16 Aug Film Fund-amentals: 3rd Quarter Reports

The 3rd quarter reports are coming in, and it has been a great year for the major studios. Too bad they’re all still stuck making movies, because that has been the consistent downer to the biz.

Disney had a net income rise of 11 percent thanks to the theme parks and TV systems. OK, the film division plummeted by 60 percent, which is one of the reasons why they have stopped work on The Lone Ranger. The proposed $250 million budget for this sucker (which in real money means something around $300 to $350 million) suddenly looked a tad high.

Viacom had a profit increase of 37 percent. Most of this was derived from cable TV and VoD deals. Paramount Pictures (a subdivision of Viacom) had a 29 percent drop in income despite the billion-plus revenue from the latest Transformers flick.

Warner is a tougher call. They have not yet released their 3rd quarter report, and their 2nd quarter report was designed to give everything a pretty rosy spin. By the end of the 2nd quarter, their profit was up by 14 percent, partly due to the NCAA college basketball playoffs. Film returns at Warner were more of a mixed bag despite the 13 percent increase (before adjusted operating profit). In reality, Warner’s film division is largely hanging in there courtesy of home entertainment profits and video games.

What does this mean? First off, if you want to make money, then go into television. Every one of these companies is being propped up by their TV and cable holdings (well, that and a handful of amusement parks). The movies are simply an ultra-expensive hobby.

Which is the other problem. To paraphrase that modern political philosopher, the movies are too damn high. The stalled Lone Ranger production is a good example. Seemingly all you need for this movie is a couple of actors, some horses and plenty of Western landscape. Sure, I am being very simplistic (even simple-minded) in this argument, but let’s get real, we’re talking about the Lone friggin’ Ranger, for gawd’s sake. So you should be able to do this baby for around $60 million easy (unless you’re planning to strap rockets onto Silver and really make things go Hi-yo).

Unfortunately, they probably were planning something like that. The pursuit of spectacle has become the predominate focus of modern Hollywood movies. Everything else (script, actors, etc.) have taken a backseat to the “Oh wow” factor. But there is only so much “Oh wow” to go around, and a lot of people still go to movies because they’re looking for a story. This is an issue that comes up repeatedly in every study and survey done on the audience. Even people working in Hollywood are making the same comments. But this has little effect on the current plans of virtually every major studio. Heck, in the case of The Lone Ranger, Disney is squabbling over a mere $50 million differential (they want the movie made for $200 million, which means they’re willing to spend close to $300 million).

As loony as the system is, it can be viewed as half OK. After all, the steady profits from TV, cable and ancillary markets (video games, etc.) have so far provided enough extra profit to keep the screwy system afloat. The growth of the VoD market also looks good. This is especially important, since the TV and cable market is already showing the first serious sign of loss to the booming online trade. Granted, the actual theater market is dying, and increasingly Hollywood is even helping to shove it onto the ash heap.

But it is a business model that has some major holes. All of the TV, cable and ancillary markets are in a massive state of change. Much of the current change has to do with an undermining of the kind of centralized control that the major companies must depend on. In turn, the major companies and the MPAA have been busy attempting to ram through new laws that broaden the legal definition of piracy and impose increasingly harsh penalties aimed at any website that looks even half cross-eyed.

Likewise, the major studios are still banking on the dubious concept that movies are recession-proof. In the past, movies fared extremely well through normal recessions (those economic events that usually lasted about six months). The current recession started in December 2007. To be honest, this isn’t even a recession anymore. It’s more like a slow-moving depression. And nothing is about to change (at least not for the good). It is a situation that has driven many politicians to wild fits of delusional thinking and a few seasoned economists to bizarre flights of desperate fancy. But no matter what, we are now in a strange zone of political and economic inertia in which unemployment and under-employment will stay at record highs while the general public will be forced to focus on basic needs in a modern struggle for survival. Oddly enough, going to the movies is simply not one of those basic needs.

Which is why we have the current contradiction. Theater attendance is going down. DVD sales have plummeted. Production costs continue to climb, with $200 million as the current going rate. The soaring budgets are a form of unstoppable force while the economy has become one nasty unmovable object. It’s an old dilemma that never ends well, and the Hollywood majors are no exception.