Tuesday, June 1, 2010

Eyes Wide Shut: Why Journalists Don't Understand Hollywood

There was a time when the box office numbers that were reported in newspapers were relevant to the fortunes of Hollywood. Up until the 1950s, the major studios owned most of the large theater chains and made virtually all their profits from their theater ticket sales. This was before television sets, VCRs, and DVD players became ubiquitous in American homes, and before movies could be downloaded and streamed into computers, smart phones and Ipads.
Today, Hollywood is in a very different business: creating rights that can be licensed, sold, and leveraged over all many different global platforms, including movie theaters, Pay Per View, DVDs, pay television channels, cable television, free television, and toy licensing. And while the box office at American theaters continue to be a part of this stream, they account for less than 15 percent of the total revenue. Yet, media continue to breathlessly report the American box office numbers every week, as if they still represented the profits and losses business of Hollywood.
Such reporting leaves their audience, much like a movie audience, in the dark about the true business of Hollywood. Even the numbers themselves are grossly misleading when used to describe what a film or studio earns because they represent what theater chains get from ticket sales, and the studios no longer own or control these chains. The distributor of a movie gets a portion of these ticket sales, usually about 50 percent and then immediately deducts from these proceeds its outlay for prints and advertising, which is called "P&A". In 2007, the most recent year for which the studios have released these expenses, P&A averaged about $40 million per title, which was more than they typically received from their share of American ticket sales In addition, the distributor deducts a hefty distribution fee, usually between 15 and 33 percent of the total theater receipts. Therefore, no matter how well a movie appears to fare in the box office race reported by the media, it is usually in the red at that point. Indeed, studio executives correctly assess, that as a rule, they lose money on "current production," their term for the American box-office. Their profit comes on most from the so-called "back end", including DVD, television and foreign receipts. In 2007, according to the secret numbers of their trade association, the MPAA, almost 90 percent of the revenue of the major studios came from world DVD sales, multi-picture output deals with foreign distributors, pay TV, and network television licensing.
There are of course notable exceptions, such as "Avatar" in 2009 and 2010, which broke all records for tickets sales, and, unlike the average movie, made a fortune at the American box-office (even though 72.5% of its revenues were abroad). Such successes, which often siphon off audience from other movies, do not change the reality of Hollywood. They are the exceptions that prove the rule. For the vast majority of movies that do not make a penny at the American box-office, the only useful thing that the newspaper box office story really provides is bragging rights: Each week, the studio with the top movie can promote it as "Number 1 at the box office." Newspapers themselves are not uninterested parties in this hype: in 2008, studios spent an average of $3.7 million per title placing ads in newspapers. But the real problem with the numbers ritual isn’t that it is misleading, but that it distracts attention from the realities that are reshaping and transforming the movie business. Consider, for example, studio output deals. These arrangements, in which pay-TV, cable networks, and foreign distributors contractually agree to buy an entire slate of future movies from a studio, form a crucial part of Hollywood’s cash flow. these unsung deals allow studios to stay in business. The loss of an output deal, uch as the termination of New Line Cinema's deal with HBO, doomed the studio, even though it had produced such immense box office successes as the Lord of the Rings trilogy. Yet, even the existence of output deals is seldom mentioned in the mainstream media. As result, a large part of Hollywood’s amazing money making machine remains nearly invisible to the public. The problem here does not lie in a lack of diligence or intelligence on the part of journalists. It proceeds from the entertainment news cycle, which generally requires a story about Hollywood to be linked to an interesting current event within a brief time frame. For such a story, the only readily available data are the weekly box office estimates; these are conveniently reported on websites such as Hollywood.com and Box Office Mojo. If an intrepid reporter decided to pursue a story about the actual profitability of a movie, he or she would need to learn how much the movie cost to make, how much was spent on P&A, the details of its distribution deal and its pre-sales deals abroad, and its real revenues from worldwide theatrical, DVD, television, and licensing income. Such information is far less easily accessible, but it can be found in a film’s distribution report. But this report is not sent out to participants until a year after the movie is released, so even if a reporter could obtain it, the newspaper’s deadline would be long past. Hence the media’s continued fixation on box office numbers.