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Why the death of Hollywood has been greatly exaggerated

Last weekend was, by any account, not a great one for Hollywood. Box office receipts were down across the board, though not unexpectedly. This is traditionally a slow time of the year for cinema attendance in America.

Nobody picks the first weekend of September because they think it’s going to be a huge gross,” CBS Films’ Steven Friedlander told the Los Angeles Times, defending lacklustre results for the opening of the mini-studio’s new romantic drama The Words, starring Bradley “Sexiest Man Alive” Cooper.

But still, it was worse than usual. For the first time since 2008 no title hit the $US10 million mark. Total ticket sales reached $US67 million, the lowest — as countless outlets pointed out — since the second weekend after the 9/11 attacks in 2001. In fact, the most successful feature per screen was Steven Spielberg’s re-released Raiders of the Lost Ark  — 31 years after it opened.

A rash of despairing headlines ensued: “Hollywood’s nightmare weekend at the box office”; “Bad news for film industry as takings drop to record low”; “Hollywood reels after lowest US box-office figures of the decade”; “Worst slump in a decade as Hollywood loses golden touch”. It fed into the end-is-nigh commentary: the declining state of DVD sales and rentals; the failures of big-budget blockbusters like Disney’s John Carter; waning interest in 3D films; and, of course, an oldie but a goodie in how online piracy will send Tinseltown to hell in a hand basket.

Yesterday actor-cum-economic commentator Brad Pitt spoke about the need for new-found austerity, generating international headlines by discussing how superstar actors can no longer command the dosh (let’s say, $US10 million-a-movie) they used to. ”That arithmetic doesn’t really work right now … a lot of the studios have been challenged because of the economic downturn,” he said, citing harsh fiscal backdrops as yet more additions to Hollywood’s litany of woes.

The sobering truth: Hollywood’s business model is in big trouble, the once all-powerful studios are slowing sliding into bankruptcy and punters have every reason to expect the end of the industry as we know it. Except they don’t.

If Hollywood is going so badly, why, then, did Disney — the studio responsible for reportedly cutting gaping wounds into their margins with John Carter — report healthy profits, across all divisions, in the past financial quarter? The Big Mouse chalked up $US1.8 billion in net income, up 31% from the year before. CEO Bob Iger declared: “We had a phenomenal third quarter, delivering the largest quarterly earnings in the history of our company.” In history.

It wasn’t an anomaly. In the same quarter, Time Warner shares went up 15% and Viacom’s rose 8%. During the fiscal year, every one of the six major studios recorded record profits.

Siren-ringing media reports are right about one thing: the game of how to make money at the top end of town has changed. What’s lacking is the detail on what kind of game the studios are now playing. Far from flopping in a financial deathbed, they’ve found other lucrative revenue pools to dip their toes in, and the message is clear: come on in; the water’s fine.

While domestic returns are falling, business overseas is good. Disney’s biggest success this year, The Avengers, collected $US621 million domestically and $US886 million internationally, taking total earnings to over $US1.5 billion. In the first 12 days of its offshore release, the film grossed a staggering $US440 million before it even opened on American shores.

In recent years we’ve seen global release dates for blockbuster movies become par for the course. If The Avengers experiment is anything to go by, expect more American productions to open overseas first.

More than $US84 million of The Avengers’ global intake was earned in China, a new frontier for Hollywood where the thirst for large-scale spectacles drives the brokerage of historically generous deals. In February, China upped the number of foreign films allowed within its borders from 20 to 34 and increased the share of revenue given to American studios from about 13% to 25%. That’s big bucks for Hollywood.

The relationship between US studios and state-run China is becoming increasingly intertwined. Not only is China starting to co-produce Hollywood movies (such as Iron Man 3) to share costs and minimise risk, but it’s also purchasing product placement in studio productions — a sign of how valuable they view the content.

In last year’s blockbuster Transformers: Dark of the Moon, a Chinese scientist in a lift with star Shia LaBeouf sips from a carton of “Shuhua Milk”. One dairy related line of dialogue later (“let me finish my Shuhua Milk”) and it became a catchphrase in China. Shuhua Milk sales, according to the LA Times, rose 12% last year.

While it’s true The Avengers is a convenient example of global success (currently listed by Box Office Mojo as the third most successful worldwide earner of all time, behind Avatar and Titanic), it’s important to remember: a) the list of top earners fluctuates regularly; and b) Hollywood survives not by average results spread across its output but by a small number of titles that do exceptionally well.

Cash cows are also found closer to home. While industry top brass may harp on about the effect online piracy is having on the bottom line, emerging platforms are invariably linked with new licensing fees and archives of old products being dusted off, re-bundled and resold.

Ancillary markets such as pay-per-view and video-on-demand are becoming major new money pits. And, with the relatively new ability for consumers to stream movies online via high-speed connections, growth is expected to generate massive returns. Platforms like video-on-demand also allow studios to maximise profits on smaller titles: last year Black Death, a medieval horror movie starring Sean Bean, and 13 Assassins, a Japanese action epic, grossed around $US4 million a piece in VOD rentals alone.

Hollywood’s experiment with VOD went further with the release of Margin Call, a GFC thriller starring Kevin Spacey and Jeremy Irons, by simultaneously opening the film in cinemas and online. ”This will be a very profitable movie for us due to the low marketing expenses and multiple day-and-date revenue sources,” said Jon Feltheimer, chief executive of Lionsgate, shortly after its  US release last November.

And it was. Margin Call made around US$5 million in cinemas and, available to watch on iTunes for $US7, made that again online. The film is now considered a game-changer.

