Film Fund-amentals: The Decline and Fall of Hollywood

In many parts of the country, the leaves are already turning brown. It is due to drought, not seasonal change. The same is true at the box office.

The 2012 box office is at its lowest level in…well, take your pick. According to a recent report, it has been the worst box office since 1993. I seem to recall that an earlier report placed it as the worst since 1995. Some analysts predict that the final tally for the summer box office will be down by 3 per cent  from 2011, and you may remember that 2011 was already down to a 16 year low at the time. Likewise, 2010 saw the lowest attendance since 1997. Inexplicably, the mid-1990s were the golden years, and it’s all been downhill ever since.

Based upon many of my past postings (see Dickens of a Mess), the steady decline of the Hollywood box office isn’t exactly a surprise. I have been warning and explaining this point for the past two years. So, at the moment, I am more amused by the latest “insider” take on the problem. The latest is that the 2012 drop is being caused by…(drum-roll please)…the Olympics.

Is there any real evidence that the Olympics would create a conflict for movie viewing?  No. There is not a single shred of data to support this assumption whatsoever. But that’s OK. Prior to the Olympics, the drop was due to the Colorado theater shooting. Before that it was caused by the weather. Before that is was due to….You get the point. Eventually, someone will blame it on sun spots.

One of the few articles on this decline that makes sense is Tom Shone’s recent post at the Guardian web site, called Summer at the Cinema. Of course, Shone commits several unforgivable transgressions in his thinking. He first demonstrates the suspect nature of Hollywood accounting, by reference to the mysterious extra ticket sales generated by Paramount back in 1994 from theaters that didn’t exist. Then he changes the current box office record by adjusting the box office of old films for inflation and comparing them to the modern list.

Once that adjustment is made, Avatar doesn’t even make it onto the top ten. Instead, the highest grossing film in history is Gone With the Wind, closely followed by Star Wars. Even Snow White and the Seven Dwarfs aces out Avatar. One reason why Hollywood does not like to adjust financial figures is because the results might make the modern whiz kids look bad. It should also be noted that with the exception of Titanic, all of the top ten titles are over thirty years old.

In reality, the decline of the Hollywood cinema has been going on for several decades. The advent of the digital revolution has simply accelerated a process that was already well under way. Heck, some folks would argue that Hollywood never really recovered from the invention of television. Certainly the whole Hollywood system is still straining from the forced collapse of the old studio system, starting in 1948.

In his article, Shone argues that the vast changes and increase in home entertainment options have been the primary force shrinking the box office. That is certainly true. At this point, the changes are not just shrinking the box office; they are replacing the whole system. The digital revolution has and will continue to alter the entire structure of both distribution and production. It will prove to be the most profound event in the history of cinema since the invention of celluloid. Actually, it will be the end of “cinema” and the beginning of some new digital form. It is the single greatest threat that the conventional Hollywood film industry has ever faced. But it’s not the only threat.

An inability to adjust to any form of rational business and financial modeling is the other great threat facing Hollywood. The Hollywood film industry has always had the odd distinction of being a business based upon large amounts of spending in the hope that a precious few movies will actually make a profit. In that regard, the business structure more closely resembles gambling than any kind of rational enterprise. People in the business will insist that this is the reason why only a select few (that is “Them”) are capable of understanding the biz. Everyone else is a dim wit.

Of course, this is total nonsense. Addicted gamblers have the same rationale and attitude. Likewise, addicted gamblers usually go belly up while they are doubling down. In the old days, in Vegas, these guys would eventually be found in a back alley with a pair of broken legs. But in Hollywood, they merely become executive producers.

The entire financial model used by Hollywood is completely unsustainable. The system is propped up by financial institutions using models that are often only half-sustainable and interfacing into financial models that have been borrowed from other businesses (for example, the mortgage industry) without any form of adjustment for film assets. When those approaches fail to work, as inevitably they do, they then fall into line with the gambler nonsense of the Hollywood insiders. Meanwhile, the insiders are desperately hoping that the Chinese will come in and simply give them money. Good grief, this sounds like the federal government.

So the whole thing is a complete mess in the process of imploding. Which is sort of OK. The Hollywood system is rapidly becoming irrelevant. Sure, they have money (kind of – it’s borrowed from everywhere else) and political clout (which is how they keep trying to derail the digital revolution). But what they really need is financing based on bona fide risk analysis and a cooperative approach to digital adaption. Well, that and maybe a few original ideas. Unfortunately, they are resisting any form of financial discipline while mindlessly trying to tame and devour the emerging digital process.

Hollywood will not fall over night. Instead, it will collapse much like the Roman Empire. It will splutter and misfire, spinning into various smaller pieces as it slowly dissolves and scatters into a strange collection of hybrid forms (in between some really splashy shows in the Coliseum). Most likely this process will take about ten years. Hopefully sooner.

And by the way, every time I make a prediction like this it ends up happening a lot sooner. I’m way too conservative these days.