So, one of my birthday gifts was a copy of Edward Jay Epstein’s “The Hollywood Economist: The Hidden Financial Reality Behind the Movies.” The book opens with this snippet in the intro.
There was a time around the middle of the twentieth century, when the box office numbers that were reported in newspapers were relevant to the fortunes of Hollywood: studios owned the major theater chains and made virtually all their profits from their theater ticket sales. This was a time before television sets became ubiquitous in American homes, and before movies could be made digital for DVDs and downloads.
Today, Hollywood studios are in a very different business: creating rights that can be licensed, sold, and leveraged over different platforms, including television, DVD, and video games. Box office sales no longer play nearly as important a role. And yet newspapers, as if unable to comprehend the change, continue to breathlessly report these numbers every week, often on their front pages. With few exceptions, this anachronistic ritual is what passes for reporting on the business of Hollywood.
To begin with, these numbers are misleading when used to describe what a film of studio earns. At best, they represent gross income from theater chains’ ticket sales. These chains eventually rebate about 50 percent of the sales to a distributor, which also deducts its outlay for prints and advertising (P&A). In 2007, the most recent year for which the studios have released their budget figures, P&A averaged about $40 million per title–more than was typically received from American theaters for a film in that year. The distributors also deducts a distribution fee, usually between 15 and 33 percent of the total theater receipts. Therefore, no matter how well a movie appears to fare in the box office race reported by the media, it is usually in the red at this point.
So where does the money that sustains Hollywood come from? In 2007, the major studios had combined revenues of $42.3 billion, of which about one-tenth came from American theaters; the rest came from the so-called backend, which includes DVD sales, multi-picture output deals with foreign distributors, pay-TV, and network television licensing.
For a multi-billion dollar industry, it seems strange that only ten percent of the revenue generated would come from audiences, right? But, as I’ve said, audiences can’t save much of anything these days in the entertainment fields. The focus on a building a younger audience doesn’t seem to be the most useful strategy for building a donor base since this demographic has one of the highest levels of unemployment and crippling debt which will surely place the group as a whole in a relatively less affluent class once they approach retirement age. The NFL (currently pulling in about $10 billion last year) revenue from audiences is 20% of total revenue. Large arts organizations like symphonies, operas, and ballets pull in between 30% to 50% of their revenue from audiences.
What happened to the Movie audience? In the section of the book, THE VANISHING BOX OFFICE, Epstein says:
The regular movie audience has been so decimated over the past six decades that the habitual weekly adult moviegoer will soon qualify, if not as an endangered species, as a niche group. In 1948, 65 percent of the population went to a movie house in an average week; in 2008, under 6 percent of the population went to see a movie in an average week. What changed in the interval was that virtually every American family bought a TV set. In 1948, when TV was still a rarity, theaters sold 4.6 billion tickets. By 1958, TV had penetrated most American homes, and theaters sold only 2 billion tickets. (pg. 53)
In response, Hollywood studios
[…] tried to counter television with technology dazzle, including wider screens (CinemaScope), noisier speakers (surround sound), and more visually exciting special effects, but technology did nothing to stem the mass defections. They also tried epic, three hour movies, such as Ben Hur, Lawrence of Arabia, and Dr. Zhivago, that, although they succeeded individually, had little effect on the weekly movie audience. Even the much-heralded fantasy bonanzas of Spielberg and Lucas could not halt the decline. by 1988, ticket sales hovered at 1 billion. (pg. 53-54)
And within the past ten years, ticket sales have hovered between 1 and 2 billion according to the National Arts Index 2013 Report.
So the studios have eventually relied on the opening weekend model to draw in the biggest crowds as quickly as possible. This also requires a different marketing strategy.
The studios, realizing that they could no longer count on habitual moviegoers to fill theaters, devised a new strategy: creating audiences de novo for each movie via paid advertising. (pg. 54)
And this is so much for the audience numbers as much as it is a way to show the venues (Cinemas/Movie Theaters) that a movie should be one they show at their establishment which is little more than a food business.
The Box Office take, or the ranking within the Box Office only matters so much to license the film. Studios with a proven record for enough hits will score the most Movie Theater screens for their films. Obviously this affects what type of movies will be made. Epstein also tells us why the Box Office revenue and rankings are misleading for the business side of the studios.
The only useful thing that the newspaper box office story really provides is bragging rights: Each week, the studio with the top movie can promote it as “Number 1 at the box office.” Newspapers themselves are no uninterested parties in this hype: in 2008, studios spent an average of $3.7 million per title placing ads in newspapers. But the real problem with the numbers ritual isn’t that it is misleading, but that the focus on it distracts attention from the realities that are reshaping and transforming the movie business. Consider, for example, studio output deals. These arrangements, in which pay-TV, cable networks, and foreign distributors contractually agree to buy an entire slate of future movies from a studio, form a crucial part of Hollywood’s cash flow. Indeed, they pay the overhead that allows studios to stay in business.
Which makes sense when the audience only comprises a mere 10% of the total revenue of movies. While 1.28 billion is not a small number by any means (the 2011 figure from the NAI 2013 Report), it’s a far cry from the 4.6 billion of 1948. Interestingly, some of the reasons for this decline of attendance as reported by movie-goers doesn’t seem to be much different than the reasons we’re given for declining attendance in classical music events.
This is changing as well, the licensing and other output deals seem to be happening less (a parallel to “donor fatigue?”) within the past ten years.
The unwinding of output deals, which started to occur much more frequently in about 2004, can doom an entire studio, as happened in 2008 to New Line Cinema, even though it had produced such immense successes as the Lord of the Rings trilogy. Yes, despite their importance, output deals are seldom mentioned in mainstream media. As a result, a large part of Hollywood’s amazing moneymaking machine remains nearly invisible to the public.
One lesson that can be learned here is, the larger the entertainment industry, the less a live audience matters for sustaining it. Another lesson to be learned, the formal structures of all forms of entertainment aren’t all that different from each other and exist on a continuum of differing economic strategies that are dependent more on how big the industry is than a simple calculus of “popularity” or “cultural relevance.”
I’ll probably be coming back to themes from this book in future posts so stay tuned.