VOD releases also increase profits by reducing the percentage of earnings studios share with theatrical exhibitors. By how much is uncertain, and will inevitably fluctuate, but The Hollywood Reporter suggests it may be as high as a 70% split. This is significantly more than theatrical splits, which start at around that point then reduce as theatrical seasons taper out.

Theatrical exhibitors are understandably irked about shortened release windows and simultaneous multiplatform distribution. But, said Liongate’s Steve Beeks, “we’ve got to find new ways to get to consumers. The world has moved on.”

And Hollywood is moving with it. The rise of mobile devices and introduction of higher internet speeds produce a greater demand for legal streaming and downloading. Social media platforms are yet to emerge as powerful exhibition outlets, but that time can’t be far away.

In January this year Lionsgate dipped its toes in Zuckerberg’s waters, using the Taylor Lautner action movie Abduction to test a simultaneous Facebook/DVD release strategy. A 48-hour Facebook rental cost US$3.99. Warner Bros. also experimented with The Dark Knight Returns. New media consumers will become increasingly hungry for video content, and rivers of money will flow in from licensing fees and distributor/exhibitor splits.

So don’t believe the hype. Hollywood’s bottom line is: business is good.

7
  • 1
    Rossco from Newcastle
    Posted Friday, 14 September 2012 at 2:09 pm | Permalink

    What does profit mean in Hollywood anyway? Apparently ‘Star Wars: Episode Five; The Empire Strikes Back’ as it’s known colloquially, is still waiting to go into profit and denied the late David Prowse (an element of Darth Vader) any royalties due to him. Then there’s the infamous ‘Coming to America’ case that exposed the dark underbelly of accounting, scriptwriting credits and the wonderful world of percentages at play in La La Land. So I do concurr with the author’s sceptisism toward Brad Pitts comments. Although I do agree that the fees are reaching a new level of obscenity but what’s a star to do if the blockbuster they headline can potentially make Billions now? Such hard decisions. I don’t envy them at all.

    It is heartening to see that Hollywood is catching up with the rest of the world insomuch as using the Internets as a force for good and more importantly, profit. The Facebook experiment I find particularly interesting.

    I can imagine a day soon where one could buy a movie ticket to a new release or perhaps even a rerelease, (why discriminate?) for a discounted price through your Facebook account. When the session you’ve attended is finished, Facebook sends a reminder to your phone and asks for your score, twit or Lengthier review of the movie. As a marketing tool I reckon that would be invaluable. I’d sign up for it, no worries. They’re not already doing it are they? I thought I was being so terribly clever thinking that up.

  • 2
    Rossco from Newcastle
    Posted Friday, 14 September 2012 at 3:04 pm | Permalink

    Apologies for the double up. I’m in holiday in Moree, reading Crikey on my iPad & posting over 3G. It appears that the server had an aneurysm whilst trying to up load.

  • 3
    Scott
    Posted Friday, 14 September 2012 at 3:06 pm | Permalink

    the late David Prowse”

    I’m pretty sure he is still alive.

    But don’t blame the studio for David making a bad deal. You always go for a share of gross profit (ala Sir Alec Guiness), or turnover, not a percentage of the nets . Because depending on how the movie is financed, earnings can be sent back to the studio in the form of interest, distributions or debt repayments which are finance expenses and hence reduce net profit (but not gross profit)

    He got some bad advice I’m afraid.

  • 4
    Rossco from Newcastle
    Posted Saturday, 15 September 2012 at 7:23 pm | Permalink

    Ooh, my bad. I thought he was. Hmm, don’t know who I was thinking of then. Sorry Dave.

  • 5
    Socrates
    Posted Sunday, 16 September 2012 at 12:14 pm | Permalink

    The demand for entertainment hasn’t gone down, nor the profit from making it. What has changed is the means of distribution. The losers from this are obvious: video store and cinema owners, perhaps even television stations. The winners are home theatre makers and internet service providers. That leaves movie studios about square.

  • 6
    Rossco from Newcastle
    Posted Monday, 17 September 2012 at 12:34 pm | Permalink

    I agree Socrates, but I wouldn’t count Cinema owners out yet. I think with Digital projection and high speed broadband they could transform into something new. Already we’re seeing the live transmission of West End Plays from London in Cinemas, small scale so far but I think as word spreads it will grow. I can see community event television becoming popular.

    For instance watching the latest episode of a cult TV show such as True Blood or Boardwalk Empire with an audience of other fans on the Big Screen in High Def. It’s only a matter of time before the Studio’s discover this untapped source of income. It would be money for Jam using Facebook and Twitter to promote it.

    I’ve just come back from a trip through country NSW where I noticed lots of old and beautiful Movie theatres sitting there neglected. If I had the money I’d be buying them up and converting them to Digital with big sound systems for just such events. Something like that in these towns would bring the entire district into town and if events were sponsored by local business’s it could help transform regional Australia.

  • 7
    Scott
    Posted Monday, 17 September 2012 at 1:03 pm | Permalink

    I don’t know Rossco. Seems like a good way to lose a lot of money.

    I think ultimately, the end game for the movie industry is pay per view to home cinema. Electricals are getting cheaper so it’s easy to set up a pretty good system in your house. Once the broadband speed is increased, and the distribution system sorted, I think it will be a straight stream/download from the movie studio (or production house) to your home. Convenience is king. We are going to see it with TV soon (when AppleTV becomes a reality)

    The idea of everyone going to the cinema for an “event” screening (especially in country towns) I just don’t see happening, even now when DVD box sets are available. And you would need numbers to make it profitable…more than would be provided by niche segments like fans of True Blood.

    But I’ve been wrong plenty of times before.

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