February
29, 2004.
A very different elite made their way along the
red
carpet into the newly built Kodak Theater for the seventy-sixth
presentation
of the Oscars. Many of the stars were now paid representatives
for
fashion and cosmetic companies, walking product placements
for a
worldwide broadcast that Hollywood publicists claimed,
with their usual
hyperbole, would reach 1 billion viewers. (In fact,
according to the
Nielsen rating, the event was seen that night in 43.5
million homes.)
The lobby through which they passed contained a gauntlet
of five-foot-high
sepia-tinted photographs of stars—including Grace
Kelly, Jack Nicholson,
Marlon Brando, Halle Berry, Tom Hanks, and Julia Roberts—
mounted on Plexiglas panels that hung in front of beaded
white walls
designed to suggest an old-time movie screen. These
outsized images, like
almost everything else in the meticulously planned ceremony,
memorialized
the past glory of Hollywood. Not that the glory of the
present was
being ignored—the auditorium itself had been specially
outfitted to accommodate thirty-six strategically placed
television cameras.
Although outwardly much of the 2004 awards ceremony
seemed to
resemble its predecessors from the days of the studio
system—the statuettes,
the celebrity presenters opening sealed envelopes, the
acceptance
speeches, the special awards, the self-deprecating jokes
by the master of
ceremonies—Hollywood was now a very different
place, operating according
to a very different logic. The physical plants of the
great Hollywood
studios, with their soundstages and back lots, still
existed in
somewhat diminished form, and most of the studios still
bore the same
names and logos, such as Paramount’s mountain
peak, Universal’s globe,
and Fox’s searchlights. But beneath their outward
appearance, they were
radically different enterprises. They were now international
corporate
empires, with their shares traded on stock exchanges
in New York, Tokyo,
and Sydney and their debt managed by global banking
syndicates.
Movies now were just one of their many businesses.
Columbia
Pictures was now owned by the Sony Corporation, a Japanese
electronics conglomerate that manufactured everything
from com-
puters to PlayStations and owned music, television-broadcasting,
and insurance companies. Sony also owned TriStar Productions,
CBS Records,
and the studio in Culver City once owned by MGM. (In
2004, it would
gain control of MGM itself—and its film library.)
The
Warner Bros. studio was now owned by Time Warner, a
giant
conglomerate that contained the Internet assets of America
Online; the
media assets of Time, Inc., which included HBO; the
cable and entertainment
assets of Turner Entertainment, which included New Line
Cinema; and the movie, television, and music assets
of Warner Communications.
The
Fox studio was now owned by News Corporation, an Australiabased
media company whose properties included newspapers,
magazines,
a television network, cable networks, and satellite
broadcasting in Europe,
North America, South America, and Asia.
The
Universal studio was now owned by General Electric,
America’s
largest industrial company, in partnership with Vivendi
Entertainment, a
huge French conglomerate. Its properties included the
NBC television
network, the USA cable networks, USA Films, and the
Universal theme
parks.
The
Paramount and RKO studios were now both owned by Viacom
International, a media company that owned the CBS and
UPN television
networks; MTV, Nickelodeon and other cable networks;
Blockbuster
video stores; the Infinity radio networks; and Viacom
Outdoor Advertising
billboards.
And
the Walt Disney animation studio had grown into the
Walt Disney
Company. It now owned—with its $19 billion acquisition
in 1996
of CapitalCities/ABC Corporation—a television
network, a radio network,
cable networks, theme parks, cruise ships, and other
assets, all
of which made it, as its then-chairman Michael Eisner
once put it, “a
true full-service entertainment enterprise . . . in
the vast entertainment
firmament.”
Despite
the differences among them, the six entertainment giants
still had three fundamental things in common.
First, whereas in the days of the studio system making
movies for theaters
had been the one and only business of studios, the movie
business itself
was now a relatively unimportant part of each conglomerate’s
financial picture. Even when all the earnings from movies’
theatrical re-
leases, video and DVD sales, and television licensing—both
domestic and
international—were included in their movie businesses,
they accounted
for only a small part of each company’s total
earnings. In 2003 Viacom
earned 7 percent of its total income from its movie
business; Sony, 19 percent; Disney, 21 percent; News
Corporation, 19 percent; Time Warner, 18 percent; and
General Electric, if it had counted Universal Pictures
as part
of its conglomerate that year, less than 2 percent.
So while the film business
may have held great social, political, or strategic
significance to each
company, it was no longer the principal way any of them
made their
money.
