Monday, January 17, 2011

The Golden Globe Infomercial

If the Golden Globes infomercial did not exist, NBC might have had to invent it to compete with ABC’s Oscar Awards. Fortunately, for NBC, an otherwise obscure group calling itself the Hollywood Foreign Press Association (HFPA) had invented this award-ceremony in 1944 during a free lunch in the 20th Century Fox commissary. Although its dozen or so "members" were mainly refugees in LA. The German occupation of their homelands had made most of them correspondents without a country, but they loved movies. At this point, Twentieth-Century Fox’s ingenious studio head Darryl F. Zanuck saw that they offered a highly-valued product in Hollywood: awards for studio movies. Since the Academy of Arts & Sciences had passed over his studio's Song Of Bernadette for the "Best Picture" Oscar in 1943), why not accept the "Best Picture" award-- as well as Best Director" and Best Actress-- from the Hollywood Foreign Press Association (although the "association" had not yet put together enough money to design the "Golden Globes.") So, with a little largesse from the studios, another annual Award ceremony-- and opportunity for product placement-- was born.
In short order, the Hollywood Foreign Press Association came up with a slew of other awards that appealed to studio chiefs, such as "Best Film for Promoting International Good Will," "Best Film Promoting International Understanding," "Best Non-Professional Acting," "Hollywood Citizen Award," "Ambassador of Good Will," and a special award for "Furthering the Influence of the Screen" (which went to the Hindustani version of Disney's Bambi.) With them, it managed to promote free dinners for its members at celebrity hangouts including Ciro's, the Coconut Grove and the polo lounge of the Beverly Hills Hotel.
For a while, it was run by Swedish twin brothers; Gustav and Bertil Unger, who were tap dancers. Gustave wore his monocle in his right eye, Bertil in his left, and one consideration in picking winners was who they could get to show up.
But despite the fun, the enterprising group only began to make real money when Ted Turner elected to televise its informational in the 1980s, a gig taken over by NBC in 1996 (which paid the HFPA roughly $3 million a year for the broadcast rights.)
Nowadays it is of no matter that the 82 members who vote the awards are mostly free-lance writers and photographers with day jobs or that they have little, if any, connection with the Hollywood community. As the Hollywood Reporter observed "The studios couldn't care less whether the awards are decided by isolated Benedictine monks in the Himalayas or angels on high, at least not since the Globes have evolved into a tremendous marketing tool." As such, it offer scripted speeches by stars, promotional clips from movies, and nostalgic eulogies to some 20 million viewers. And by this time the value of public self-congratulation has become so inculcated in the Hollywood culture that one producer complained to me, "These ceremonies have taken over our social life. Almost every week we get into our formal gear, push through a gauntlet of paparazzi to get to some ballroom, give ourselves awards for everything from movies to lifetime achievements, and then applaud ourselves." Nevertheless, Hollywood’s star troopers suited up last night for yet another black-tie award ceremonies, NBC got its high ratings, the media could report, as if it was a news event that Social Network, won best movie, and Hollywood got yet another infomercial.

Friday, January 7, 2011

Why Indie Movies Are An Endangered Species

Up until 2008, it was not easy to finance an independent film but, with the right script, stars, and director, the entire budget could be borrowed from banks on the strength of pre-sale agreements. What had made this business model work then was the likelihood the film had of getting meaningful distribution in the US domestic market (which includes Canada). Most of the better financed indie distributors, such as Miramax, New Line, and Paramount Vantage, were owned by the major studios that had bought these companies for, among other reasons, to expand their DVD shelf spaces at WalMart and other retailers. Their willingness to make commitments to distribute movies domestically had a great advantage overseas: it greatly increased the value of pre-sales, since foreign distributors benefitted from the buzz and publicity from an American opening. Indie producers also could rely on domestic market to get a substantial part of their financing. Prior to 1990, they could get over fifty percent of their movie financed based on the value of the domestic market. Even though the value fell as distributors cut their commitments in the 1990s, the domestic market could provide a producer with 20-30 percent of his budget as late as 2007. And with that keystone in place, a producer could get the balance from foreign pre-sales and government subsidies. This formula was not perfect but it allowed indie producers to make such award winning films as The English Patient, Traffic or Babel. In 2008, however, he value of the American market virtually disappeared for the purpose of financing a movie. As one top producer told me in late 2010 ,”it is now zero.”

