"Hollywood has long been seen as a place of wonder but lately, it may feel like every box office smash is a sequel or even a sequel of a sequel. The movie business is changing and here with a critical look at the evolving industry is veteran movie producer Lynda Obst. She’s the author of the new book “Sleepless in Hollywood.” "
" Excerpted from “Sleepless in Hollywood.”
Let me give you the simplest math, he replied. The simple, simple, simple math.Good, I thought. Because my friends and I are not so great at math. I can guesstimate the budget of a big movie to within a hundred thousand dollars by reading the script, but I cant add the columns therein.
The movie business, Peter said, the historical studio business, if you put all the studios together, runs at about a ten percent profit margin. For every billion dollars in revenue, they make a hundred million dollars in profits. Thats the business, right?
I nodded, the good student, excited that someone was finally going to explain this to me.
The DVD business represented fifty percent of their profits, he went on. Fifty percent. The decline of that business means their entire profit could come down between forty and fifty percent for new movies.
For those of you like me who are not good at math, let me make Peters statement even simpler. If a studios margin of profit was only 10 percent in the Old Abnormal, now with the collapsing DVD market that profit margin was hovering around 6 percent. The loss of profit on those little silver discs had nearly halved our profit margin.
This was, literally, a Great Contraction. Something drastic had happened to our industry, and this was it. Surely there were other factors: Young males were disappearing into video games; there were hundreds of home entertainment choices available for nesting families; the Net. But slicing a huge chunk of reliable profits right out of the bottom line forever?
This was mind-boggling to me, and Ive been in the business for thirty years. Peter continued as I absorbed the depths and roots of what I was starting to think of as the Great Contraction. Which means if nothing else changed, they would all be losing money. Thats how serious the DVD downturn is. At best, it could cut their profit in half for new movies.
Id never heard it put so starkly; Id only seen the bloody results of the starkness. The epic Writers Guild strike of 1988 was about the writers trying to get a piece of home viewing profits. It shut down the town for eight months, and estimates of what it cost the Los Angeles economy run between $500 million and $1 billion. They held out as long as they could, until all parties had bled out as if theyd been struck by Ebola. And still the writers got no piece of those golden discs. Then the writers struck again in 20078 for a piece of the Internet frontier, and won not much more than they did after the last awful strike, and we all watched its terrible and unintended aftermath play out during the recession and in the subsequent suspension of writers and producers deals.
I think the two driving forces [of what youre calling the Great Contraction] were the recession and the transition of the DVD market, Peter said. The 2008 writers strike added a little gasoline to the fire. Well, at least my writer friends would be relieved to know that Peter didnt think it was totally their fault, as some in town were fond of intimating.
He went on to say, It was partially driven by the recession, but I think it was more driven by technology.
There it was. Technology had destroyed the DVD. When Peter referred to the transition of the DVD market, and technology destroying the DVD, he was talking about the implications of the fact that our movies were now proliferating for freenot just on the streets of Beijing and Hong Kong and Rio. And even legitimate users, as Peter pointed out, who would never pirate, were going for $3 or $4 video-on-demand (VOD) rentals instead of $15 DVD purchases.
When did the collapse begin?
The bad news started in 2008, he said. Bad 2009. Bad 2010. Bad 2011.
It was as if he were scolding those years. They were bad, very bad. I wouldnt want to be those years.
The international market will still grow, he said, but the DVD sell-through business is not coming back again. Consumers will buy their movies on Netflix, iTunes, Amazon et al. before they will purchase a DVD. What had been our profit margin has gone the way of the old media.
It hit me like a rock in the face. The loss of DVDs for our business had created a desperate need for a new area of growth. This was why the international market has become so important a factor in creative decisions, like casting and what movies the studios make.
We sat in mournful silence for a second before I realized that Peter probably had to take a call from China and I should go home and take a Xanax.
But then Peter said the most amazing thing. A P&L, if youre not a numbers person, is a profit-and-loss statement. Studios create P&Ls in order to explain to their financial boards, banks and investors how they are going to recoup their costs when they green-light films. It estimates how much money key domestic and international markets are expected to gross based on how elements (i.e., stars, director, title) have performed in the past in those markets, country by country. It also estimates how they will perform in various ancillary markets like DVD, TV, pay cable, Internet, airplane devices, VOD, handheld devices, etc., again based on past performance. If it all adds up to the amount of the budget or more, Go!
