21 Jun Film Find-amentals: The Sound of Money

Stop the press! Paramount Pictures has just crossed the billion dollar threshold, and the summer has barely begun. Oh whee! They are rolling in it and everything is beautiful (at least along their legendary gates on Melrose Avenue).

Hollywood loves the smell of success, and Paramount’s chairmen Brad Grey has seemingly produced the one bright shaft of sunlight seen recently in town. Too bad it isn’t exactly accurate information and the light is a tad dimmer than thought, maybe even a bit twilight-like. But a billion sure sounds good.

Until you start looking at the numbers, figure out the totals, check and cross-check the actual averages and all of that dull stuff that studio executives don’t much like doing. Suddenly, you find out that a billion just ain’t what it used to be, and the news is really neither here nor there. For example, in the first six months of 2011, Paramount has produced and/or distributed six feature films that took in a global total (so far) of $1.4 billion. Paramount’s own announced figure is closer to $1.2 billion. Presumably this is the amount taken out of deals for the three films they primarily distributed. Still, these figures are very good.

Of these six movies, we are looking at a total production budget of $518 million. However, several of them have estimated budgets that are being pedaled on the low side. For example, Thor is listed on the IMDb site as having a budget of $150 million. In reality, its budget was more likely somewhere between $200 to $250 million (based upon the various estimated budgets that exist for the film). These days $150 million is just a standard PR line when someone is rude enough to ask about the cost. So we can safely raise the production budget by at least 50 percent, bringing it to $1.2 billion.

By the way, did we mention the PR cost attached to many of these movies? Didn’t think so. The average tent pole movie currently results in PR costs that are almost equal to the estimated production budget. So most likely a film like Thor had a promotional cost of around $150 million. Again, we have to adjust the figures. I will be generous and boost the count by a mere 30 percent (based on the production costs before I made the first adjustment — to be honest, I’m cutting them a lot of slack). This would add another $420 million for a total of $1.6 billion.

And did I mention that Paramount’s own figure of $1.2 billion is most likely a high-ball estimate and the real figures are probably at — or just below — $1 billion? Either way, it doesn’t matter. They’re not exactly making money. They are spending money at an incredible level, but they’re not really making any. It should also be noted that Paramount is actually in better financial shape than some of the other major companies.

The estimates and adjustments I’ve made are all extremely rough figures. Since I made a point of low-balling on some of the adjustment, it is very probable that the real figures are even worse. Hollywood accounting is notorious for being less of a science and more of an occult ritual with a wide range of variations in how the numbers magically flow. But the basic pattern presented above is most likely a reasonable assessment. Which brings us to the obvious question: How the hell do these people stay in business!

There are no good answers to this question. Even many of the key players in Hollywood are, I suspect, beginning to ponder the same thing. There is a quiet sense of desperation lurking in the shadows of the sun-lit streets of Los Angeles. There is something going wrong, yet nobody can exactly put their finger on the problem.

Just a quick glance at the Paramount track record brings up a few of the more notable quirks in the current system. Two of the titles on this list were released in 3-D. As we all know, 3-D is supposed to be the salvation of the industry. Oh wait, that was last year. The new story is that 3-D is bringing the industry down. As the cost of 3-D tickets have gone up, the audience has decisively diminished (oh gee, what a surprise). Some analysts are now suggesting that the average tent pole movie would do better by either minimizing 3-D release or skipping it altogether. The main current exception appears to be animated movies. At least for now.

Foreign distribution is the main godsend at the box office. With only one major exception, most of the Paramount movies did better outside of the US than at home. In the case of both Kung Fu Panda 2 and Thor, the foreign market dominated by a ratio of 2 to 1. The only significant exception was Justin Bieber: Never Say Never. Much like Pop-Tarts, Bieber is sort of an American thing.

The ancillary market (DVDs, VoD etc.) has become ever more important. At best, theatrical release will only get most of these movies to a break-even mark (and currently, not even that). Any real profit is made elsewhere. That is one of the major reasons why Hollywood is fighting so hard to take control of the internet by any means possible. For a variety of reasons I have previously discussed, they will undoubtedly fail in this effort (no matter what Congress does). Combine that with the rapid drop in the DVD market and it becomes obvious that the major companies are fighting a losing war.

So we are still stuck with the question of how they stay in business. After several years of thought on this matter, I have concluded that ironically, the question really doesn’t matter. The key to modern Hollywood is that you are dealing with an industry in which none of the financial issues make any sense (don’t believe me, just ask Jonathan Demme). Vast sums of money come and go in a bizarre manner that defies any rational explanation. Most of the accounting is fictional, and the actual figures are too high to be comprehended by any sane person. So the real question is not how do they stay in business. Rather, how do they get anybody in the financial trade to keep giving them money?

What did you say? Haven’t I kept up with the news about the current state of the financial world? Oh, good point. It is more of the same, isn’t it?