What caused this sudden decline was the closing of most of the studio-backed specialty distributors. Within the space of a few months, New Line Cinema, Miramax, Fine Line Features, Picturehouse, Warner Independent Films, Fox Atomic, and Paramount Vantage shut down. Most of the remaining ones, sharply cutback on making advance commitments. The causes of this cratering ranged from faltering DVD sales in large retail chains to the ending of output deals by HBO and other Pay-TV channels.

The result was that indie producers had to base their ability to borrow money almost entirely on the foreign market. Yet, foreign distributors then greatly reduced the amount they were willing to commit because they could no longer be confident that indie films would have the publicity and hype that goes with an American release. Making matters worse, three of the top seven markets, Japan, Spain, and Italy, sharply cut back on making pre-sales deals. So it was nearly impossible for a producer to assemble enough pre-sales in the remaining major foreign territories– Germany, Britain, France and Australia– to finance the film.

Even so, in theory, it was possible to raise the additional funds through government subsidies and tax shelter (which can provide 30 percent of the budget.) In reality, however, both pre-sales and subsidy agreement are just pieces of paper. To convert them to cash, the producer must bring them to a bank willing to accept them as collateral. And no bank will make such a loan without another piece of paper, called a completion bond, which guarantees that the movie, come hell or high water, will be delivered to the foreign distributors with all the elements, such as stars, specified in the contracts. So the producer must accede to the terms of one of the companies who sell completion bonds. The problem here is that the accommodations that must be made eat up a large part of the loan.

To begin with, banks will no longer will provide 100% of the value of the contracts. The best a producer can obtain is 80 percent minus the bank fees and pre-paid interest. From what remains, the foreign sales agents will deduct their fees, which usually run about 20 percent of total foreign sales. Then the completion bond company will deduct its fee and require the producer to segregate a portion of the loan in an account under its control for unforeseen contingencies. Even though a few top producers are able to negotiate lower fees and better terms, most indie producers wind up with no more than half the money he needs for the movie.

Consider, for example, the case of a producer who needs to raise $10 million to shoot a film. Assume that he has lined up all the ingredients necessary for international sales, including three stars, that his foreign sales agent, who got the standard 20 percent commission, arranged $8 million in pre-sales contracts, and that he has received commitments for government subsidies and tax credits worth $3 million.. So, on paper, he has $11 million to make a $10 million movie. In addition, he has bought a completion bond from an insurer and found a bank willing to loan him money

In this case, the bank lent him 80 percent of the value of the $11 million collateral, or $8.8 million. From that sum, the bank deducted its 3 percent fee, or $264,000. It also required that the producer set aside in an escrow account the interest on the loan for 18 months. At a blended rate of five percent, this amounted to $660,000. So there is only $7,876.000 available from the loan.

Next, the producer was contractually obligated to pay the foreign sales agent his 20 percent fee, or $1,600,000. Now he had only $6,276,00.

Then the completion bond company takes its 2.6 percent fee, or $260,000, and requires that 10 percent of the budget, or $1 million, be set aside for “contingencies” and $200,000 be set aside for the “deliverables” (which is the material that has to be delivered to foreign distributors before they pay for the rights.). After meeting these terms, the producer has only $4,816,000 left from the loan, or less than half the money he needed to shoot the movie.

How can a producer close such a yawning gap? If he reduces the budget by cutting out any of the stars or other specified production values, he will violate the terms of the pre-sales and subsidy contracts. So unless he wants to re-negotiate with everyone, he has to stick to the budget. Nor can he borrow more money against the collateral since he has mortgaged his production to the hilt.

