January 9, 2006

The Business Of 2005, Pt 2

Looking back before looking forward…

Part 1 was about why the misperceptions about the future of delivery are very dangerous and people shorthand annual downturns in theatrical revenues into the very necessary discussion of what to do to expand the Home Entertainment track even further. Let's start Part 2 with the basic, using Box Office Mojo numbers.

(And let me note now that either Exhibitor Relations or EDI could put Box Office Mojo out of the game in about 6 months, but the neither has responded to what has made Mojo such a success… people who have an interest - personal or professional - in numbers, like to be able to analyze them for themselves. There is enormous power in the backload of box office information and whoever offers the most depth and the easiest ways of accessing it in creative ways will have a huge audience. And right now, that is still Mojo.)

Total Grosses For The Last Five Years
2005 - $8.830 Billion
2004 - $9.381 Billion
2003 - $9.240 Billion
2002 - $9.154 Billion
2001 - $8.119 Billion

Sorry if some want to beat the drum about the number of tickets sold. They probably don't want to tell you two things. 1) Ticket sales are an estimated number, this year based on a wild guess based on previous cost increases. 2) Ticket sale numbers don't much matter.

I'll tell you what. When Tom Cruise starts making his participation deal based on tickets sold or the reality of per-screen averages, you call me. That should be around the same time some movie from 1977 turns a profit because the gross has been adjusted for inflation.

If you really want to debate how many tickets were sold and what it means, we will also need to discuss such infinitely more important issues, like how much studios actually spent on production this year. But we can't do that because we don't really have that information. But I can tell you that this is the first summer since 2002 without a single movie that cost $200 million to make. I can also tell you that if the summer of 2006 is 10% up from this summer, it will be down in profitability because of the mammoth cost of the movies coming our way… perhaps the most expensive summer ever.

But I digress…

Notice the drop off in 2001? It is significant. But it is also the first of the only five $8 billion domestic box office years in history. If 2006 was to drop 10% from 2005, it would be the first time the box office went under $8 billion in five years and that would be very significant. But it seems unlikely to happen.

How much was the domestic box office 10 years ago. $5.494 billion. More than $3.3 billion off of this year… the domestic total has risen 39% since then. It is a different business. And then add to that an expanded international business and, of course, the sell-thru DVD.

Yet studios are still struggling. Why? Because the amount spent to make and market movies has increased not only 39%, but it has also eaten the international gains and a significant percentage of the "found money" in DVD.

And that is where we desperately need a slump. Because there is no lack of business. There is a lack of profit. And when you see people running about like chickens with their heads cut off, demanding new delivery systems, they aren't fixing a problem, they are hoping to save themselves the unpleasant business of actually saying, "no."

Why are the Dependents becoming so powerful? Because studios will tell you that only the smaller divisions can get people to work for reasonable amounts. And we're not talking about Jim Carrey cutting his quote to shreds to make an art film like Eternal Sunshine of the Spotless Mind. We're talking about Paul Thomas Anderson making a movie at Paramount Classics for three times what P.C. has ever spent on a movie (and that expenditure, for Hustle & Flow, was an anomaly in multiples) instead of at Big Paramount because he'd spend double that again if he had a fat studio looking over his budget.

In any case… I am kind of bored by the discussion of "the slump" of 2005. I will point out again - one last time - that if you took The Passion Of The Christ anomaly out of the annual total for 2005, this year would have been off from last year by fractionally less than 2 percent. (Last year would also, by the way, been the lowest grossing domestic box office year since 2001, so we could have had all this slump talk then.) This summer's Top Ten movies were down just 1 percent. And December 2005, even with the Kong and Dick & Jane disappointments, was the biggest December in domestic box office history.

The question moving forward is what is the best way to make movies and profits based on a domestic theatrical market that is likely to float between $8.5 billion and $9.5 billion for the next 10 years. The only way it gets lower or higher than that, in my opinion, is the behavior of the distributors regarding other parts of the market.

So now… let's take a look at all of this in a larger, more realistic scale.

Only 21 films in the world netted rental of $100 million or more in worldwide theatrical in 2005. That's down from 28 in 2006, 25 in 2003 and 26 in 2002.

But again… not the point.

The point is, we have never had a year in which more than 28 films generate more than $100 million in rentals. But how many movies are being made that cost more than $100 million each year?

I count 14 this year… 12 last year… 11 the year before…

There are 13 or 14 already on the schedule for 2005 and I suspect we will see one or two more before too long.

People easily see the profitability of Wedding Crashers, but have a tendency to dismiss titles like Hitch, Fantastic Four, Constantine, The Pacifier, and The 40 Year Old Virgin as the low-risk cash cows they are. Five different studios, five different audiences. But the notion that the industry needs to focus on big, dumb movies and nothing else is, well, even dumber than some of these dumb movies.

Further, the composition of the group of 2005's twenty high grossers will be disappointing to many film critics and film lovers.

7 of the 20 films were Remakes or Sequels (Star Wars III, Harry Potter IV, War of The Worlds, Charlie & The Chocolate Factory, Batman Begins, King Kong, The Longest Yard).

4 of the films that were not sequels or remakes were Star Driven (Mr & Mrs. Smith, Hitch, Constantine, Flightplan). (And, parenthetically, 2 of the remakes were star driven (Cruise, Sandler) with the one whose star does not draw worldwide, Sandler, doing 83% of its business domestically.)

7 that were not sequels, remakes or star driven were Family Focused (Madagascar, Fantastic Four, Narnia, Robots, Howl's Moving Castle, The Pacifier, Chicken Little).