These are the quantifiers that studios use to rationalize their decisions, to put them on solid-enough financial ground on which to base predictions to their corporate boards.
So, Peter said as I was about to leave, the most interesting thing is what a few studio heads said to me privately about two years ago. He stopped to smile. None of them from Fox, of course.
Of course, I said. I knew he was about to share something very inside with me.
They said to me, We dont even know how to run a P&L right now. The look on his face expressed the sheer madness of that statement. We dont know what our P&L looks like because we dont know what the DVD number is! The DVD number used to be half of the entire P&L!
What are the implications of that?
He looked at me incredulously, as if to say, Havent you run a studio? Then he said very emphatically, The implications are youre seeing the implicationsthe implications are, those studios are frozen. The big implication is that those studios arenot necessarily inappropriatelyterrified to do anything because they dont know what the numbers look like.
I posted something similar to this in another thread, but European markets, in terms of how the releases work, have been much closer to the way film releases were in the U.S. 20-25 years ago…they don’t have instant access to everything and they have had to wait for home releases, but the studios have started to transport the same imbecilic quick film release strategies in Europe and they’re going to have the same problem there that they have here in about a year or two because the entire infrastructure for the problems is 80% already in place.
Wow only 100 million from a one billion dollar investment in 2009, and now around 50 million from a billion right?
No wonder a few bad $250 million movies crash and burn kills the industry with those terrible magins.
No wonder no serious investors touch the movie industry.
No wonder vfx vendars get squeezed so hard.
Things are starting to make sense.
Seems like a broken business model.
I wonder if hollywood will become subsidized like the meat industry?
Or is this info wrong?
Steve and George seem to be saying basically the same thing though.
Well TV is on the raise and internet. Things always change.
Very interesting. But this bit I have a hard time believing:
the historical studio business, if you put all the studios together, runs at about a ten percent profit margin. For every billion dollars in revenue, they make a hundred million dollars in profits.
10% seems awfully low, almost too low for anyone to risk investing on.
Very interesting. Not the only reasons DVD sales are down-but I know I myself don’t buy as many DVD (BRDs now) is because frankly Hollywood has a hard time making anything I’ll bother watching once let alone repeated viewings. Only PIXAR (and the like) really get my money these days motivated by my son’s entertainment.
But yet another sequel to a film I didn’t bother with in the first place?! Good luck with that…
The only films I’d buy for myself now were mostly made 20 (or more) years ago-when things felt fresher and-frankly more inspired. But I too tend to rent pay-per-view etc one time only (if at all) and thats enough these days. Plus it is hard to see films in a theatre that aren’t kid approriate these days anyway. If I need to get a baby sitter to see your film it must be ‘kickin’ it’ if I bother to do so!
Putting blame on evil pirates is starting to get old… In my opinion, Hollywood is only to blame themselves. Rising prices, mediocre content, but mostly stubbornly holding onto OUTDATED DISTRIBUTION MODELS is what’s killing their sales. People prefer to download movies instead of going to the cinema or buying a DVD? Then give them the option instead of complaining! This comic strip sums up my view on this whole topic:
It’s too bad they can’t just come out and tell you the real math. Looks real grim until
you realize that if they invested $300 million in a movie and it pulled in a billion dollars,
($100 million earned on $300 million investment) this is a 33% return on investment.
It doesn’t get much better than that.
I personally don’t bother to pirate movies because there’s so much stuff to watch as is, but that cartoon I think hits the nail on the head.
People want easy, near-instant access to content. Most don’t particularly care about the making-of documentary videos that come with DVD’s. They just want to see the show.
A lot of TV shows in particular end on huge cliff hangers. So when you watch a series up until the current season, but the latest season isn’t available on netflix yet because they’re still putting together the making-of documentary videos, they turn to torrents.
People will download it and not give a damn that the movie industry is too slow to fulfill their target audience’s demand.
They can blame piracy, but they should just as equally be blaming themselves for not adapting to the market fast enough.
I am all for changing with the times,
but in some cases the problem is that the customer is asking for the impossible.
there is a reason why is takes x amount of time for a tv show to be produced.
There is a reason for the pipelines that has been established.
(And yes, I have a big problem with the Netflix binge eating mentality for new TV content)
To target the making of videos, is to be fair a cheap shot, since they are usually done by a separate unit that works separate from the actual production team.
why does it take so long for a movie to go from theaters to DVD release?
