Hollywood's New Economics

by Edward Jay Epstein

The screenwriter William Goldman famously explained Hollywood this way: nobody knows anything. One reason that the workings of Hollywood studios seem inexplicable to the public is the continual, almost obsessive, focus on the weekly box office race. The media, by treating the box-office grosses released on Sunday afternoons as if they were the results of a weekly horse race, only furthers the misunderstanding about how modern Hollywood makes its money. Once upon a time, as late as 1948, the tickets bought at the box-office accounted for virtually all of Hollywood's profits. But nowadays, the domestic box-office is only a small, and often misleading, part of Hollywood’s big picture.

First, these reported " box office grosses" are not actually what the studios take in from their movies. They are the ticket sales which go to the movie houses. The movie houses usually keep about half for themselves and remit the balance to distributors (which may or may not be an arm of the studio). The distributor then deducts from the its out-of pocket cash expenses, including prints and advertising (called “P&A,”). These deductions often wipe out most, if not all, of what remains. Studios spent on average $35.9 million just for P &A on each of their titles in 2007. (Even their so-called “indie” divisions, such as Miramax, Sony Classics, and Fox Searchlight, spent an average of $25.7 million on P & A.) As a result, the studios spent more on P&A to lure in an audience into American theaters for an average film then they got back from their share of the box-office. And that does not take into account the cost of making a movie, which for a studio averaged $70.8 million in 2007 (Their Indie divisions spent only $49.5 per film). So while a "boffo" box-office gross might look good in a Variety headline, it might also signify a boffo loss.
Second, and far most important, it diverts from the reality that the domestic box-office provides only a minute part of the studios’ revenues/ (See Table 1).  In 2007, according to the secret MPAA studio numbers, only about 20 percent of the the studios' revenue came from movie theaters, and over half of that came from foreign theaters. In 2007, worldwide TV, Pay TV, DVDs, and other licensing provided 80% of these revenues.

     Movies now serve as launching platforms for creating properties that make their real profit in the so-called “back end” , much like the runways at haute couture fashion shows. Because of the crucial importance of these post-theatrical rights, Hollywood's profit margins depend upon optimally leveraging these properties across all the platforms they can find, such as Pay Per View, DVDs, Video-On-Demand, and TV movies. There is (no longer) a movie industry, there is an entertainment industry.


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