| On
The Trail Of Hollywood Gold
by Jonathan V. Last
A survey of the muck soon to be celebrated
at the Academy Awards confirms William Goldman's sad truism:
Every Oscar night you look back and realize that last year
was the worst year in the history of Hollywood.
It is depressing to watch the quality of American cinema
degrade, as if it were some kind of glittery radioactive
isotope. But Edward Jay Epstein provides comfort with "The
Big Picture" (Random House, 375 pages, $24.95),
offering a compelling backstory to the awfulness we see
at the cineplex.
"The Big Picture" is Hollywood's "Moneyball"
-- a groundbreaking work that explains the inner workings
of the game. (Movies in this case, not baseball, although
each could probably learn from the other.) There is, Mr.
Epstein argues, a powerful economic reason that movies aren't
very good anymore: They don't have to be.
"The Big Picture" begins with the birth
of the studio system at the turn of the 20th century, a
world of privileges and profit sources that contrasts strikingly
with the current maze of studios, entertainment conglomerates
and media barons. It is difficult to imagine now, but Hollywood
was once run by a mere handful of men.
They had writers, actors and directors under contract, to
whom they assigned projects based on their own whims. They
churned out a fantastic number of movies -- cheaply -- and
exhibited them in theaters they owned. And the public couldn't
get enough. In 1947, Hollywood sold 4.7 billion movie tickets.
The studios were hugely profitable movie factories.
Out of Favor
Times
have changed. In 1949, invoking the Sherman Anti-Trust Act,
the Justice Department forced the studios to divest themselves
of their theaters. Over the years actors, directors and
other artisans redefined themselves as free agents. Television
came to compete with the movies, as did home video. And
despite a population boom, movie-going fell out of favor.
In 2003, only 1.57 billion tickets were sold, a third the
number 56 years earlier, while the real cost of making movies
increased some 1,600%.
It
wasn't just production costs that exploded. Today the average
movie costs $4.2 million to distribute and nearly $35 million
just to advertise. (The comparable 1947 figures, adjusted
for inflation, were $550,000 and $300,000.) Such peripheral
costs, Mr. Epstein explains, have grown so large that "even
if the studios had somehow managed to obtain all their movies
for free, they would still have lost money on their American
releases."
What happened? Hollywood redefined itself too, Mr. Epstein
argues -- as a clearinghouse for intellectual property,
not a factory for making movies. This new business is at
least as profitable as the old one, but the "product"
on offer is different. To explain, follow Mr. Epstein's
detailed analysis of the movie "Gone in 60 Seconds."
In 2000, "Gone," an action-thriller,
was released to little acclaim and somewhat disappointing
box-office returns. The company that produced it, Touchstone,
was (and is) part of the Disney empire. That year, Disney
touted the global box-office revenue of "Gone"
as $242 million. Not bad. Even if theaters kept $139.8 million
from ticket sales, Disney still took in $102.2 million.
Surely there was a profit in there somewhere?
Not necessarily. Consider the expenses. The physical production
of the movie was $103.3 million. Prints cost $13 million;
insurance, taxes and customs clearance came to almost as
much. The studio spent $42 million for advertising in North
America and a bit more than half of that for the rest of
the globe. On the back end, Disney paid out $12.6 million
in residual fees and figured in $17.2 million for overhead
and $41.8 million for debt service -- for a total negative
cost of $265.3 million, more than double the studio's take
of the box-office receipts.
So how did Disney make money? The answer is in the clearinghouse.
Disney never expected to profit from the theatrical release
of "Gone in 60 Seconds," but it did count
on harnessing a whole river of money -- from the rights
to the intellectual property it had created.
Hide and Seek
By 2002, Buena Vista Home Entertainment International, another
division of Disney, had reaped $198 million in sales and
rentals from "Gone in 60 Seconds" videos
and DVDs. Only $19 million of that sum was credited to the
movie itself, though, thanks to the complicated royalty
system that Hollywood employs. This reduced number is an
important accounting trick since the movie's star, Nicholas
Cage, was contractually entitled to 10% of the video gross.
Indeed, one of the key components of the clearinghouse system
-- boosting studio revenue enormously -- is hiding income
from a movie's (seeming) profit-participants. There is nothing
illegal about it, although the effect is a nasty little
game of hide and seek. One of the virtues of "The
Big Picture" is Mr. Epstein's astonishing access
to numbers that the movie studios go to great lengths to
keep secret, so as not to offend people like Mr. Cage.
In coming years, Disney can expect a steady, if diminished,
stream of income from these "Gone" home-video
sales. But there is more. HBO paid Disney $18.2 million
for the rights to air the movie (of which only $2.7 million
was exposed to parties entitled to residuals). Once HBO's
deal expired, it migrated onto cable's TNT network for another
payout. Disney will continue to collect money from "Gone"
whenever domestic cable or network television shows it.
In a few years, local TV stations will fork over to Disney
still more millions when their window finally opens on purchase
rights. Still later there will be cash from foreign TV markets.
And let's not forget income from product licensing and soundtrack
sales.
The truth is that, even with terrible movies, the studios
have to try hard not to make money. In this way, today's
Hollywood is very much like the studio system of old. The
two business models are so favorable that the quality of
the product is beside the point. The difference, of course,
is that the movies from the studio era were often quite
good.
If "The Big Picture" has a flaw, it is
that Mr. Epstein does not explore the question of why one
era produced better movies than the other. Part of the answer
revolves around the popcorn economy that Mr. Epstein details
so authoritatively. Once the studios divested themselves
of their theaters, theater-owners needed a way to make their
businesses solvent, and concessions were the solution. Today
popcorn sales keep movie theaters afloat. Adolescents are
the primary popcorn consumers and the group most likely
to see a film in its first week of release. These two facts
create pressure for teen-friendly films with intentionally
short shelf-lives. A recipe for junk.
Occasionally Mr. Epstein gets a detail wrong. He reports,
for instance, that the term "blockbuster" comes
from lines forming around the block when in fact Variety
coined it in 1951, likening the box-office success of "Quo
Vadis?" to a World War II aerial bomb. Elsewhere he
overestimates the cost of making theatrical trailers. Some
may approach a million dollars, but the average is about
$300,000.
But
such minor matters do not obscure Mr. Epstein's impressive
achievement. He has produced an insightful work of forensic
accounting and a keen industry analysis, full of surprising
numbers and vivid examples. His candid insider sources perhaps
reveal more than they intended. All the stars in the Hollywood
firmament should read "The Big Picture"
before they negotiate their next contract.
Mr.
Last is online editor of The Weekly Standard.
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