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DAVE DAVIES, host:

This is FRESH AIR. Im Dave Davies in for Terry Gross.

Everyone knows that movies cost billions and make millions and that we're paying a lot more for tickets than we used to. But did you ever wonder how the box office take is split among the theaters, the studios, the artists and the video stores?

Our next guest, Edward Jay Epstein, has spent years figuring out the finances of the movie business and he says power relationships in Hollywood explain a lot about why movies follow predictable formulas and why independent films are hard to make and get into theaters.

And Epstein's new book, "The Hollywood Economist," has other fascinating insights, like how cup holders drive seats cup holders on seats drive up revenue, how states and some foreign countries subsidize studios, and why most multiplex theaters have exactly 299 seats; that's because 300 would trigger a requirement of the Americans for Disabilities Act that every row be wheelchair accessible.

Edward Jay Epstein is an investigative journalist whose written books on subjects from the Kennedy assassination to the diamond industry. I spoke to him recently about his new book, "The Hollywood Economist: The Hidden Financial Reality Behind the Movies."

Well, Edward Jay Epstein, welcome to FRESH AIR. You know, movies once captivated the American public. The audience was enormous. Give us a sense of how much the American public was watching movies decades ago, back, say, in the '40s, as compared to how often we go today?

Mr. EDWARD JAY EPSTEIN (Author): In the 1940s it was the national pastime. Approximately 67 percent, two-thirds of the American public every week on the average went to a movie. And they didnt just simply see a movie, they saw newsreels, they saw cartoons, animation, shorts, a second feature, but it was their weekly pastime. Today, less than 10 percent of the public on the average go to the movies in a week.

Now, even with movies like "Avatar," they score enormous numbers but the percentage still doesnt go above 10 percent. They take their numbers from other movies that are playing at other theaters. You still have less than 10 percent of the population and it's been this way for the last 10 years.

DAVIES: You know, one of the differences between the movie business today and, you know, 40 or 50 years ago was that there were fewer theaters, bigger audiences and bigger screens. Now you have multiplexes with, you know, thousands of screens, which means that movie - that studios have to produce thousands of prints of their films. Is that a significant expense?

Mr. EPSTEIN: Well, prints now cost roughly, people use a number a thousand dollars a print. It could be more or less. But so if youre doing five thousand prints, it's $5 million. Now, if the, you know, youre doing "Avatar," its not a significant cost. If youre doing a film like "Hurt Locker," in which case, you know, your total box office is $8 million, its a - it'll wipe out your entire box office. So its a significant cost. Not as significant as advertising.

DAVIES: But they actually do make actual films on reels. These aren't simply digital computer files that we're seeing in theaters, right?

Mr. EPSTEIN: That's interesting you raised that point, Dave, because now when films are shown digitally, there's a digital file. But the movie companies, the studios, the distributors, whatever we're going to call them, still charge -this is not something they make public - they still charge the film for what they call a digital copy, even though the digital copy, rather than a $1,000 might cost them $50, and they then contribute the money for digital copies of the movie to help the theaters convert from analog projectors to digital projectors. So they have a basic scam going on, and that is charging for something that doesnt exist.

Now, what happens is, it adds to the deficit of the individual movies but helps all the studios together by helping the theaters to convert to digital, which will in the future reduce their cost.

DAVIES: So the studio makes a movie and then its distributor, which is a subsidiary of the same studio, charges a fee which includes high costs for prints of the movie which aren't really the major cost but its a way of extracting revenue from the film, right? That then gets used to convert the theaters to digital projection.

Mr. EPSTEIN: In the case of digital projection, thats true. In the case of analog projection, which is still the majority of theaters, they actually make a print but they get a footage allowance from the film labs, which they get back at the end of the year if they use a certain amount of footage, and that reduces their cost by 10 or 20 percent, which goes into their treasury and doesnt go to the account of the film.

