Film Fund-amentals: Occupy Hollywood

About two and a half years ago, I argued that the suits running Hollywood didn’t know what they were talking about in their long-term projections on the economic development of the business. Back then, they were insisting that the industry was recession-proof and that it was capable of weathering the economic turmoil until recovery.

Of course that was based on the idea that the Great Recession would follow the standard economic model. Unfortunately, the Great Recession has not cooperated. Sure, technically the recession ended two years ago, but it didn’t seem to get the memo. We’re supposed to be in a state of economic recovery that is shaky at best, with plenty of room for debate.

But the grim fact that is basically agreed all around is that the recovery has, at best, been extremely limited and has primarily been felt by an extremely narrow pool of major financial interests. Everyone else has seemingly been left to eat cake.

Which is where the film industry gets into a bind. By and large, movies are a form of discretionary spending. Nobody really has to see a movie in order to live (except for a few middle-aged men who are really hardcore Scarlett Johansson fans). Increasing numbers of people are finding it easier to skip the theaters and wait to see movies by any other means possible.

Hollywood was braced for a six-month recession and was determined to pursue a strategy devoted to a decreasing number of productions, primarily focused on the $150 million to $200 million budget range. Theater attendance would be beefed up through the allure of 3D projection as the new standard. The rapidly developing online trade was viewed as a potential menace, but it was also considered minor because the audience would want to see the movie in a theater.

It’s two and a half years later and the master plan is way undone. The national economy still resembles a massive pile-up on I-95. The current real budget for a major movie is now hovering between $250 million and $400 million (these are the best estimates that can be made of the real figures extrapolated from the lower figures publicly released by the main companies). A few of these films will make about a billion plus in global box office. Most will come in at about $500 to $600 million. Increasingly, many will barely go over the $100 million mark.

The vast bulk of these movies are playing to various levels of loss. With decreasing revenues in DVD sales and rentals, the majors are not recouping these losses. Most studies currently suggest that 3D has been good for animated productions but increasingly detrimental to many others. The current threat by Sony to charge moviegoers for the glasses is not exactly a tribute to the financial success of the process.

Theater attendance is down (somewhere between 5 and 20 percent, depending on whose figures you trust — the fact that there’s such a wide gap suggests that someone is playing with the math). Online viewing of movies has accelerated. With its move into the VoD market, Netflix demonstrated the validity of the process. Of course it then demonstrated the negative effects of bad business decisions with virtually every move made since then, but it did prove the initial point.

The original model that Netflix pursued for its expansion into the VoD market was based on the idea that many people would upgrade to a home theater design using a large screen TV connected to the Internet. The reality appears to be that a lot of folks are simply watching on their laptops and PCs. This is the low end of the market, but many viewers are willing to cut corners on the quality issue while saving big bucks.

Hollywood is quite aware of this trend. They are desperate to control the VoD market. Their effort is based upon a two-step approach. First, the MPAA, major guilds and many of the main production companies have applied ample pressure on Congress to pursue legislation that would tightly regulate the Internet in a fight against online piracy. Their concern is actually quite valid. However, there is some strong indication that the most severe forms of online piracy (by which I mean good-quality digital copies as opposed to the cheapskate cell-phone-in-the-theater stuff) have roots within the actual industry. A certain amount of the piracy is an internal security matter. But the companies have decided to go after the Internet itself (which is a bit like a bank that discovers it has a vice president who is embezzling, so it penalizes the customers instead).

The result — if not the primary focus — of this political effort is to create a “secured” Internet in which Hollywood can then develop a vertical monopoly on distribution. Considering the history of the film industry (after all, classical Hollywood was based on a vertical/horizontal monopoly), this is no surprise. But so far the models of the emerging Hollywood online distribution system have been insane. For example, Universal considered making Tower Heist available for VoD three weeks after it opened. The press largely focused on the uproar that ensued from the theaters (and Universal did back down). But few looked at the price tag that Universal was planning to hawk it for: $59.99.

Almost every economic and business move currently being made by Hollywood is based on a steady (even mammoth) upping of the ante. Production costs will continue to rise — the recent go-around that Disney had about the budget for The Lone Ranger film is a farce, since they were rolling back a preposterous $250 million cost to a merely crazy $200 million budget and the movie will undoubtedly go over its budget no matter what. Meanwhile, they are responding to a decreasing (and increasingly cash-strapped) audience by upping ticket prices at every level. Likewise, they are convinced that they should control the VoD market and gouge the entire system. At the same time, they insist that they are not seriously affected by the current economic crisis because… well, at this point they seem to lack any clear answer, but it sort of sounds as if they are too big to fail.

Which makes it very tempting to start an Occupy Hollywood movement. Considering the financial thinking that is going on, I would strongly suggest a move toward complete institutionalization of the system. Heck, straitjackets, rubber rooms and electroshock therapy just might work.