Tell Us What We Already Know

It sometimes takes a lot of work to tell us what we already know.

That is one of my impressions after reading the recent Variety report about the current state of Hollywood, as analyzed by Michael Nathanson for Nomura Equity Research. Nathanson’s report, based on ten years of scrutiny, seems to present a semi-optimistic picture of Hollywood’s current direction as he maps out the its modern business model. Notice I have a “semi” in there.

According to this report, Hollywood has succeeded in streamlining cost issues by reducing productions and focusing on a few selected tent pole releases. I guess that is one way of looking at it. In turn, these movies have a higher box office profile and generate much larger revenues. By and large, that is true. For every $300 million spent, at least $250 million is earned at the box office.

The report suggests that the past decline in theater admission may now be on a slight upward tick. Actually, the real figures suggest that the decline may have at best bottomed out. The signs of life are erratic.

The decline in the home-video market has possibly bottomed out as well. Quick note to Nathanson: don’t bet on it buddy. I know that life is full of maybes, and maybe you have a point, but maybe the entire home market is changing so rapidly that you are simply not able to factor that in; and so maybe, just maybe, you are way off base.

The report also notes that the dynamic emergence of the international film market has greatly bolstered Hollywood. This is a fact. Most major Hollywood blockbusters are currently earning the main bulk of their profit from the overseas market. Heck, some of these suckers are only earning their money overseas. At the moment, this has become a godsend to Hollywood.

OK, I am being a little backhanded in my presentation of this report. I didn’t intend to start out that way. After all, Nathanson makes some good points. It is true that, by vastly reducing the amount of modest productions and loading maximum money into a few big movies, Hollywood as indeed successfully streamlined the whole process. Why heck, just a decade ago Disney would have had to produce over two dozen bombs in order to lose the kind of money they blew on John Carter.

I can’t help but point out the problem with this methodology. It only looks good on paper for about two seconds. Then, it becomes obvious that by loading everything into one boat, you can lose it all that much faster. For example, you have just spent $300 million on a movie (which is increasingly the standard budget). Then you spend about another $250 to $350 million on post-production, advertising and stuff (again, increasingly normal). So you have to make over $600 million to even come close to breaking even. So sure, most of these films make lots and lots of money. But the end result is really just a highly inflated version of chump change.

Ticket sales are not really going up. Ticket cost has gone up. That is the factor that makes it look as if admissions have risen. Fewer people are going to the movies, but they are paying more for the tickets, so the increase is optical only. I realize that the entire film industry has a long tradition of playing funny games with these figures, but this is not the moment to do so. Admission is up. Attendance is down, way down.

Nathanson presents the home market as reaching a point of stabilization due to the increase in VoD and online distribution. Essentially, he sees the online approach as a helpful component to mainstream DVD distribution, which is tantamount to seeing the online future as a handmaid to the market. Ironically, many people in the online trade sees themselves in an evolution moving in a completely different direction. I personally think that Nathanson hasn’t a clue to the long-term direction of the digital market.

In his study, Nathanson admits he had problems getting figures from the major companies (especially ones with large TV divisions) that clearly separated flows made between film productions and other forms of media. But he concedes that TV operations are currently making up the majority in profit for these companies. In a financial sense, behind every Hollywood movie are a lot of TV shows that keep the system rolling in revenue.

TV brings in the bacon, and then the overseas market stirs it up in a pan. Currently, a tent pole movie earns two to three times its gross overseas. Presumably there are many reasons for this, but many of the official reasons don’t make much sense. Presumably, the phenomenon has been due in part to Hollywood’s long standing ability to flex economic dominance over large parts of the foreign market. Also, presumably, it is related to the foreign market’s ongoing focus on theater presentation at the expense of other distribution modes.

But all of this is changing. For example, the Spanish company Alta Films is on the verge of going under, in part because the Spanish audience is shifting from theater viewing to VoD. I suspect this process will be felt eventually throughout the European market. Likewise, there have been indicators of a commercial shift toward national productions over American films, originally seen in France and now, increasingly, China. So maybe this report isn’t so rosy after all. There are a lot of strings attached to it. Not strings actually. More like big heavy ropes with anchors attached. Be forewarned.