The movie is already digital. Can’t it just be converted to a h.264 and uploaded to netflix to stream? People don’t care if it’s not as perfect as it gets. That’s what bluerays are for.
I think that’s where the disconnect is. People don’t want to wait 5-6 months to watch it from their home.
Surely the business side of things can be streamlined or planned out in advance?
Game of Thrones was created to sell $200+ per year HBO subscriptions. Not $35 ‘boxset’ downloads. It is not surprising or slow or stupid that HBO and film companies aren’t adapting to these new distribution models. It’s because the figures simply don’t add up. A $5-per-gathering rental seriously undercuts a $10-per-person cinema ticket - up to tenfold for a group of five friends. That kind of cannibalisation won’t stand in a business on a modest profit margin and that’s why you can’t get a rental on release night. You might argue slashing prices by 80 or 90% and increasing convenience would increase sales, but increase them by 5x or 10x? Is there enough free viewing time in the market to increase anybody’s sales 10 times over?
I would NEVER EVER release anything costing hundreds of millions of dollars to streaming immediately. That’s got to be the stupidest idea ever considering steaming brings in the least amount of money and has the highest risk of getting your stuff pirated.
The main reason Game of Thrones is so widely talked about is because the content is pretty decent, it’s well reviewed and you can’t get it anywhere, but HBO. There’s a build up of motivation to see the show that everybody is talking about and anticipation once you get HBO that drives people to pay those extra subscription fees.
Here’s where it matters:
People don’t like having a million things to juggle.
I’d rather pay more money overall to just netflix and have it all stream, than to have to deal with 5 or 6 companies each with their own set of rules and the hassle of mailing and waiting for DVD’s, programming my DVR, and having several bills to pay instead of one.
I’d much rather pay $60 a month to netflix to stream everything than to pay netflix $15 a month for a limited streaming catalog, $10 a month for netflix DVD mailing, $12 a month for HBO for their live-airing, $12 a month for Showtime’s live airing, and $5 a month for DVR service. And then there’s hulu, amazon, etc if you wanted more options.
IMO, movie studios and cable providers need to strike a serious deal with netflix to get their content into their catalog and then have netflix charge more for that privilege.
The Studios would like it to be shorter but the Theater owners screamed bloody murder when the studios asked to reduced the time. Theater owners only make money while the movie is in the theater. Thus they have a vested interest in keeping the DVD from being released as long as possible.
Shrinking of the theatrical window
While originally conceived for a six months duration, the theatrical window has today been reduced to little more than four months. Movie studios have reportedly been pushing to shrink the duration of the theatrical window in an attempt to make up for the substantial losses in the DVD market they’ve been suffering from since the 2004 sales peak.
These attempts have encountered the firm opposition of theater owners, whose profits depend solely upon attendance and who, thus, benefit from keeping the movie available on the silver screen.
In early 2010, Disney announced it would be putting out the DVD and Blu-ray versions of Tim Burton’s Alice in Wonderland 14 weeks after the movie’s release date (instead of the usual 17) in order to avoid competition from the 2010 World Cup. In response to such statements, theater owners made threats not to show the movie on their screens, but later reconsidered their position before the movie was released.
Other strategies are also being deployed in order to make up for slow DVD sales. Most major studios have considered making movies available to VOD services shortly after their theatrical release for a premium price. In July 2010 Netflix secured a deal with Relativity Media in which the latter agreed to distribute a number of major movies to the aforementioned VOD service before Pay TV.
hmm yeah, that’s interesting. The studios and theaters obviously need each other and need to reach an agreement.
I can’t help but think if push came to shove, that the movie studios ultimately hold the cards. Theaters can scream bloody murder about movie studios releasing a movie early to netflix or DVD, but in the end the movie studio still has that way to make money.
A theater without movies, doesn’t have a fallback plan.
That right there tells me theaters will fall before hollywood does - starting with american theaters.
The studios who refuse to adapt and still want to rely on theaters will probably die off next after the other studios get priority deals with netflix and amazon.
I believe Hollywood is all about budget and money now. It’s kinda massive competition over here. Everyone who is taking part in them is now talking quality and earning and how to achieve folk’s attention. People are so involve in such activities that they don’t actually know what exactly is going on. I think this is the order! The New World Order!
Hi Christie, looks like you’re new here, welcome to CGTalk. Yeah I agree Hollywood is all about money and trying to push whatever they want on people. I was wondering though, if I could ask you a question through PM. You seem to have PMs and email disabled.
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