Slate's Hollywood Economist: Studio Death Spiral?

After two weeks of strong box office sales, Hollywood's box office revenues slid again this past weekend and have been down most of the year. Speculation is building that Hollywood is facing a demise. Alex Chadwick talks with Slate contributor Edward Jay Epstein about what some are calling Hollywood's "death spiral."

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This is DAY TO DAY. I'm Alex Chadwick.

You've heard stories this year about Hollywood's box office crisis. We've heard them--heck, we've even reported them. It turns out that's overstated. Edward Jay Epstein writes Slate's Hollywood Economist column. He's a regular guest here, as well.

Edward, welcome back to DAY TO DAY.

You're writing this week about what you call the death spiral. We'll get to that more in a moment. But you're also writing about sources of information for what's really going on in the business of Hollywood. And you've revealed the existence of a particular report, and that's where these numbers lie. Tell us about that, would you?

EDWARD JAY EPSTEIN (Slate): You have to understand that Hollywood has to know what's going on from studio to studio. So what the studios do is every three months, they take their internal numbers in everything--movie theaters, DVDs, television, pay television--and they send them to their trade organization, which is the MPA. The MPA consolidates them and sends them back to the studios, which is perfectly legal for a trade organization to do. So the studios have a benchmark. But even better, we now have a way of actually seeing the performance as opposed to using all sorts of ridiculous projections.

CHADWICK: These projections and numbers you might get from the annual reports and various things. The studios are very obscure about how they make their money and where their money's coming from. Why aren't they more open about these things in their financial reporting the way other businesses are?

EPSTEIN: The studios in their financial reporting are, of course, honest, but they blur together all the categories their revenue come in to into one large category called studio entertainment. The reason they do this is they want to cloud over a central fact of the movie business, a sad fact. And that is they lose money on making movies and distributing movies in theaters, which they call current production, and they make money, all their money, from home entertainment, which includes both television and DVDs.

CHADWICK: They lose money when people go to see movies in the theaters because not enough go to see them and they're very expensive. They make it back on DVDs. This is a really recent phenomenon, the rise of home entertainment vs. the theaters.

EPSTEIN: Well, it's actually over the last 10 years, but it's been spiraling out of control. So they're making more and more of their money--they're now making 85.8 percent of their money from home entertainment and just 14.2 percent from the movie theaters. That's where they're getting in their revenues. When you deduct the expenses of marketing, advertising, etc., they lose money on the movie theaters and they make money on what they call the back end.

CHADWICK: And this is what you term the `Hollywood death spiral.' You end this week's essay in Slate by saying, `More on that next week,' so you leave us with kind of a cliffhanger on the Hollywood death spiral and what's going to happen.

EPSTEIN: Well, the death spiral exists. It basically is as they make more money from DVD sales, the DVD salesmen at the studio have more and more clout and more and more leverage and keep trying to shorten the interval, called the video window, at which the video is released and which kills the remaining box office. So the box office keeps shrinking, the home entertainment section keeps rising and the spiral takes another turn. What I want to address next is what to do about it.

CHADWICK: Opinion and analysis from Edward Jay Epstein, author of "The Big Picture." He writes Slate's Hollywood Economist column.

Edward, you'll be back next week with the answer to the death spiral?

EPSTEIN: I look forward to it, Alex.

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