Hollywood is in a state of constant small changes these days. For the first time this relentless evolution is happening, however, out of choice and not out of necessity.

Every major step forward in this business has been caused by the very real threat of insolvency. It happened during “the studio era” as sound and then color were given real tests, then finding wide acceptance, because of studios on the brink of bankruptcy. The business of making and exhibiting movies survived the “Paramount Decree,” television, and actors being paid a piece of the gate, but not without the studio system falling and ultimately failing.

After 30 years, the new version of the MPAA world has reached maturity. There is very little of the movie world before 1970 that is in any way analogous to the movie world of today, outside of the making of the movies themselves. And, for me, that includes the care and feeding of movie stars, the press and everyone else who is in the part of the universe that is driven by the production of films.

But once you get past production, everything has changed. Movies have become product. If you want to get on your high horse and scream and point at Jaws and Star Wars, you can. But those films simply widened the perspective of the businessmen who owned studios at the time. The truth is, those movies tricked most of them into believing that they could go and do likewise instead of understanding that you cannot run businesses based on the dream of the mega-hit.

In the 27 years since Star Wars, the pursuit of the mega-hit has come close to shutting down a number of studios. But something even bigger than the chase of mega-hits has changed the business entirely… the former “ancillary markets” have become the primary income producer and safety net of the industry. First, there were the massive bidding wars between broadcast TV and the burgeoning pay-TV outlets for rights. Home Video soon replaced those deals with an even greater source of income. And now, DVD has become the ultimate income producer, as sell-thru has become quick, profitable and hugely popular.

So here we are, at the start of a new year, wondering what lessons we have learned from 2003 and how those would best be turned into action in 2004. There are many different answers for the many different divisions of the film universe. Are you in development, production, merchandising, marketing, publicity, exhibition, international exhibition, home entertainment, pay-TV/broadcast, post-first-run home entertainment repurposing (there has to be a name for library operations, doesn’t there?) or are you into video games and the web and all the still second-tier froo froo?

All of those areas have lessons to take from the year gone by, from wins and losses. But what is most interesting to this writer is the macro future of the business. If there is a single problem with the business of movies that is not really being addressed very effectively, it is the idea of a central focus. No one seems to be able to see the forest for the trees anymore. Maybe Michael Lynton will become the great visionary of the new millennium of the movie business. Maybe not. But to date, Alan Horn/Barry Meyer, Sherry Lansing, Michael Eisner, Peter Chernin, Alex Yemenidjian and Ron Meyer have all been looking for the holy grail of vertical integration, but have ended up putting out fires and maintaining status quo far more often than moving forward.

The simple truth is, Viacom, Disney, Fox, and NBC Universal all have a complete set of tools in the media integration world. Time-Warner has a smaller network with the chance to get bigger and the power of a major cable foothold. Sony has the fewest weapons, but has the tenuous advantage of being the only company with a major stake in the hardware business. (If anyone had the stomach for a DreamWorks / MGM / Apple / Pixar merger, that would an interesting conglomerate indeed.)

So now that all of the remarkably integrated companies exist, who is going to imagine a new vision for an integrated future? Who is going to see beyond the internal battles and politics to the opportunities that will keep the film business from cycling back into a place of slow deterioration waiting for the next big thing and lead the way to actually being the next big thing?

On the individual level, there are small strides made all the time. Fox Searchlight used Internet marketing better than anyone actually has (don’t get me started on the Blair Witch lie) to launch 28 Days Later with relatively little marketing expense. But using some of the same tactics on In America has not worked, mostly because the niche In America needs to draw is not made up of internet dwellers the way that the zombie movie fan demo is.

On the flip side, Disney did well by not reacting very much to the negative internet buzz for Pirates of the Caribbean or the short-sighted “pirate movies don’t sell” crap that came from journalists who claim to hate the system just before spouting all the excuses used by the system for making the same movies over and over and over. Marketing, starting with the final trailer for the film, did what internet buzz and pundits cannot really do… it made a large percentage of people in every demo want to see the movie.

What works for one movie does not work for the next. Yet the machinery has become so massive that there is a tendency to lose the sense of choices being made, conceptually and literally, for each individual movie. If 2003 taught us anything, it is that the better tended the garden – at least with studio movies – the better the result. We also learned that if you are in the business of selling elements and a film comes along that isn’t really built to be sold that way, that film is likely to have big troubles, no matter how smart the aesthetic decisions about 1-sheets or trailers.

The exhibition business started to boom again, as the bankruptcies of a few years ago led to new owners and the freedom to escape albatross long-term leases for theaters, leading to a nearly complete refreshing of the domestic theatrical experience, better deals with the studios and actual profitability.

The merchandising boom took a major hit with even popular movies coming up short in the retail universe and shortened theatrical windows bringing the same fast-hit mentality to the merchandise game. As a result, television merchandising has become a more steady business while the feature film opportunities have become riskier and riskier.

Publicity has become even more frustrating as marketing dollars have come to overwhelm publicity efforts, while most publicity departments are still working with the same paradigms as a decade ago or longer. There seems to be a slow move afoot to decommission the junket system as we now know it, as studios are rethinking the value received for laying out the national feedbag. But the system is hard to break, as all the studios are intertwined in the process.