Second, unlike their predecessors, who made their profits
at the box
office, all six companies now routinely lost money on
theatrical release
(or, as it is now called, “current production”).
Consider, for example, the
Disney film Gone in 60 Seconds. Although a
not-otherwise-memorable
car-theft movie starring Nicolas Cage, it had been singled
out for its commercial success by Disney chairman Michael
Eisner in the company’s
2000 annual report, where it was described as one the
company’s biggest
“hits.” As far as the public—and shareholders—knew,
the movie’s impressive- sounding worldwide box-office
gross of $242 million amounted
to an immense profit. But the company’s confidential
financial statements,
issued semiannually to the movie’s profit participants
over the
next four years, tell a different story.
Disney paid $103.3 million to physically produce the
movie—the socalled
negative cost. Then, just to get the film physically
into theaters in
America and abroad, it had to pay another $23.2 million—$13
million for
prints and $10.2 million for the insurance, local taxes,
customs clearances,
reediting for censors, and shipping fees. Next Disney
spent $67.4 million
on advertising worldwide. Finally, it had to pay $12.6
million in “residual
fees” in accordance with agreements it had with
various guilds and
unions. Altogether, then, it cost the studio $206.5
million to get this
film—and its audiences—into the theaters.
The so-called gross—a figure authoritatively reported
in the media as
if it was the amount a movie earned for its studio—also
proved elusive.
Most of the $242 million collected at the box offices
never made it to Disney’s coffers. Theaters kept
$139.8 million. Disney’s distribution arms—
Buena Vista and Buena Vista International—collected
only $102.2
million for a film on which it had spent $206.5 million.
And this calcula-
tion does not include Disney’s cost in paying
its own employees in its production, distribution, and
marketing arms or the interest on the millions
it had laid out. When this overhead ($17.2 million)
and interest ($41.8
million) were included, the loss on the theatrical release
of this “hit” was
over $160 million by 2003.
Nor was Gone in 60 Seconds an aberration. In
2003, a relatively good
year, the six studios lost money on the worldwide theatrical
release of
most of their titles, or their current production. These
losses stemmed not
from malfeasance, mismanagement, or flawed decisions
about the content
of the films but from the economic realities of the
new era.
The
massive moviegoing audience that had nurtured the studio
system
simply no longer exists. In contrast to the 4.7 billion
movie tickets
sold in America in 1947, there were only 1.57 billion
tickets sold in 2003.
So, even though the population had almost doubled, movie
theaters sold
3.1 billion fewer tickets than they had in 1947. Television,
as well as other
diversions, had so reduced the audience that less than
12 percent of the
population bought a ticket in an average week. And the
six studios could
not count on getting even this small fraction of its
former audience. To
settle the federal antitrust suits in 1949, they had
sold their own theaters
and discontinued their block-booking contracts with
the independent
theaters. As a consequence, they had lost control over
what was shown in
theaters. The theater owners, not the studio heads,
now decide which
films to show and for how long. And the theater owners
no longer restrict
their bookings to only major studio releases. So the
six studios now have
to compete with studioless studios (such as MGM, DreamWorks,
and Artisan
Entertainment), as well as other independent filmmakers,
for the
desirable times and screens at the multiplexes. Indeed,
the six major studios,
including their subsidiaries, accounted for less than
half of the 473
films released in the United States in 2003. As a result,
their take from
the American box office totaled only about $3.23 billion.
Just as in the old days, studios still have to pay the
distribution expenses
on their films. But now they also have to create a new
audience for
each and every movie. This requires creating and paying
for intensive
television advertising as well as making enough prints
for simultaneous
openings in thousands of theaters to take advantage
of that advertising.
In
2003, just the prints required for the opening of a
studio film cost, on
average, $4.2 million. The advertising averaged another
$34.8 million a
title. But while the studios spent an average of $39
million per film just
to get audiences and prints into American theaters,
they recovered from
the box office only $20.6 million on average per film.
So in 2003 they
wound up paying more to alert potential moviegoers and
supply theaters
with prints for an opening than they were getting back
from those who
bought tickets. (The story was similar with overseas
theaters, for which,
in addition to prints and advertising, the studios had
to pay the cost of
dubbing and additional editing to tailor the films to
foreign audiences.)
These
new marketing costs had grown so large by 2003 that
even if the
studios had somehow managed to obtain all their movies
for free, they
would still have lost money on their American releases.
