Hollywood Remake

Wall Street Journal
Dec ember 29, 2005

by Edward Jay Epstein

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Thinking Outside The Box Office

The continual, almost obsessive, reporting about falling attendance at movie theaters this year so shaped the story about Hollywood that even by August the New York Times could report, "Hollywood's box office slump has hardened into a reality." But is it Hollywood's reality?

Yes, movie attendance in the U.S. was down in 2005, but that is not unusual. In most years since 1948, when 90 million Americans -- two-thirds of the population -- went to the movies in an average week, attendance has declined. And now only about 10% of the population goes to a movie theater in an average week. But don't cry for Hollywood: In 2005, more people than ever watched its products -- though not in movie houses.

The fixation on the movie box-office, which is abetted by the media's treating box-office numbers like some great sporting event with a weekly "champ," obscures the reality that Hollywood's real business is not about making movies any more; it is about creating licensable properties -- including TV programs, cartoons, videos and games -- that can be sold in a multitude of markets.

Of course, Hollywood once was entirely about movies for theaters. Up until the late 1940s, virtually all of the major studios' revenue in America and Canada came from the proceeds of the tickets sold at movie houses, which they either directly owned or controlled through "block booking" contracts. They could largely determine where, when and for how long their films played, without independent and foreign competitors cutting into their box-office harvest. And since they were then the only place in most cities where people could get their diet of motion picture entertainment -- including newsreels and cartoons -- they could count on a huge weekly turnout driven not by national advertising but by habit.

This all ended by 1950. The U.S. government broke up the studios' monopoly over the theaters, forcing them to divest themselves of theaters and abandon block-booking contracts; and the advent of home television ended their monopoly over the audience for motion pictures. Instead of paying to go to movie theaters, a large part of its former audience now chose to watch sports, games shows and movies at home for free. By 1959, theaters had lost over 60% of their audience. By the late 1980s, even though the population had nearly doubled, annual ticket sales had fallen from 4.6 billion in 1948 to just over one billion. Even worse, the studios had to split what was left with independent and foreign filmmakers. To survive, Hollywood had to reinvent itself. How did it do so?

Hollywood is never short on imagination. Instead of relying on habitual moviegoers to fill theaters, it created audiences for each and every different movie released by bombarding potential moviegoers for a particular film with expensive, 30-second ads on national TV, usually seven ads in the week preceding the opening. For this strategy to work, studios needed to target a demographic that predictably clustered around the same TV programs, and that could be motivated to leave the comfort of the home on an opening weekend. They zeroed in on the only people they could reliably lasso: teenagers.

The problem with audience-creation is that, even though studios could succeed in filling theaters on opening night with movies that triggered teenage interest, it often cost more just for advertising and prints than they got back as their share from ticket sales (theater-owners keep about half) Obviously, this would be a formula for bankruptcy -- if the movie business still depended mainly on ticket sales. But with color TV sets in virtually every home, and with less than 2% of Americans going to movie theaters on an average night while over 95% remained home to watch, Hollywood logically followed its audience from the big to the small screen. Underlying reality: In this pursuit, the studios had the good fortune of losing their lawsuit against the VCR. And equally fortunately, the teen audience they recruited also proved to be the primary audience for profitable videos, games and other licensable properties.

In 2005, the ticket sales from theaters will provide less than 15% of the studios' revenues while home entertainment, in the form of free TV, Pay-TV, DVDs and videos provided more than 85%. (See Chart). Movies now serve essentially as launching platforms for licensing rights, much like the runways at haute couture fashion shows. To be sure, they are not the only launching vehicle -- as Jeff Bewkes has brilliantly demonstrated with HBO series such as "The Sopranos" (which may partly explain his becoming president and COO of Time Warner, Inc.); but the theatrical release of movies remain the usual means for sufficiently establishing products in the public's mind so they can succeed in other more profitable markets, such as DVDs, television and toy licensing.

Even in terms of the box office, Hollywood did not fare badly in creating audiences this year. Although U.S. theaters took in 8% less money in the first nine months of 2005 than they did in the same period in 2004, the movies of the major Hollywood studios -- Fox, Sony, Warner Bros., Disney, Paramount and Universal -- taken together, were up, not down. From Jan. 1 to Sept. 30, 2005, the movies of the six majors took in $4.7 billion compared to $4.5 billion in the same period in 2004. They did so by increasing their slice of the total box-office pie from 68% in 2004 to 75% in 2005. (See Chart)

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The losers were the independent studios that specialize in more grown-up movies, such as Lions Gate Entertainment and Newmarket Films, and the two so-called "studioless" studios, DreamWorks SKG and MGM. They suffered 40% box-office declines in 2005 and have now both sold themselves to major studios and their financial partners -- MGM to Sony, DreamWorks SKG to Paramount -- while Lions Gate Entertainment has dropped out of the business of opening movies in wide releases simultaneously on 3,000 or more screens.

If the Hollywood studios now have a virtual monopoly on such wide releases, it is not an accident. The Big Six can prudently afford to make the huge investment in audience-creation necessary to open a movie on thousands of screens because they, unlike wannabe studios, have the muscle to earn it back by leveraging their products across many licensing platforms -- including those, such as the TV networks, that belong to their corporate parents. The Hollywood studios, with their repertory of successful amusement-park franchises, including "Star Wars," "Spider-Man," "Batman" and "Pirates of the Caribbean," and the proliferation of new platforms, can look forward in 2006 to a very happy new year.

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