Month: August 2003

Industry brief: Movies I                        

The movie industry as industry is now followed by the general public almost as closely as fans follow the business of professional sports. More and more the daily newspaper entertainment section reads like Variety or Hollywood Reporter, with reports on upcoming projects, financial returns, “bankability” of various stars, and changes in management at the big studios. The weekly film grosses stand beside the Major League Baseball standings and the New York Stock Exchange listings as numbers to keep tabs on. These haven't overshadowed the usual news of Hollywood divorces, love affairs, and drug busts, but they are taking up a bigger part of newspaper gossip columns, television shows (like Entertainment Tonight) and magazines (like Entertainment Weekly), The unending supply of Adam Sandler comedies, gross-out farces, and Schwarzenegger shoot-em-ups pales in comparison with the real melodrama, that of the business behind. the scenes.

The movie industry is like the other oligopolies we have look at. The pace of change is accelerating. New, often hidden, forces are putting pressure on every aspect. The existing oligopoly face a bigger gamble every year. But it is possible to track some of those forces; applying the ideas of shelf life, shelf space and mind space can help define the forces behind most Hollywood headlines.

There are several major trends in the industry that we will cover later.

1. Movies now have three lives: theater, video, broadcast
The shelf life of movies in theatrical releases seems to be getting shorter and shorter. If you want to see movies at the cineplex, you'd better go there in the first or second week, Unless it's a blockbuster, it may not be around by the time you have read the reviews, asked your friends, and arranged for a babysitter. Any theatrical run of over six weeks is unusual.

But this short theatrical shelf life is extended by several afterlives, first as videos to rent or buy (VCR or now DVD), then as TV programs first narrowcast (on pay-per-view, on airplanes, on cable) then broadcast (first on HBO and Cinemax, then on other networks), and, to a growing extent, as downloadables on the Web.. While these after-markets were once incidental to the fiscal health of a movie studio, they now have become a central part of the finance plans of every film. Because of these aftermarkets, all films have now, in theory, an indefinite shelf life. This factor is changing the way movies are made, distributed, and sold.

2. International markets are as important as domestic
Another way of extending shelf life is international release. Increasingly, studios are counting on the U.S, market to simply break even with production costs. They hope to make the real money in the international distribution rights. The global distribution is getting stronger rapidly – with the enormous Asian markets just starting to open up. Over the past decade, more and more cineplexes are being built in more and more countries. The international factor, once just icing on the financial cake; now it fundamental to the planning and making of most Hollywood movies.
As the US overseas movie market expands, the opposite is not happening. If anything, fewer foreign films are shown in the USA than ever, and even fewer have any serious financial success.

3. The blockbuster mentality rules.
The cost of shelf space in the movie industry is so high that there is littleroom for modest hits. In our winner-take-all society, you either a hit or a bomb. Around 500 commercial films are released each year in the United States, 200 of them as major studio releases. The cost of gaining mind space for any one of them is so expensive that small films rarely return the investment – and it's getting worse. On average, only one new film can be a hit each week. That means that 150 of the major studio releases will fall short of hitstatus.

An average major studio Hollywood film costs between $50-75 million to make. It costs between $30-50 million to market. Most films that make less than $100 million dollars within a year from release are failures, and many are. An increasing number of films, like Pearl Harbor (2001) and The Matrix Reloaded (2004), have to make well over $200 million to break even. At that level of risk, though, the payoff can be enormous. The example of Titanic(1999) has wiped out the memory of many expensive bombs.

From a studio's point of view, it's better to swing for the fences than try to get singles and stolen bases, even if you strike out most of the time. The ideal is getting global mindspace, as Titanic did, to drive the after-markets. These have a magnifying effect on the few big winners, making them all the more critical to a studio's fortunes.