The films are all set up. The titles are set up as off-the-books corporation for the purpose of simply accounting on the film. The actual flow of money into a studio is very different from the money that is credited to the film.

DAVIES: Now, you write that studios dont really make a lot of money from the box office. I mean a lot of it goes to the theater owners and to the distributors and to the advertising and printing costs. So where do they make their money if it's not from their theater audience?

Mr. EPSTEIN: Well, the reality of the movie business is very simple. They have a library of movies of literally thousands of titles. Those titles they can sell over and over again to television stations, to cable networks, to pay television, to put them on video - now of course it's DVD - license them to games. This brings in a steady and major flow of money, which pays for their entire production, the money that they actually earn from the ancillary rights to a movie.

And these rights, to keep them flowing - and it's worldwide, it's global, it's not just America - to keep the money flowing in, they need hit movies because when they sell a package and they sell these movies not individually but theyll sell 20 movies to a pay television network or to a foreign television network, they need few hits, big hits like "Batman" or "Avatar" or whatever you have, to drive the package through the whole system. And they make their money by basically selling the same product over and over again through different platforms.

The beginning - it all opens with the theater and the box office. Now, you know, if we go back to the 1940s or earlier, all the money came from the box office, so people still think in terms of a box office as the heart of the business. But that all changed in the '50s, when television came in. Now you have 90 percent of your audience at home basically, watching television or watching their computer or watching their DVD machine or whatever they have there. And because of that, the studios have to be - have a means of reaching the home audience as well as the audience that actually gets into a car and comes to a movie theater.

DAVIES: What about product placements in films? Is that a major source of revenue?

Mr. EPSTEIN: It's not a major source of review to the studios, but it's helpful, especially in independent movies, where people get free computers and free cars to use. They dont get the cars to take home but they get cars to use during the production. Airplane tickets. It helps reduce the budget of a movie. It isn't the major source of money.

What is a major source of money is government subsidies. You know, that - or even state or city subsidies in America. That could reduce your budget by 25 or 30 percent. Product placement is more or less, you know, a nice freebie that comes on top of everything else. It's the cream in the coffee, if you like.

DAVIES: Now, when a movie's being made, one of the risks is that an actor or actress will walk off the set, get ill, get injured. What kind of insurance do they have for stars?

Mr. EPSTEIN: Well, you can't make a movie, at least a movie where you'll have any sort of independent financing, unless you have cast insurance. Cast insurance says that if any of your major players - could be the director or the stars - are incapacitated, the insurance company will compensate you fully. Even if it means scraping the entire production, you'll get back every penny, including script development cost. It's a very expensive cast insurance. It could be five percent of your budget.

DAVIES: Are there some stars that have higher premiums because they have a way of not finishing films?

Mr. EPSTEIN: Well, yes. The insurance companies, one of the things they do is evaluate risk. They're not fools and they look at every aspect of a star's history, whether theyve taken drugs, whether theyve been in trouble with the police, anything, whether they had an injured arm or leg, anything that might reoccur. I mean because, again, insurance companies are risking hundreds of millions of dollars in the case of some major films like "Terminator 3" against a few million dollars in premium. So that they want to make sure that the stars dont do stunts - not that the stars would do the stunts normally - but they want to make sure that doesnt happen.

They want to make sure that the stars dont expose themselves to any risk by playing any sports during the movie or even driving a car in some cases. And they want to make sure that they won't suddenly disappear.

DAVIES: We're speaking with Edward Jay Epstein. His new book is "The Hollywood Economist." We'll talk more after a break.

This is FRESH AIR.

(Soundbite of music)

DAVIES: If youre just joining us, our guest is writer Edward Jay Epstein. He writes about the economics of Hollywood. His new book is called "The Hollywood Economist."

Youve written about how difficult it is for independent films to get financed and to find an audience. And I know that when I read - sometimes when I watch films that are described as independent films, it will say that they are distributed, in fact, by one of the big studio names that we know - you know, Paramount or Warner Brothers. What do we mean when we say an independent film?