While publicists have always had to sell media outlets on the value of their projects’ talent, it seems that more and more the end result is that movies are shilling for the media outlets and not the other way around. Instead of seeing a movie early and getting excited about the film, editors are now seeing movies that they know will sell copies and looking at the films only to make sure that they won’t be humiliated by a shocking failure. Then they assign the writers that are best suited to giving the studio – acting far more like an advertiser – the advertorial they need. This has been going on for years, but it has become so transparent that the editorial content has become more valuable as an awareness builder than anything else.

Home Entertainment has begun to market itself much like theatrical releases, with bigger and bigger ad budgets every month. The ability to create “opening weeks,” reflective of opening weekends in theatrical exhibition has been quite brilliant. But the downside has also been relatively brief windows for both DVD sales and rentals. In sell thru, only 3 of the Top 20 sellers last week had been on the charts for 10 weeks or more and only 1 of the 3 was a new title, LOTR: The Two Towers. On the rental side, there was no film that generated as much as $1 million for the week that had been on the shelves any longer than 6 weeks.

Why should anyone feel bad about any of this?

Well, the most popular answer is that fewer people are actually buying tickets every year and that is a problem. To me, that concern is ridiculous on its face. In the last few years, as DVD has boomed, the industry has actually added about 20% in revenue for most titles (increase of DVD sales and rentals versus losses in video numbers) while ticket sales only fall around 3% a year. That is a huge boon. How any one could expect a double digit increase in revenue from one area and no fall off from somewhere else is beyond comprehension.

What’s happening now is about as good as it can get under the current paradigm. But what comes next?

Piracy is a real concern - especially as the industry banks more and more on the specific technology that is most easily pirated as a leading source of revenues. Folks love extras, but as the novelty of DVD ownership wears a little thinner, what motivation will people have to spend money on DVD purchases when DVDs of equal quality can be pulled off the internet. That’s not to say that the whole machine will collapse. Some morality still exists in the world. And there will be technological fixes that inhibit a large percentage of the public. But the movie business, even with DVD, is a small margin business and 4 or 5 percent is a lot of money and often all of the profit.

The answer has a lot to do with directing the motives of the public. And that’s when it becomes complex. Because revenues are being maximized so completely these days that we are on the border of a greater anarchy. And while the analogy to what’s happened to the record business does not hold in detail, it does in spirit.

When record companies started producing CDs, audio tape was the vogue and the production of CDs, a limited commodity, was more expensive. Prices were higher, but early adapters wanted to play. As the CD business mainstreamed, prices were expected to go down as production prices went down. And for a moment, I guess we could attack the raw greed of the record companies. But then, the costs of being in the record business rose to meet the increased profits. The bidding for talent went out of control. The budgets for videos – and the number of videos committed to for each album – grew and grew.

What has been the first clear change during the “DVD Revolution?” Budgets for production have gone out of control, as producers and agents figure out how to play the DVD card against studios, who in turn know they would be committing fiscal suicide were it not for the shield of DVD revenues. The sense of intense risk has been taken out of movies that cost $80 million and more. As a result, we don’t go a year any more without half a dozen movies that lose more than double the production budget of Heaven’s Gate or One From The Heart. And we yawn.

But as people get used to all this money lying around, giving it up will not be easy. I mean, take a look at the response to the screener ban. People who claim the moral high road over the greedy studios and the evil Jack Valenti have convinced themselves that the screener ban was a personal insult or some insane plot or any old reason to point fingers at anything other than our love of entitlement. My favorite canard is the argument that the MPAA should clean up its own house first and that screeners can’t be responsible for more than 1% of piracy.. Well, if you know anything, you know they are killing themselves to get their houses in order. But, more importantly, where is the moral argument that you throw away 1% because it might insult your “friends” in the industry? Is that $30 million you’re throwing away? $15 million? $10 million? What if it’s only $5 million? Is that okay? All in the name of those of us who are afforded every luxury being afforded one more luxury? (50 free screenings of a movie in two months – or more – just isn’t enough!) This is how Hollywood fights for what it wants to keep. And it’s not even the really powerful who were worried about losing something in this particular fight.

Every player wants every last thing they can get. One greedy turn deserves another and all that. But when you can’t take the step backwards, when sanity lies behind you, the inevitably of disaster settles in for the long haul.

Opening weekend is life and death because the industry has chosen to build itself that way. There are very few people in a position to be serious about changing the fiscal flow chart. Even the brightest minds in town are in the business of maximizing what exists, not breaking new territory. As you chat with smart people, you hear breakout ideas. But like parents of a newborn – and there is one every couple of weeks at most studios – one often has to put the passion to the side in order to service what is necessary.

Studios learn not to be able to do things… like market small movies. It’s not a natural failure, but a learned one. What studios are learning to do now is to churn films out, open as big as possible and start prepping for home entertainment. When’s the last time you saw a TV spot for a third weekend of a film that wasn’t either a surprise hit or an awards film? Fourth weekend?

