June 22, 2005

THE SLUMP ISN'T REAL, BUT CHANGE IS...
(Part 2)

As I was saying….

Batman's landmark position in both video sell-thru and the shortened video release window led to another deal that changed the video rental business. Instead of a split price point for rental and sell-thru, a rental "rental" was created and the major rental storefronts were flooded with copies of every new release to deal with the "opening weekend" demand. This was followed a few week later by a furious sell-off of the used tapes at deep, deep discounts ($9.95 to as low as $2).

Meanwhile, domestic theatrical was being transformed by bankruptcies and mergers. Some competitive overbuilds were eliminated. Some dirty, beat up theaters - some movie palaces that could have been revived by a more caring system - used the bankruptcies to dump long leases and to reconfigure into the bigger, better stadium-seating multiplex world in which we now live.

The kick-off of the new era was Spider-Man, with the first $100 million opening weekend, generated by a record number of actual screens, as multiplexes expanded the number of screens within their houses (counted only once in what is still poorly tagged "screen count") to fit overwhelming first weekend demand. The "screen count" was 3615, but the print count was almost double that and the number of screens that actually showed the film was probably almost double that number in that first weekend.

As DVD continued to emerge, Blockbuster wanted there to be a similar deal to their video deal. They wanted it to remain a rental business and fought the notion of DVD sell-thru aggressively… after all, it would surely lead to their demise if it caught on. (The impact of another threat, the NetFlix business model, wasn't yet apparent.) But the studios were to smart for all that. The flood of slightly used tapes in the marketplace had dug deeply into retail video sell-thru. They weren't going to make that mistake again.

The DVD business was building, but it took a superhero, once again, to push the envelope and to define the culture of DVD. This time, it was Spider-Man… with more than a little bit of help from some hobbits.

In the fall of 2002, Lord of The Rings: Fellowship of the Rings and Spider-Man both swung into DVD before Thanksgiving. The year before, Shrek was out and, if you had children in your house, you might have already bought a DVD for Big Green and Monsters, Inc, etc. But here were two films that the teenage set HAD to have and they HAD to have the DVD because of all the supercool (read that with a French accent) additional materials, especially in the Rings discs.

As best as I can tell, that was the first year that a studio grossed more on DVD than on their domestic theatrical. Home Entertainment was no longer "just an ancillary."

The economics were simple. A normal DVD sale (Rings packages were an even bigger cash cow) generated $8 - $12 in profit for the studios (before taking out participants' shares). A video in the rental-to-sell-off market generated maybe half that much. With a market full of people who were willing to spend twice or three times the cost of a rental to own the DVD, studios could sell almost as many units as they were flooding the rental market with, almost doubling their income. In addition, there was still a rental market generating dollars. Win, win, win… cash, cash, cash.

Over at the movie theaters, things were going great guns. Spider-Man had broken through as the first $400 million domestic film since Titanic. The Lord of The Rings movies were doing landmark business. Finding Nemo and Pirates of the Caribbean were on the way.

Ah, those happy moments.

But trouble was on the way. They say that nature abhors a vacuum. Well, Hollywood abhors a cash vacuum. And with the new expanding revenues, thanks to DVD sell-thru, the extra money got spent in a hurry. Budgets expanded, top salaries grew, back-end percentages became bigger and more standard.

Charlie's Angels had been modestly profitable, thanks to DVD. But the sequel was greenlit at nearly the cost (including overruns) on the first movie. How could it miss?

Hulk lumbered into the marketplace at a cost of about $150 million.

Terminator 3: Rise of the Machines was over the $200 million mark.

Both Matrix sequels were well over $200 million apiece.

And a summer after Men In Black II went into theaters almost unable to make a profit due to the massive percentages being eaten by the talent team surrounding it, along came Bad Boys II, which was looking at about $350 million worldwide theatrical as a breakeven point, taking all ancillaries, including DVD, into consideration.

And as all of those costs increased, risk increased… and marketing costs accelerated to ever more dizzying heights. Even minor titles, meant to hit and run, started to spend big bucks in TV advertising in order to get any traction at all. And not only were movies that were, say, opening in May, throwing tens of millions into television's sweeps month, but June, July and even August movies started throwing money around in May since it was the last great opportunity to get big television audiences so awareness could be built.