Mr. EPSTEIN: An independent film is a film that it does not have a studio green light. Studios might later pick it up to distribute, they might buy it at a film festival. Sony has an entire division, Sony Classics, which buys films essentially at film festivals, nowadays not paying more than $2 million a movie. But an independent film, the major difference between an independent and a studio film is a studio film has a distribution date the day it is greenlit, the day it goes into production.

When "Wall Street II" went into production in September of 2009, it knew that it was going to be released April 23rd, 2010. When an independent movie is made, it has no distribution and no distribution date. So it might have to go to film festivals. It might be years later before it gets distributed, or might never get distributed. For that reason, its much harder raising money if you dont know when the money's ever going to be returned to you.

DAVIES: So an independent film, when its made, there is no assurance that a major studio will distribute it. So how do people finance independent films?

Mr. EPSTEIN: Well, there's been many different attempts to finance independent movies. Sometimes it's rich people finance independent movies. People like William Randolph Hearst made films back in the 1920s. For a long time they were financed by selling the rights to the film in foreign territories - Germany, France, Japan. And by selling those rights and then borrowing money on the contract that they would be paid for those rights, they were able to finance the movies. But this has become exceedingly difficult in the last few years. And this year, 2010, its almost impossible to find enough presales to finance a movie.

DAVIES: So in other words, you would sell the assurance that once a film finishes its American run, that the foreign rights would belong to whoever is putting up the financing and then use that promissory note, in effect, to get a bank loan or some other kind of investment. But you dont really know at that point what kind of success it'll have and whether itll have a foreign audience, do you?

Mr. EPSTEIN: Well, you dont - you know, if youre a foreign distributor, you dont have to put up any money. You just sign an agreement that if the film is finished and if it plays - sometimes as a contract it has to play in American theaters - you will put up so much money for the rights to that territory. Let's say Germany. So you agree to pay $10 million for the German rights to the movie if it's delivered. Then the movie producer has to go to a bank and say, I would like to borrow $10 million on this note. The bank will say, well, how do we know it'll be finished? Then you have to get a completion bond from essentially an insurance company which says that we guarantee that the movie will be finished, and that bond might cost you another million dollars. So it's a very complex process, raising money, and this process made much more difficult recently because of the end of, say, the DVD market abroad or the shrinking of it abroad.

The end of independent distributors in America - some people are no longer sure the movie will be released in America, so foreign distributors dont want it -and the growth of local film industry, all these things have come together, so these days it's very hard to finance a film other than from investors or angels, however you want to describe people who are willing to risk money for the pleasure of seeing a film made.

DAVIES: You know, its a little discouraging as I listen to you describe how all this works and how the studios want to get a teen audience to justify the, you know, tens of millions in advertising and distribution costs that they will incur, and how hard it is for independent producers to get financing to get a film made. Do you think that overall the quality of cinema has been degraded by the finances?

Mr. EPSTEIN: I do think that the quality of movies have been juvenilized, if not degraded, have brought down in their age level and their intelligence, by the requisites and the realities of what a studio needs to do to keep money flowing in. You know, I think that everyone in Hollywood would like to make socially relevant and intelligent movies. These are intelligent people in Hollywood and they would like to make movies like Quentin Tarantino makes, they'd like to make really good movies.

The problem is, they know that they need an audience to come to the theaters that they can find, and that audience tends to be teenage and high school students and people that basically want action in movies. So more and more they produce the movies that will produce the audience they need and somehow they hope that a little money will be available to make "The Hurt Locker"s or the other movies that they would really prefer to make if they had their way about it, if they had the ability to do what they wanted to do.

DAVIES: Well, Edward Jay Epstein, thanks so much for speaking with us.

Mr. EPSTEIN: Thank you so much, Dave.

DAVIES: Edward Jay Epstein's book is "The Hollywood Economist." You can read the first chapter on our Web site, freshair.npr.org.

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