The numbers behind the industry.
There was a time, around the middle of the twentieth century,
when the box office numbers that were reported in newspapers
were relevant to the fortunes of Hollywood: studios owned
the major theater chains and made virtually all their profits
from their theater ticket sales. This was a time before
television sets became ubiquitous in American homes, and
before movies could be made digital for DVDs and downloads.
Today, Hollywood studios are in a very different business:
creating rights that can be licensed, sold, and leveraged
over different platforms, including television, DVD, and
video games. Box
office sales no longer play nearly as important a role.
And yet newspapers, as if unable to comprehend the change,
continue to breathlessly report these numbers every week,
often on their front pages. With few exceptions, this anachronistic
ritual is what passes for reporting on the business of Hollywood.
To begin with, these numbers are misleading when used to
describe what a film or studio earns. At best, they represent
gross income from theater chains’ ticket sales. These
chains eventually rebate
about 50 percent of the sales to the distributor, which
also deducts its outlay for prints and advertising(P&A).
In 2007, the most recent year for which the studios have
released their budget figures, P&A averaged about $40
million per title— more than was typically received
from American theaters for a film in that year. The distributor
also deducts a 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
So where does the money that sustains Hollywood come from?
In 2007, the major studios had combined revenues of $42.3
billion, of which about one-tenth came from American theaters;
the rest came from the so-called back end, which includes
DVD sales, multi-picture output deals with foreign distributors,
pay TV, and network television licensing. 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 the focus on 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. Indeed, they pay the overhead that allows studios
to stay in business. The much more frequently in about 2004,
can doom an entire studio, as happened in 2008 to New Line
Cinema, even though it had produced such immense box office
successes as the Lord of the Rings trilogy. Yet, despite
their importance, output deals are seldom mentioned in the
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 finite time frame. The ideal example of such
an event is the release of a new movie. 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
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,
even if reporters themselves are aware of their irrelevance
in the digital age.
The purpose of my book The Hollywood Economist is to close
gaps like these in the understanding of the economic realities
behind the new Hollywood.