The Economist
Hollywood
Split screens
Feb 23rd 2013 From the print edition
IN “ARGO”, a thriller set in 1979, a CIA agent played by Ben Affleck seeks the help of sharp-tongued Hollywood executives, and
pretends to make a science-fiction film, in order to enter Iran and
smuggle out six American diplomats who have been hiding in the Canadian
embassy in Tehran. In the film, Hollywood helps liberate the trapped
Americans. In real life, some are wondering whether Hollywood is the one
in need of rescue. “Schizophrenic” is how one studio boss describes the
state of Tinseltown.
The economics of the film industry are changing. Profits are down,
even though Hollywood is making splashier films for new, fast-growing
markets. Meanwhile, television, once the unglamorous sister, is enjoying
record earnings and unprecedented critical acclaim. As a symbol of
Tinseltown’s shifting power, Seth MacFarlane, a comedian best known for
creating the TV series “Family Guy”, is hosting the Oscars on February
24th.
Hollywood executives have long been
paranoid and insecure. Now they have cause to be. “The business model
within film is broken,” says Amir Malin of Qualia Capital, a
private-equity firm. Between 2007 and 2011, pre-tax profits of the five
studios controlled by large media conglomerates (Disney, Universal,
Paramount, Twentieth Century Fox and Warner Bros) fell by around 40%,
says Benjamin Swinburne of Morgan Stanley. He reckons the studios
account for less than 10% of their parent companies’ profits today, and
by 2020 their share will decline to only around 5%. That is because the
“big six” studios (the other is Sony Pictures, owned by the eponymous
electronics maker) are growing more slowly than TV. In 2012 Time Warner
grossed $12 billion from film, up 20% from 2002. That compares with a
more than 84% rise in the company’s TV-network revenues during the
period, to $14.2 billion.
Film and TV are very different businesses, though studios like Warner
Bros and Fox do both. TV is relatively stable and currently lucrative.
TV networks earn money from advertising and from the fees that cable and
satellite operators pay to carry their programmes. These fees amount to
some $32 billion a year in America, and are growing by about 7%
annually. People love watching TV, and, per hour, it is one of the
cheapest forms of entertainment.
In contrast, film revenues are volatile. Attendance swings like the
moods of Claire Danes’s bipolar character, Carrie Mathison, in the TV
show “Homeland”. In 2011 American cinemas sold 1.28 billion tickets, the
smallest number since 1995. Last year, ticket sales rose back to 1.36
billion and box-office revenues to a record $10.8 billion, thanks to
blockbusters like “The Avengers”. But film-going in America is not a
growth business, especially now that people have so many media to
distract them at home. The share of Americans who attend a cinema at
least once a month declined from 30% in 2000 to 10% in 2011. Analysts
expect revenue from American cinemas to be flat for the foreseeable
future. Even people in Hollywood admit that America is a “mature” film
market. That is no compliment in a town where ageing puts you out of
work.
Hollywood’s movie studios are confronting three long-term problems:
less lucrative home-entertainment divisions, the rising cost of making
films and the terms they get in fast-growing new markets.
Although a movie’s box-office performance is usually what catches
headlines, a studio depends on how that film performs later, when it is
sold or rented to customers to watch at home. DVD sales peaked in 2004.
Since then the sale of movies as VHS tapes, DVDs and Blu-ray discs (ie
not downloads) has fallen around 36%, according to IHS Screen Digest.
Rental kiosks, like Redbox, which offer cheap disc rentals, and
video-streaming services, like Netflix, have exploded in popularity, but
are not as lucrative as outright sales. “People are still watching the
same amount of movies that they did a few years ago,” says Todd Juenger
of Sanford C. Bernstein, a research firm. “They’re just spending $6
billion less a year to do it.”
Blockbusted?
Meanwhile, costs are rising. Everyone had expected technology to make
it cheaper to produce films, but the opposite has happened, says
Michael Lynton, the boss of Sony Pictures. A move from analogue to
digital film enabled perfectionist directors to shoot more takes and
touch them up afterward, using up expensive production and editing time.
Studios have also started to make more “tent pole” films: big releases
that can support the bottom line like a pole holds up a tent. These
typically rely on expensive special effects, rather than compelling
scripts, to attract a global audience. They often cost $200m to make and
another $50m-100m to market.
When costly movies flop, the losses are scary. Disney took a $160m
write-off after the failure of a single one, “John Carter”, a confusing
space adventure. Studios used to be able to sell tickets and DVDs even
for duds. Now social networks and fan sites ensure that bad reviews
spread quickly, sinking a film’s reputation faster than a director can
shout “cut”.
Hollywood executives have been trying to roll out the red carpet to
emerging markets, where more middle-class movie-goers are being minted
every day. One boss of a film-production company calls the international
box office “the lifeboat on the Titanic”. Box-office revenues outside
America are growing two and a half times as fast as they are
domestically. China, the heartthrob of every studio executive, has
overtaken Japan to become the world’s second-largest movie market.