The only 2 outliers in the Top 20 were Wedding Crashers and Kingdom of Heaven. The first should be counted as the biggest box office surprise of the year, and as with so many comedies, 75% of its gross was domestic. The second title, as it has been pointed out, was budgeted with expectations of these kinds of numbers at minimum, based on Ridley Scott's previous successes. Also, it is worth pointing out that Kingdom of Heaven was the only straight drama in the world to make this list, though some might add Flightplan to the category.

But the other 90% of titles in the group fit into three very critically unpopular categories and one about which there is great ambivalence: Remakes, Sequels and Star Driven films… and Family Focused films.

Just focusing on the Top Five, 4 of the 5 were sequels or remakes… and the 2 remakes had major stars. The one outlier is Madagascar, which clearly rode Shrek 2's success to massive overseas numbers

So anyone who wants studios to be more original or to aspire to something more challenging should understand why that is counterintuitive to a studio. It doesn't require idiocy or Simon Legree level greed. Where is the majority of the business? Familiarity and Families.

Next…

In this group of 20, there is only one film that was split between studios in the traditional way. My understanding is that DreamWorks was not a full financial partner on War of the Worlds, so I am not including that. Only The Longest Yard, which was split between Paramount and Sony (where Adam Sandler's production company lives), is a real split. And that film happens to be the 20th film on the list.

What does that tell us about the future? I'm not completely sure. As you surely know, Titanic, the highest grossing film in the world, was a foreign/domestic split. But this year, a single focus seems to have lead in these cases to greater success.

There are some cases of non-studio finding being part of the math. The #1 film of the year, Star Wars: Episode III was privately funded by George Lucas and distributed by Fox. The Chronicles of Narnia was primarily funded by Phil Anchutz's Walden Media. And Howl's Moving Castle, which is another oddity on the chart, grossing only 2% if its box office revenue in domestic release, was primarily funded by Studio Ghibli

Then there are Mr & Mrs. Smith from New Regency, Constantine in partnership with Village Roadshow and The Pacifier in partnership with Spyglass.

Of course…

With all of this, studios are looking at the costs of production and particularly marketing and then looking at how much money there is in DVD and wondering, "How can we get to the good meat without so much expensive, time consuming work?"

And the question of the next few years is, "Can we get to the "good meat" without the expensive, time consuming work."

As much as studios' Home Entertainment divisions are now spending to "relaunch" their films on DVD, the question remains, how much is that $100 million-plus in worldwide marketing for the theatrical release an influencer in the eventual DVD sale, as opposed to the less substantive - though still expensive - DVD marketing campaigns?

The debate will continue on for many months to come. And it will be no more reasonable when The DVD Slump becomes the endless drone. The financial problems with the films business remain real. And the financial potential of an ever-expanding range of digital delivery systems is also real.

But what the Fake Futurists must come to understand is that the further a film gets from a theatrical release, the lower the price gets, no matter how wide the market expands.

The Superbowl attracts about 85 million Americans each year. It's free and it's a national holiday of consumption. Titanic sold about three times that number of tickets… around 255 million worldwide. The #2 film all time, LOTR: Return of The King, sold about 160 million tickets. The second highest grossing first of a series, Harry Potter & The Sorcerer's Stone, sold about 140 million tickets. The biggest opening ever, worldwide, sold about 32 million tickets in one weekend. (And by the way, that film, Star Wars: Episode III, is only the 12th highest worldwide grosser ever… the $849 million gross isn't chicken feed, but the hare does not always beat the tortoise.)

The power to time shift is about to change the television model in a major way. There is no choice. Television created its windows by limiting access outside of very specific programming boundaries. With DVRs, that is over. Show a show once and for a fan, it can be theirs forever. With a 300 hour DVR, a full season of every episode of your favorite three hour-long shows fills 20% of your available space. And burning to DVD is easy as pie. But logically, television will continue to lead viewers to the variety of options.

But the film business doesn't face that kind of problem. The film industry differentiates - or has - in a very specific, demonstrable way. Piracy is a real problem, but it doesn't need to be a major revenue problem. For films, studios now get an annual return of about $9 billion from Home Entertainment and about $6 billion from Theatrical. But going back to one of my early observations… the Theatrical business is weighed down by corporate perception of the expense and risk associated with theatrical release, which Home Entertainment scoots by with the assumption that it could be easily matched in a shifted Film universe.

But by shifting to a Home Entertainment based concept of primary delivery, film will face the same problems as television, which it doesn't now. By the time a movie gets to the point where it is easily time shifted by being on pay television, the money associated with those showings is relatively minor. Before that, at this point, there is still a theatrical window at $7.50 plus a head and a DVD window at about $15 a unit. And what are people paying on TV. Well, at $10 for HBO a month and say, 40 new programs/films a month, I guess that means I paid about 25 cents for Million Dollar Baby today.

A quarter. Down from $7.50 a year ago. (Or yes, $10 or $12 in NY or LA.)

Faster industry… kill, kill.

So were theatrical revenues down in 2005? Yes. By a little, when you take a massive anomaly into account. And so was DVD revenue for motion pictures.

But don't forget the big picture. The prices at theaters may be as high as they can go for a while without diminishing returns. Ads might have to follow formalized agreed-to rules like trailers so people can anticipate and avoid (if they like) in-theater ads… or at least let ticket buyers know that they have been heard. And home delivery systems must keep expanding, just as anti-piracy measures must.

But what makes the film business unique from TV or the music business is the cost of production, the amount of money earmarked for marketing and theatrical distribution. One of these things can be adjusted if there is the will… another can really not expect to change too much realistically… and the third is the driver for the whole shebang.

Happy new year.

EMe.

December 28, 2004 - Movies You Should Have Seen, But Didn't
December 29, 2004 - The Ten Worst
December 30, 2004 - The Ten Best
January 3, 2006 - Reflections On A New Year
January 6, 2006 - Sundance Preview
January 5, 2006 - The Business Of 2001, Pt 1