This leaves the producer only one feasible way to fill the gap: finding an equity investor to buy part of a movie that has not yet made. Making this even a harder task, , all the salable foreign markets have been disposed of. So the only real asset that remains is the 20 percent tier of the foreign contracts and subsidy contracts which is not covered by the bank loan. This is also the riskiest tier. But if all goes well that 20 percent will yield $2,200,000 which can be committed to repaying the equity investor after the film is delivered in all the foreign markets. But that still leaves an unsecured gap of $3 million. If the producer manages to bring the movie in on budget, the $1 million fund held for contingencies is released by the completion bond company, and this money then can be used to repay the equity investor. Even so, the investor still has $2 million at risk. To get back this money, and make a profit, he must gamble that the unsold American rights will be sold after the movie is completed. But not all indie films ever get distributed in theaters of America . Every year tens of thousands of movies are submitted to film festivals, only a few dozen get meaningful distribution in theaters. And without such distribution, a movie has little chance of being licensed for TV or getting shelf space in major retailers for its DVDs.

Despite these odds, indie producer often do succeed in finding investors to fill the gap and produce award-winning movie. But this flawed business model also exacts a price. As one of the leading indie producers told me “The new number crunching game has caused the production budgets of films to collapse, so that what we used to make for $10 million a few years ago, needs to be made for $5 million now -- if it can be made at all! And meanwhile, all the hard costs of production (union rates, equipment, locations, etc.) have gone up, which means that producers now have to figure out how to deliver the same production value for much less than 50 percent of what they used to get to get the job done.” The picture may of course brighten in the future with new specialty distributors, such as the new Miramax, Anchor Bay, Film District, and reorganized MGM, getting into the act. 
It is also possible producers may soon be able to borrow against new forms of distribution, such as Video-On-Demand.  Even so, as long as the American market lacks value for the purpose for the advance financing of movies, indie producers have a difficult, if not impossible, road to hoe.