Studios’ business in China is “twice the size of what it was a year or
two ago”, says Mr Lynton of Sony Pictures.
But even though studios are selling more tickets in emerging markets
like Russia and China, they are taking home less money for their hits.
In America the big studios keep around half of box-office receipts. In
China Hollywood studios keep only a quarter. Moreover, no more than 34
foreign films may be released in China each year. (Last year, the big
six studios released 134 films in total.) These countries also generate
puny home-entertainment revenues, and this will not change for years. To
compete with pirates in Russia one studio starts selling DVDs only a
month after a movie’s release.
The hunger games
Squeezed between rising costs and falling revenues, the big studios
have responded by trying to make more films they think will be hits:
usually sequels, prequels, or anything featuring characters with name
recognition. But, as William Goldman, a script writer, once wrote,
“nobody knows anything”—ie, hits can’t be predicted. Independent
filmmakers can still make money on surprise hits but these have limited
markets abroad: American dramas and comedies tend not to perform as well
overseas as cartoon and action flicks.
Between 2006 and 2012, the six big studios also cut the number of
films they made by 14-54%, according to Nomura. And they started to pay
actors and directors far less. Several years ago a big-name actor might
receive $20m for a film, and be offered three every 18 months. Today he
or she might receive $10m, and get cast in only one every 18 months.
Some studios have also started to use first-time directors, because they
cost less and it is easier to control their expenses. Talent agencies
have felt the pain. Two big ones, William Morris and Endeavor, merged in
2009. “It’s taken time for people to understand that there’s less to go
around,” says Brad Grey, the boss of Paramount. “Not only can we not
pay the same amount to all the players, we can’t do the same number of
projects.”
Television has taken up some of the slack. Budgets for the flashiest
shows have risen: some episodes now cost $5m-6m an hour. That is much
less than a feature film, but double the cost of many network shows.
Scenes in HBO’s “Boardwalk Empire” and “Game of Thrones” are as
spectacular as any movie. Film stars like Dustin Hoffman and Jeff
Daniels have gone over to TV because networks are throwing money at
shows and giving actors and directors more creative licence. The
difference in quality between television and film is much smaller than
it used to be.
Executives have changed their tune about whether the digital
companies that have muscled into Hollywood, such as Netflix, are demons
or diamond-mines. “Netflix has been the best thing to happen to
Hollywood in a long time,” says Chris Silbermann of ICM Partners, a
talent agency. That is because it and other streaming services, such as
Amazon’s Prime, are paying billions for the right to stream studios’
content to subscribers online. They are competing for rights with
premium-cable channels, such as HBO and Showtime; this is probably
pushing up prices. Netflix spent an estimated $4.8 billion buying
streaming content in 2011-12. Studio bosses hope these services will
expand globally.
But Netflix and other firms are changing the home-entertainment
business profoundly—and studios are scrambling to keep up. Last year was
the first in years that home-entertainment revenues did not decline
(they were about flat, see chart). Now studios want to increase them.
Their best bet is to beef up digital sales, which offer fat margins.
Several are experimenting with “windowing” (making films available for a
certain time in each format), and are releasing digital downloads weeks
before films are available on DVD.
According to Mike Dunn of Fox, by 2015 Americans will have 861m
internet-connected devices, such as games consoles, tablets, smartphones
and laptops, up from 560m in 2012. That translates into every American
owning 2.7 devices. Studios think they can make owning movies attractive
again, if it is easier to watch them on all these gadgets. The big
studios (with the exception of Disney) have got together for an
initiative called “UltraViolet”, which allows people to store the rights
to watch movies they buy in the cloud. But even boosters of the plan
admit consumer behaviour has changed. In the future, more people may
prefer to rent, not buy.
You want me to work as a…film executive?
So some want studios to go further and get rid of the theatrical
window (when films are exclusively in cinemas) altogether. The idea is
to let consumers watch movies at home for a higher price rather than
trek to the cinema. Predictably, cinemas are not enthusiastic. Nor are
most studios. “Movies are just too expensive for us to collapse the
windows and effectively eliminate a separate source of revenue,” says
Alan Horn, the head of Disney’s studio.
But some are flirting with it. Last year Lionsgate, an independent
studio and distribution company, made “Arbitrage”, a thriller about a
fiendish financier, available in theatres and on “video-on-demand” at
the same time. Michael Burns, Lionsgate’s chairman, reckons it earned
three times as much as it would have done otherwise, because it “found
two different audiences”. But if one big studio did this, cinemas could
fight back and refuse to show that studio’s movies. Few want to risk it.
Poverty is awful. Have you seen “Les Misérables”?
