Thursday, March 4, 2010

Hollywood's Real Money Machine

This Sunday a global audience, second in size only to the Super Bowl, will watch television's most lucrative infomercial—the 82nd Annual Academy Awards. For some three and a half hours, interspersed with clips from currently-available movies, Hollywood's most publicized stars will ecstatically award the winners 13-inch-high gold-dipped statuettes known the world over as the Oscars.
The initial purpose of this gala event, which the studios created along with the Academy of Motion Picture Arts and Sciences in 1927, was, in the words of its main architect Louis B. Mayer, "to establish the industry in the public's mind as a respectable institution." But it was also designed to market and create "stars." Mayer was cofounder of Metro-Goldwyn-Mayer, one of Hollywood's most successful studios during its Golden Age (1930s-1950s), and is known as the father of Hollywood's "star system" of marketing.
Yes, the stars will be out Sunday night, but to further enhance its global audience this year, the Academy has doubled the number of Best Picture nominees. Even with this expansion, attention remains focused on two polar-opposite films: Kathryn Bigelow's "The Hurt Locker," and James Cameron's "Avatar," both of which have garnered eight other Oscar nominations
The Hurt Locker" is a reality-based film about a squad of courageous American soldiers who defuse bombs under horrendous conditions in Iraq. By Hollywood standards, it is a very small movie, costing only $15 million to produce and another $15 million to publicize and distribute. And although critically acclaimed, it sold only $18.5 million in tickets worldwide. With theaters keeping roughly half of these box-office sales and the distributor deducting its expenses off the top, it is deeply in the red. Nevertheless, for many among the Academy's nearly 6,000 voting members, it represents the kind of intelligent realism that Hollywood is capable of making for an adult audience.
"Avatar," on the other hand, is a fantasy-based movie about alien life forms who need to be rescued from neocolonialist corporate exploitation on a planet called Pandora. The film, enhanced by brilliant visual effects, may be the most expensive ever made. According to a top executive at Fox, it cost over $225 million to produce and another $150 million to publicize and distribute—a number that has been hyped to as much as a half-billion dollars.
Whatever the cost, "Avatar" has been an immense success, selling a record-breaking $709 million of tickets in the U.S., where it is shown in 3D as well as the traditional 2D format, and more than twice that amount overseas, where it's shown mainly in 2D. For Rupert Murdoch's 20th Century Fox, which gets its distribution fee off the top (as well Dune Entertainment and Ingenious Partners, the private equity funds that provided 60% of the financing, and James Cameron's production company, Lightstorm Entertainment) it is a veritable El Dorado.
The film's success at the box office has also excited hopes that its 3D visual effects will restore the Golden Age of movie attendance, a time before television when two-thirds of Americans went to the movies in an average week. Nowadays less than 10% go to a movie theater in an average week.
The overall box-office numbers, however, provide little grounds for such optimism. "Avatar" no doubt has enriched many theaters charging a premium for the 3D experience, but it did so largely at the expense of theaters showing other movies. In the eight weeks that "Avatar" dominated U.S. box-office receipts (Dec. 18 to Feb. 11), total movie attendance increased by about 6%.
But even if the audience resurgence is no more than a pipe dream, "Avatar" represents for many in the Academy the idea that Hollywood's ultimate salvation lies not in superior story-telling and acting but in eye-popping visual effects, stunning animation and state-of-the-art 3D projection that immerse the audience in the illusion.
Regardless of box office receipts, Hollywood's major studios have a sure-fire engine for making money from viewers who don't regularly go to the movies. It's what the studio calls its "library," which contains the rights to all the movies and television series that it has ever produced or acquired. By relentlessly licensing and selling the rights to these titles, studios harvest money from home audiences decades after a film plays in theaters.
Consider, for example, the Time Warner library. It has more than 45,000 hours of feature movies, cartoons and TV episodes, dubbed or subtitled in more than 40 languages, that it licenses to pay-TV, cable TV, satellite telecasters and television stations in more than 175 countries. These titles are often bundled in take-it-or-leave-it packages (a practice that is prohibited by U.S. anti-trust laws in distributing movies to theaters), which helps optimize profits. In 2009, just the television distribution part of this operation brought in more than $2 billion, according to one source at Warner Brothers. A revenue stream this lucrative, even after paying residuals to guilds, labor and other participants, would be enough to pay for most, if not all, the costs of Warner Brothers's new movies.
Libraries, of course, also pull in huge revenues from the global sale and rental of DVDs. (Technically, newly released titles are not included in the library for two years.) Even though DVD sales of movie titles and TV series are now waning, on the horizon is another promising revenue stream: digital rights for Internet delivery. While at present these rights provide little more than pocket change for studios, future revenues are due to explode with the proliferation of smart phones, netbooks, tablets, game consoles and other such gadgets. In any case, as one Viacom executive recently told me, "No studio could stay solvent for long without a library."
If the studios' libraries, the reality-based money machines that boost the bottom line, do not receive accolades or even a mention at Sunday's Academy Awards, it isn't that their value is unappreciated. It's because Hollywood's real genius is understanding that its audience prefers illusion to reality. The stars shine brightest on Oscar night. And that's show business.