***

Thursday, December 2, 2010

Is Netflix Streaming Towards Disaster

Netflix, through the simple device of using the post office to bypass video stores, has become one of the great success stories of the new entertainment economy. It now claims 16 million subscribers who pay a monthly flat fee for an unlimited number of rentals. For this mail-in business, Netflix did not need the approval of the studios. It simply buys DVDs, as does anyone else, from retailers such as Wal-Mart then mails them out to subscribers. What makes this form of rental legal is the “first sale doctrine,” which holds that once a person buys a DVD, he can rent it out to others without the permission of the copyright holder. Through that court-approved doctrine , Netflix created its mail-in empire. For a monthly charge of as little as $9 a month, subscribers get any movie they choose on the Netfix website. Whenever a subscriber mails back his DVD in a stamped address envelope provided by Netflix he receives the next DVD he has ordered. There are no late fees. Rather than backing its trucks up to Wal-Marts, Netflix buys most of its DVDs from wholesalers. Its average price of about $15 per copy. (Some studios also supply lower priced DVDs in return for Netflix delaying its mailing them until a month after they are in video stores.)
Last year, Netflix took in $1.67 billion in subscription fees. For its mailing business, its major expense, other than purchasing the DVDs, is postage and handling. It sends out about 2 million discs a day, which requires maintaining 50 distribution centers and buying over a half billion dollars worth of postage. Because of these expenses, its operating profit was only about 12 percent.
Netflix is now attempting to reduce its vulnerability to postage rate hikes by streaming movies over the Internet. Reed Hastings, the chief executive and co-founder of Netflix, explained that this new strategy is part of his concept that Netflix is not just as a mail-order house but a full-service home entertainment distributor since streaming provides movies in digital form on everything from Ipad, and Iphones, to game console and TV sets. Over the last three years, this streaming experiment has garnered a growing number of subscribers partially because it has been absolutely free to the subscribers of its mail-in service. Next year, however, it plans to charge for its streaming service. If it succeeds in converting its mail subscribers to streaming, it will in effect create a virtual channel that directly competes with the three major Pay-TV channels, HBO, Showtime, and Starz.
The problem here is that while streaming movies is a more efficient way of delivering movies than the mail, it requires a radically different business model. Unlike with mail-in DVDs, the first sales doctrine does not apply to streaming. So Netflix needs to license the electronic rights from the studios, and that is extremely expensive. In the case of new movies, studios license slates of 20 or so titles in so-called output deals for hundreds of millions of dollars. The average cost for a single title in such a deal is about $16 million for a two year license. Where Netflix can buy 10,000 copies of a major title for $150,000 to mail out, it will need to spend about $16 million to license it for streaming. Such a 100 fold increase in price can obviously be deleterious to profits especially since Netflix still has to maintain its mailing centers, and buy DVDs, for the subscribers who elect to continuing using the mail-in service either because they prefer DVDs’ higher quality and features or they don’t have the apparatus to receive digital streaming.
For the past 3 years, while building up its streaming service, Netflix found a temporary way around the licensing issue by making a sub-licensing deal with Starz Entertainment, a subsidiary of John Malone’s Liberty Media, which has its own output deal with Disney and Sony. paying Starz only $25 million a year for electronic sub-rights. Disney sued Starz claiming that such a deal violated the output agreement, but Starz held that it could sub-license these rights because Netflix was merely a “content aggregator.” No matter what happens in the litigation, the loophole will certainly be plugged in 2012 when Starz’ output deal expires. Not only will Disney likely demand on a payment for sub-licensing, but Starz itself has recently informed its other licensees that it will no longer discriminate in pricing, which means that Netflix will have to pay what everyone else pays for content.
And Netflix’s renewal problem is not merely with Starz. It also managed to license in 2008 the electronic transmission rights until 2012 for television programs, such as “The Office,” from networks. At that time, syndicators were only interested in the broadcast rights for re-runs of these series, and, as the streaming rights had little value, they licensed them at bargain prices. But the networks now have streaming, and video-on-demand of these programs on their own website, making it highly unlikely they will renew the expiring agreements.
The brutal reality is Netflix’s bargain days for streaming movies and television are coming to an end. As everyone else in the licensing game, Netflix will have to pay real world prices for content. Just the output deal it announced with three of the weakest studios, Paramount, LionsGate and MGM will cost it $200 million a year, a sum that exceeds its operating income last year. And if it wants the kind of output deals the other pay channels have, it will have to pay a great deal more than that.
Netflix, to be sure has brilliantly dominated the DVD mail order business. But, even aside from the immense cost of content, it must overcome three daunting challenges to succeed in the brave new world of cyber space.
First, it will have to compete directly with Pay-TV channels. HBO, which has nearly 40 million subscribers and a yearly cash flow of $1.8 billion, is not about to cede cyberspace to Netflix. It has just launched HBO GO which will stream to HBO subscribers “anything they want to see, anytime, anywhere, over their laptop, Iphone, tablet, Playstation”, according to Jeffrey Bewkes, the Chairman of HBO’s parent, Time Warner Communication. This includes not only the new titles, it acquires through its $500 billion output deals with Warner Bros, Fox, and Dreamworks but its prize-winning original series.
Second, since there are few barriers to entry to cyberspace, Netflix will also have to compete in pricing Internet savvy companies, including Apple, Amazon, Hulu and Youtube, all of whom can offer similar streaming services.
Third, as Netflix’s streaming consumes more and more of the capacity of broadband carriers such as Comcast, it will have to contend with either restrictions or usage charges that will increase the cost of streaming.
If Netflix fails to meet these challenges, its bold move into streaming might be nothing short of a prescription for financial disaster.

Wednesday, October 13, 2010

Role Reversal: Why TV Is Replacing Movies As Elite Entertainment


Once upon a time, over a generation ago, The television set was commonly called the “boob tube” and looked down on by elites as a purveyors of mind-numbing entertainment. Movie theaters, on the other hand, were considered a venue for, if not art, more sophisticated dramas and comedies. Not any more. The multiplexes are now primarily a venue for comic-book inspired action and fantasy movies, whereas television, especially the pay and cable channels, is increasingly becoming a venue for character-driven adult programs, such as The Wire, Mad Men, and Boardwalk Empire. This role reversal, rather than a momentary fluke, proceeds directly from the new economic realities of the entertainment business.

