The Hollywood Economist
By Edward Jay Epstein
Hardcover, 240 pages
List price: $16.95
Why Journalists Don't Understand Hollywood
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 learns. At best, they represent gross income from theater chains' ticket sales. These chains eventually rebate about 50 percent of the sales to a 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 that point.
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 backend, 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 unwinding of output deals, which started to occur 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 mainstream media. As result, a large part of Hollywood's amazing moneymaking machine remains nearly invisible to the public.
The problem here does not lie in a lack of diligence on the part of the 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, which also attach authoritative-sounding demographics to the numbers. 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, even if reporters are aware of their irrelevance in the digital age.
This book's purpose is to close gaps like these in the understanding of the economic realities behind the new Hollywood. In this pursuit, I benefited enormously from the help I received from people inside the industry. I was greatly aided by distribution reports, budgets, and other documents given to me by producers, directors, and other participants in the making and marketing of movies, and I am deeply indebted to several top studio executives who furnished me with the secret MPA All Media Revenue Report for 1998 through 2007 and with studio PowerPoint presentations concerning marketing costs. These documents revealed the global revenue streams of Hollywood films, including the money that flows in from theaters, DVDs, television licensing, and digital downloads.