), the average movie now costs 8 times as much to make and 116(!) times as much to market as it did 60 years ago. Ticket sales are a quarter of what they were, even though the population is twice as large. Not surprisingly, ticket sales now account for a mere 18% of the studios' average world wide revenues. So where does the other 82% come from?

This is where it starts to get interesting. The lion's share of a film's revenue has come in recent years from licensing their films for various forms of home viewing. The term the studios' use is “intellectual properties” and it includes DVD's, broadcast, cable fees, and selling spin-offs like dolls, video games, magazines and other assets mined from the film. In recent decades, this cash-cow has generated most of the revenue realized by the companies who make films. The former Hollywood dream factory (the original Hollywood studios known as The Big 7 - MGM, RKO, Paramount, Columbia, Fox, Universal and Warner Bros) are long gone having been replaced by a new Big Six (Time Warner, Viacom, Fox, Sony, NBC Universal and Disney). At the risk of sounding a tad paranoid, the reach of this new quasi-conglomerate-circle-jerk of global entertainment companies is downright creepy. Collectively, they own all 6 American broadcast networks and around 80 cable networks, control 96% of the product that reaches the prime time TV audience, own every major and most “independent” U.S. film studios, own 90% of the video game market, many of the continent's cell phone and internet networks and control nearly every consumer publication and most of the major internet entertainment websites. In short, they are big brother and they control everything you can think of in the entertainment world. Movies earn a very, very small percentage of their total revenues but remain their principle source of prestige, which is why they still make them.

The main task of today's studio is to collect fees for the use of the “intellectual properties” they control in one form or another and then to allocate those fees among the parties (including themselves) who create, develop, market, and finance the properties. It is now essentially a service organization, a dream clearinghouse for lack of a better term. As clearinghouses, they are very different creatures from their predecessors, and this difference is as apparent from looking at their financial reporting as it is from looking at their products. They produce two kinds of product these days – blockbuster/event/franchise pictures, where they make their money and prestige pictures (primarily though their subsidiaries), where they earn their bragging rights and awards. They own the marketing companies that get paid to promote the films they produce, which in part explains why the cost to market a movie has risen by 116,000% over the past 60 year. They get that money too, but they don't have to share it with anyone else.

The first product category - blockbuster/event/franchises – more often than not, make money. Breakout hits can earn huge returns because they're aimed at the children, teenagers and increasingly-childlike “adults” who buy most of the spin-off products generated from them. The first Harry Potter made a respectable $300 plus million at the theatres, but netted $1.2 billion after all the “intellectual properties” were properly exploited. DVD sales alone accounted for over $430 million in bottom line revenue. If you ever wonder why this year's average film is slightly worse than last year's, look no further than here. The studios make their bread and butter producing increasingly-stupid, lowest-common-denominator product for the masses to consume. The stories are very nearly identical, increasingly relying on an orgy of CGI, dull whimp-rises-up-and-defeats-evil plot retreads, the same music, look and style and the same fantasy happy endings. The spin-off potential rules supreme and the money has rolled in using this formula for years now.

The second product category (which could essentially by referred to as “art” films) typically lose big sums of money for the studios that produce them. It's actually rather astonishing that so many of these pictures get made because as profit centres, they lower every studios' bottom line. The Big Six eat these losses and underwrite “art” films because their executives seek, along with strictly commercial projects and Bentleys, films that are likely to attract the sort of actors, directors, awards and media response that will help them maintain their standing in the community. As obvious and persuasive as the event/blockbuster formula is from a cash standpoint, it doesn't satisfy the exec's appetite for prestige and recognition. Vanity Fair indeed.

But all that is changing. The economics and trick accounting that have played such a huge part in generating lucrative returns in recent decades is threatened by several fundamental market changes playing out in today's market. The audience for their product has fragmented across an increasingly-crowded entertainment field and even though Avatar drew record numbers to the theatres in 2009/2010, many projects anticipated to gross big numbers, didn't. The biggest single contributor to the slide in studio revenue however, has been the collapse of DVD sales in the past two years. In the middle of the recent economic debacle, consumers are simply unable (or unwilling) to afford the cost of purchasing endless home video editions and a growing number of their biggest target audience - teenagers and young adults - have turned to downloading. Problem? Well, yes and no. With downloading comes massive revenue from internet connection fees and cable companies reap huge returns from downloads too. The wider the bandwidth required, the more it costs and guess who owns the cable companies? That's right....the Big 6. Coming and going, the returns, either from legitimate or “illegal” means continue to flow back to the same studios that produced the product in the first place. They're like the mob.

The downside, the painting themselves into a corner part, boils down to this: As the studios' haven't needed to produce much in the way of decent films (because the economic leverage they've had allowed the extraction huge returns from mediocre blockbuster product anyways), they've forgotten how to make good movies. The old studio system made their share of dogs too, but more often than not, much of what they produced was remarkably good. They had to be because the film's theatrical showing was the only source of potential revenue they had at their disposal. These days, it becomes more and more difficult (and crazy-expensive) to produce bigger and bigger pictures (productions designed to give the “intellectual properties” real legs as future revenue streams) for a declining market. This decline is directly related to the slow downward quality trend, which leads to reduced audiences and reduced profits. As their bottom lines continue to drop, it's likely that we'll start to see the number of "prestige pictures" studios are willing to bankroll drop as well. It looks entirely possible that studios will be forced to move most, if not all of their attention to producing increasingly fewer (but far larger) event productions because it's the only real source of revenue they have at their disposal. That's the Avatar effect. As depressing as that may sound, I think that's what the tea leaves are saying and it doesn't bode well for American film making over the next few years. The business of making Hollywood films is in a death spiral because the commodity at the heart of the industry matters less and less as time marches on. The “product” is turning into an advertising vehicle for a process that exploits and draws it's profits from what surrounds the actual work and not the work itself.

Fans of cinema are facing some lean years ahead and will increasingly have to rely on foreign fare underwritten by governments seeking cultural currency and intellectual protection from the dozy Hollywood films set to invade their theatres next year and the year after that. Get used to reading subtitles kids, because this summer's Prince of Persia just isn't going to stoke your film passion much. I'm girding myself for exactly one comment from Joe on this tome, so not to worry. I was going to Twitter the rest of you until I learned I could only use 144 characters, or something like that. It would have read.....

“Depending on who you believe, the business side of making movies is either heading into, or already waist-deep in the shitter. But didn't Avatar”
 
Sporgey