MADELEINE BRAND, host:
OK, it's pop quiz time. Where do movie studios make their biggest profits: from A, ticket sales; B, DVD sales; or from, C, selling movies to TV? The answer, surprisingly, is C: TV licensing. And here to explain is Edward Jay Epstein. He writes about the economics of Hollywood for the online magazine Slate.
And, Edward, you note in your Slate article that DVD and video sales actually bring in more revenue for movie studios, but that TV is more profitable. Can you explain the difference?
EDWARD JAY EPSTEIN (Slate): The revenues from DVDs are the highest. That's just the amount of money you get in; but there are expenses on DVDs. You have to manufacture them; you have to send them out; you have to put them in warehouses; you have to pay residuals to labor unions. In television licensing, you still have to pay residuals to labor unions, but after that, all the expenses belong to the television networks or the cable networks or the television stations. You don't have to have marketing or anything else. So the margin of profit is 90 percent, while the margin of profit on DVDs is still very high, about 65 percent.
BRAND: So why would television networks pay so handsomely to rerun a movie?
EPSTEIN: Look, they have an audience 35 times what the movie audience is. What attracts that audience and what attracts the advertisers in the case of networks or cable is a movie that the public wants to see, and Hollywood knows how to make movies that the public wants to see.
BRAND: And, coincidentally or not, all six of the major commercial TV networks are now owned by companies that also own movie studios.
EPSTEIN: That's right. As the audience moved from the movie theaters to their homes and centered around television sets, it became clear that where the money was going to be was in television, and only the networks guarantee you at least an outlet.
BRAND: If the television networks are owned by the same companies that own the movie studios, then aren't they sort of giving with one hand and taking with the other?
EPSTEIN: The money goes from one pocket to another pocket, it's true. But they also get money back from advertising; in other words, the networks are profitable now. In the case of, say, ABC, which is owned by Disney, something like 70 percent of its programming comes from Disney. Now should that programming come from someone else? I don't know the answer. It might just be the best programming around. But, yes, there is a--let's call it a synergy.
BRAND: So where does that leave movie theaters?
EPSTEIN: Well, movie theaters are the beginning of the sequence. And the movie theaters create, in a way, the value for everything else down the chain, if the movie's released in the movie theaters. Many of the products of Hollywood go either direct to DVD or are released on Home Box Office--which is owned by Warner Bros., of course--or are these television series. In other words, not everything goes to movie theaters. But the films that go to the movie theaters, and the movies you're talking about, Madeleine--the big movies like "War of the Worlds"--the value is created, the public relations event, the media attention. What gives the film its value is that short play in the movie theaters, where they lose money. Then once they've created the value, it goes elsewhere.
BRAND: So, Edward, if a studio, a major studio, has a bad year, they can always reach back into their libraries and pick a profitable film to sell to TV--Right?--whereas...
EPSTEIN: That's what's happened to Sony this year. Sony has had a number of bombs at the box office, but it has such a deep library of television programs and movies that it's actually making more money than it made last year.
BRAND: So where does that leave the smaller studios that don't have those libraries?
EPSTEIN: They are then totally dependent on their current production. DreamWorks is a good example. Now DreamWorks is brilliantly managed, it's well-run, and yet it has to have hits to survive. When it gets a movie like "The Island," it might find itself in trouble. It--I understand it's still in the black, but it's up now for sale to NBC Universal. In other words, it has to merge with a large studio, which has been the history of all the successful small studios. They've been swallowed up by larger studios.
BRAND: Opinion and analysis from Edward Jay Epstein. He is the author of "The Big Picture: The New Logic of Money and Power in Hollywood," and you'll find his article at slate.com.
EPSTEIN: Thank you, Madeleine.
BRAND: More to come on DAY TO DAY from NPR News.
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