One worrisome thing is that the increasingly shorter and shorter exhibition windows, theatrical and home video, leads naturally to fewer opportunities to “get it right.” The often shouted point that if a film doesn’t catch on right away, it dies, has become overwhelmed by the pluses and minuses of the balance sheet. Domestic theatrical revenue means something only if it is on the far sides of the scales. Huge success is great and everyone wins. But the price of failure is measured by how badly the theatrical failure affects the other markets. (I mean, aside from the depression part for people who had intimate relationships with the failed film.)

The irony of the Paramount situation is that they protected themselves financially by splitting costs, but rarely took real chances, getting the worst of both worlds. This year, it caught up with the studio, as box office was so poor on a number of the more expensive pictures that the studio actually lost money for the first time in years. There will clearly be a new philosophy in the immediate future of Paramount, but the question is, will the play be tighter or looser? Either direction is a real option.

Then there is the very real problem that the list of options in marketing and releasing a film are becoming shorter and shorter. Specialized distribution is dying on the vine. Every year, the situation becomes worse. And every year, the formulaic release of every film becomes more the norm, as the ultimates get closer to being dead-on, for better and for worse.

Forgetting the artistic issues, there are serious economic problems with this too. McDonald’s is going through it now. In order to build the machines they have build, they narrowed their product line to allow focus on the things that sold best. Almost 30 years ago, they added breakfast to their menu… a big change. The Happy Meal was another great success. And McNuggets. But outside of these generation old changes, the company has failed to find the next great thing that would expand the market base, but not eat away at the other revenue sources. All along the way, through the years, the company continued to try new things and to do great work at maintaining the status of the company. But no real innovation that stuck… not pizza, not ribs, not chicken wings, not etc, not etc, not etc. Then suddenly, beef and fat became less fashionable and this empire had a real problem. Salads have become a more and more popular part of the McDonald’s menu. But you can’t keep McDonald’s going on salad. Pricing became a big new feature a few years ago, but the success of the $1 strategy was in maintaining existing customers, not creating new ones. McDonald’s is not going anywhere next week. But it is clear that the company understands that they have a long-term problem to solve unless beef is discovered to cure cancer and fat is proven to make you live longer.

Hollywood is on that same track. We’re still selling hamburgers the same old way. Campaigns come and go, but the burger that everyone loves is still the engine of the train. The boxes, both at home and at the multiplexes, continue to evolve, but it’s burger, burger, burger. The dependent indie arms of studios are the Grouchy Meals, selling an attractive niche package that not only doesn’t target the entire demographic, but almost prohibits the expansion of the demo intentionally. Most of the innovations that have occurred in the last 30 years, in the macro vision, have been about maximizing the potential of what exists, not breaking out new innovation. There will, like Mad Cow Disease, always be setbacks. And the industry will find ways of addressing them.

But at a moment where the industry is fairly stable, who will start trimming the trees with a vision to actually expanding the forest?

I have to admit that I find it galling as a film lover, but the single greatest piece of post-production business this year was Miramax’s split of Kill Bill into two movies. I scoff at all and any arguments that this was an aesthetic choice on any level (except for Quentin’s ego) and that this movie was in some way improved by stretching out to 3 hours. But the genius… the recklessness… the balls of reducing the 4th film of Quentin Tarantino into a pure cash call… two DVDs guarantee profitability… spectacular! Love him or hate him, Harvey Weinstein lives outside of the box. And if he has a single liability, it is his occasional desperation to deliver the perks of being inside the box.

The question of 2004 should not be how to optimize things based on where we are, but how to optimize things based on the tools at hand with a view to the future. The time to do it is now, while the business is healthy. The time to do it is when the DVD safety net still exists.

Experiment with second run theatrical exhibition again… longer DVD windows… splitting movies within marketing groups with the goal of creating niche expertise in a number of marketing groups within each studio… stop reducing risk by splitting rights and focus on reducing costs… avoid ever releasing three or more films in any six week period of the year… move your movies that need more care out of high traffic areas and stop being so namby pamby about what the pundits are going to say – your marketing budgets are more powerful than any of us… make fewer movies… explore more niches… try a pay cable network with commercial free broadcast programming…try a serious direct-to-DVD window with a big marketing budget, aiming to increase total revenue by avoiding theatrical marketing expenses… spread a marketing budget over a whole month after release…

We don’t know what methods of the past will do in the modern age… forget the lessons of the past… forget your notions of progress… rethink it all…

The irony of all of this is that the industry keeps looking for ways to make this into a more traditional business model, but the more they try to get control, the more the industry becomes driven by happenstance, as one movie or event changes the playing field and everyone tries to adjust. The future belongs to the leaders, not the followers.

Second star on the right, straight on 'til morning.

Monday - December 29 - The Movies You Didn't See, But Should Have
Tuesday, December 30 - The Ten Worst Films Of 2002
Wednesday, December 31 - The Best Films Of 2002
Friday, January 2– Reflections on a New Year
Monday, January 5 – THB Returns To The Daily Schedule

MCN will be updated daily through the holidays.