Consider what happened to Pay-TV. Back in the 1970s, HBO provided something home viewers could not get elsewhere: movies uninterrupted by commercials. It was, as a HBO executive put it, “the only game in town,” so its subscribers paid a monthly fee, no matter how little or often they watch it, to their local cable provider who in turn forked over a share to HBO. As the cable systems grew, so did HBO. By 2010, it had (including its Cinemax unit) over 40 million subscribers, and just the monthly fees produced cash flow of over $1.5 billion a year. Getting new movies was no problem. HBO simply licensed them from a few major studios for an exclusive period (which began a few months after they were released on video and DVD) in so-called “output deals.” To continue to harvest this immense bounty, HBO had merely to stop subscribers from ending their service.

But that feat became far more difficult as alternatives became readily available, including video stores, Netflix, and the Internet. Why should anyone pay a monthly fee to see movies on pay TV when it could get it else where cheaper and faster? The answer HBO executives found was to create its own original programming designed to appeal to the head of the house. Here it had several advantages over Hollywood. It did not need to produce a huge audience since it carries no advertising and gets paid the same fee whether or not subscribers tune in. Nor did it have to restrict edgier content to get films approved by a ratings board (there is no censorship of Pay-TV). And it did not have to structure the movie to maximize foreign sales since, unlike Hollywood, its earnings come mainly from America. As a result, HBO and the two other pay-channels, Showtime and Starz, were able to create sophisticated character-driven series such as The Wire, Sex and the City, The L Word, and The Sopranos. As this only succeeded in retaining subscribers and also achieved critical acclaim, advertising-supported cable and over-the-air network had little choice but to follow suit to avoid losing market share. The result of this competitive race to the top is the elevation of television.

Meanwhile, Hollywood went in the other direction. In the era of the studio system, the Hollywood studios opened their movies in a few dozen select first-run theaters, most of which they owned, and then, with the help of critical acclaim and favorable word-of-mouth, gradually moved them into local theaters. To accomplish this, they did not need huge advertising or print budgets. Nowadays, confronting a very different economic landscape, they open most of their major movies on 3,500 to 5,000 screens which are owned not by them but by a handful of multiplex chains. Multiplexes are in the “people-moving business,” as on multiplex owner put it, which means moving herds of movie-goers past the concession stands In return for providing their screens, these chains expect the studios to provide them with two things: first, lavishly-produced movies; second, and even more important, a national marketing campaign for each movie that will fill their multiplexes with consumers on opening weekend. Since such campaigns cost about $30 millions of dollars per movie, studios require that their marketing arm sign off on each project before it is greenlit for production. For the marketing executives, the deal-breaker is not the intrinsic merits of the film itself but the absence of the elements needed to build a marketing campaign both in America and abroad (where up to 65 percent of the revenue comes from.) Such campaigns typically require buying time on TV programs around which clusters an audience predisposed to going to the movies every weekend and then hitting it with 7 ads in the week leading up to its opening weekend. The target audience that fits this bill is tweens and teens, which are also the groups with the greatest propensity to consume popcorn and soda.

The least risky way to find movies that lend themselves to campaigns around which a global marketing can be built is to copy the movies for which marketing campaigns have succeeded in driving the requisite audience into the multiplexes; hence, the profusion of comic book-based movies and their sequels. In addition, studios must take into account that their movies must play in overseas markets, such as Korea, Japan, China, Russia, and Brazil, where visual action takes precedence over sophisticated dialogue. So the dumbing-down of movies is no accident.
Its after all show business.

Friday, September 24, 2010

Blockbuster Busted

Blockbuster, one the world's largest renter of Hollywood movies, filed for bankruptcy on September 23, 2010.  To understand why its collapse was inevitable in a digital world, see my January 2006 article in Slate  (below)
http://www.edwardjayepstein.com/zombie.htm