In the summer of 2004, the summer of 2003 had a clear impact. The spending frenzy slowed a little. There were still a few $200 million-plus titles and a few $150 million-plus titles without major stars in them. But the machinery was working pretty well. Warner Bros.' amazing international run continued with Troy, Fox figured out how to work around the media and to go right to its audience with The Day After Tomorrow… even big films that were considered disappointments (Van Helsing, I, Robot) did over $120 million domestic and over $300 million worldwide.

The year was so good that even without a Rings movie or a Potter in the fall, Meet The Fockers' breathtaking $280 million domestic and over $500 million worldwide didn't get a whole lot of attention.

The media abhors a vacuum too.

Welcome to 2005.

Statistics are quite malleable. For instance, in the first four months of the year, there were more $50 million grosser released this year (19) than last year (17). Last year, there were only two $100 million releases in the first four months… three this year. But the $420 million from those three films this year were $70 million behind the two films of last year.

It struck me that Lord of The Rings: Return of The King must have dumped more money into early 2004 than Fockers dumped into 2005… but I was wrong. Fockers actually drew $8 million more in the year after opening ($146 million vs $138 million), so I can't manipulate that stat.

In any case, this year's Troy was Kingdom of Heaven… and the difference between the two was $86 million. This year's Shrek 2 is Madagascar… and the difference will be over $250 million.

Between the $100 million grosser of the first four months of each year and these two analogous titles, we have more than made up the "slump" at the box office… with just six movies. Flip those six titles, out of fifty-eight 1000 screen-plus titles released so far this year and there is not only a slump, there is a fairly strong improvement.

But the idea that DVD was killing theatrical sparked the imagination of both writers and audience members. Critics, ever anxious to find an excuse to write about how terrible movies are nowadays, took it on… the studios are killing theatrical by making everything too safe. People who go to the movies finally had a good reason to rant about the ticket prices and the pre-show commercials, which have become pretty unavoidable in the last two years.

In a triumph of insanity, the very reputable Marketplace on NPR, headlined the Loew's/AMC merger as having resulted from the slump at the box office. There was no mention of the bankruptcies of just a few years ago, or the effect of AMC being the first multiplex leader and now having to retool so many of their venues, or the general weakness of the Loew's chain in spite of excellent locations… now, everything is about "The Slump."

Today's "further discussion" went long and so, this is now becoming a three-parter, because The Future still hasn't been discussed. And it requires a lot of discussion. I'll set is up before I go today….

Domestic Theatrical
International Theatrical
DVD Sell-Thru
DVD Rental
Video
PPV/VOD
Ancillaries

These are the seven areas of income production for a movie. There are other economies inside studios, especially those that own TV and cable networks, but let's leave those aside.

Video is close to going away completely, but its been absorbed by DVD, so the loss is not so painful.

Ancillaries are dumped in that category because they are a small percentage of income and tend to ride with the waves of the moment.

And then there were five…

There is certainly give and take between these five areas of revenue creation. But what has fueled the industry as it stands today is that the four fairly mature areas (PPV/VOD is not close to maturity yet) have maintained themselves and that theatrical has even grown as DVD has boomed.

But what people are humming about with all this "slump" stuff is the destruction of one or more of those four financial pillars. And what they don't seem to get is that unlike the DVD expansion, which has been wonderful for the business, the income made in the digital universe, including DVD, can not make up, financially, for the loss of a theatrical base. Moreover, if the theatrical base were to be degraded, the income levels from DVD and the other digital delivery methods would also, inevitably, be reduced. So not only would there be less income from theatrical, but the Home Entertainment revenues would be reduced. So in a business where the margins are already very low, this movement could be apocalyptic. That is, unless you want movies to become television, both literally and figuratively.

And on that happy note, more tomorrow…

PART ONE: The Video... Yesterday
PART THREE: The Future... Tomorrow

READER OF THE DAY: SUPER BOY writes: "Put it in this perspective; how often does that same person go to a rock concert/ball game? If they are married and have children that would have a far great impact on their film/concert/ball game habits than the "quality" of films/bands/teams out there. If they are not married and have no children, most certainly their opinions and tastes have changed over the same period. The important thing to note is that the film industry recognises that audiences change as the grow older and the DVD market is there to net the audience they would still be getting if that same audience had not grown older.

The final point I wish to make is that one of the reasons why the DVD market has been so huge is because of the back catalogue; if we look back to when the CD arrived, I am sure something similar occurred. The back catalogue has mostly been cleared and the initial rush is now over."

And BEVERLY HILLS writes: "Dropping attendence... here's a cartoon that explains why...

E-ME.