But studios, of course, did not make these movies for
free. And, to
make matters far worse, the costs of producing a film
have also risen astronomically.
At
the end of the studio-system era, in 1947, the cost
of producing
an average studio film, or negative cost, was $732,000.
In 2003 it
was $63.8 million. To be sure, the dollar had decreased
in value sevenfold
between 1947 and 2003, but even after correcting for
inflation, the cost of
producing films had increased more than sixteen times
since the collapse
of the studio system.
Part
of the studios’ cost problem is the result of
stars being freed from
their control. Instead of being tethered to studios
by seven-year contracts,
stars are now auctioned off—with the help of savvy
agents—to the highest
bidder for each film. Since there are fewer desirable
stars than film
projects, they can command eight-digit fees. By 2003,
the top stars were
getting not only between $20 and $30 million a film
in fixed compensation
and perks but a percentage of the film’s total
revenue after repaying
cash outlays.
For
example, Arnold Schwarzenegger received, according to
his contract,
a $29.25 million fixed fee for his role in the 2003
film Terminator 3:
Rise of the Machines, as well as a $1.5 million
perk package that included
private jets, a fully equipped gym trailer, three-bedroom
deluxe suites on
locations, round-the-clock limousines, and personal
bodyguards. In addition,
once the film reached its cash break-even point, his
contract guaranteed
him 20 percent of the gross receipts from all sources
worldwide
(including video, DVD, theatrical box office, television,
and licensing).
Under
any scenario—whether the film failed, broke even,
or made a
profit—the star was assured of making more money
than the studio it-
self. In this new era, stars, not studios, reap the
profit their brand names
bring to a film.
In 2003 the six studios—Paramount, Fox, Sony,
Warner Bros., Disney,
and Universal—spent $11.3 billion to produce,
publicize, and distribute
to theaters around the world 80 films under their own
imprints. They
spent another $6.7 billion on 105 films produced by
their so-called independent subsidiaries, such as Miramax,
New Line, Fox Searchlight, and
Sony Classic. Of this $18 billion in expenditures (which
did not include
the cost of abandoned projects), the studios recovered
only $6.4 billion
from their share of the world box office, leaving them
with a deficit of
more than $11 billion after their movies had played
in all the theaters in
the world.In the days of the studio system, numbers
like this would have meant bankruptcy. But the studios
in the new system no longer expect to earn their profits
from showing their products in movie theaters. As Frank
Biondi, who served as studio chief at both Paramount
and Universal, put
it, “Studios nowadays almost always lose money
on current production.”
This brings us to the third, and probably most significant,
feature that
the six studios now have in common. They all make the
bulk of their
profits from licensing their filmed entertainment for
home viewing. Even
as late as 1980, most of the studios’ worldwide
revenues still came from
movie theaters. At that point, no matter how large the
success of hits such
as Love Story, Jaws, or Star Wars
proved to be, all the studios were losing
money on their overall movie business. The deus ex machina
that transformed the movie business was not the selection
of better movies—as studio chiefs would later
claim—but the prodigious
expansion in home viewing that came as a result of the
video player,
cable networks, pay TV, and the DVD. By 2003 the studios
were taking in
almost five times as much revenue from home entertainment
as from
theaters.
As the studios’ profit center shifted from movie
theaters to retail
stores, they all made a further adjustment in their
business strategies.
Since the six major studios now produced only a relatively
few films, they
needed to increase their “throw weight,”
as one Paramount executive
termed it, to persuade merchandisers like Wal-Mart to
cede them the
strategic shelf space for their videos. So, beginning
in the 1990s, they either
bought existing independent distributors—such
as Miramax, Dimension New Line Cinema, October Films,
Gramercy Pictures, Focus Features, and USA Films—or
created their own “independent” subsidiaries
—such as Sony Pictures Classics, Paramount Classics,
and Warner Independent Pictures—to acquire the
rights to foreign movies and lowbudget movies made outside
of Hollywood’s purview. As a result of their search
for “throw weight,” the studios came to
dominate much, if not all, of the independent film business
as well.
By 2003, the home-entertainment share had, thanks in
large part to
the sales of more than a billion DVDs, reached $33 billion.
Since the advertising and other marketing costs associated
with them are minimal,
these sales provided a veritable ocean of bottom-line
profits, which the
studios now count on to offset the massive losses from
their films’ theatrical
releases. Theatrical releases now serve essentially
as launching platforms
for licensing rights, much like the runways at haute
couture
fashion shows.
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