Sunday, July 18, 2010

Hollywood Accounting Demystified


"STUDIO SHAME!," shouts the headline on Nikki Fink’s Deadline" website, "Even Harry Potter Pic Loses Money Because of Warner Bros’ Phony Baloney Net Profit Accounting." To prove its contention, it posted Warner Bros; September 2009 distribution report for Harry Potter and The Order Of The Phoenix, and reported, as if it revealed some shameful scandal, that while the 2007 film "grossed $938.2 million worldwide," it still remains "over $167 million in the red."
The outpouring of indignation over movie studio "phony" accounting clearly resonated with a public concerned over corporate predatory practices, with comments from readers calling for RICO prosecution of Warner Bros. But what is called Hollywood accounting is in reality a form of self-deception in an industry driven by ego considerations.
Every Hollywood production is a temporary collaboration between a studio and hundreds of independent contractors, which includes actors, directors, producers, writers, and technicians. The rules governing how each of them will be paid is set forth in their contracts which negotiated and vetted by their lawyers, agents, and financial advisers. In almost all cases, they get fixed compensation for their work, which is unaffected by the profitability of the movie or whatever accounting ploys are used to determine it. They may also get contingent compensation in the form of either "gross points" or "net points" that is dependent on the accounting definitions in their contract. "Gross points," if they begin at "dollar one," are payments based on a percent of the total revenues that flow after out-of-pocket expenses are repaid. Or "Gross points" may begin after certain conditions specified in the contracts are satisfied. In either case, "gross points" do not depend on the profitability of the film. "Net points" are another story. The payments here depend on a movie achieving a net profit after the studio back its investment, interest, overhead, distribution fee and pays all the gross players. In most cases, as David Mamet has said famously, "there is no net." And everyone in the film industry knows that with a standard studio contract, there is little, if any, chance they will see a penny from "net points" So why do they sign a contract with net points? The answer, in a word, is money. They want to be paid the fixed part of the fee and have an opportunity to be in the movie to further their career.
Yes, it is true that Harry Potter and The Order Of The Phoenix lost money on its theatrical run, but so do almost all Hollywood movies. Here is why. The reported box-office "gross" that so fascinates the media is what the theaters take in , not what the studios get. Of the $938.2 million worth of tickets sold for this Harry Potter sequel, Warner Bros.' distribution arm got only $459.3 million. Out of that sum, it reimbursed itself the out-of-pocket costs. These cash expenses came to a staggering $182.6 million, including $29.2 million paid to labs for the prints, $131.1 million paid to TV stations, newspapers and other media for ads, $8 million paid in taxes to foreign governments, $5.6 million paid to dubbing studios, and $3.5 million paid to UPS and others for shipping films abroad. This is a huge amount of money but it is what it needed these days to get a film into 7000 theaters around the world and drum up an opening night audience in 50 countries. What remained after these expenses was just $276.7 million.
Since the negative cost for this Harry Potter film was $315.9 million (which included the payments to the author and other gross players ), the film was in the red after its theatrical run. But so what? Theaters are only initial harvest of money. The real profits in Hollywood come from harvesting the back-end, which includes the DVD market, Pay-TV (HBO), and TV network and cable licensing.
In any case, Harry Potter and The Order Of The Phoenix made money for everyone involved in it. Even if does not have a "net profit, Warner Bros. has a 30 distribution fee. So it rakes its cut off the top. In September 2009, which is before most of the lucrative TV licensing revenue comes in, it had already earned $211.8 million from this fee. And DVDs are even a richer deal for it. After paying a 20 percent royalty into the account of the film, its video distribution arm gets the other 80 percent. So, on the $440 million of DVD revenues to date, it got $352 million. From this sum, it has to pay most of the cost of manufacturing, warehousing, and marketing the DVDs, as well as a percent to the author of Harry Potter, J.K. Rowling, who has a "100 percent" accounting clause in her contract, but, even so, it has a bonanza of about $200 million.
The guilds and unions also got paid. Their residuals on television licensing and DVD sales amounted to $10.2 million in 2009 ( a sum that will rise substantially as the film is released in TV markets over the next 30 years.)
The gross players also did not lose. They got a percent of the revenues, either from " first dollar," as was the case of J.K. Rowling, or when the film reached the "cash break-even" point defined in their contract. These payments, which reportedly amount to over $50 million, have been added to the negative cost of the film (which is why it is now over $300 million.)
And of course everyone else gets paid their fixed compensation, including writers, actors, and producers. True, they may never receive any money from their "net points," but, given the contracts they willingly signed, they had no reason that they would pay off. What they got from them were bragging rights, and in Hollywood, where ego satisfaction is the coin of the realm, that is not small change.
***

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.