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David Poland

By David Poland

Really Simple Perspective On The Film Business (Summer 2017)

We are at that time of the year when there isn’t a lot of news… so otherwise professional people start mouthing off like a bunch of nattering nabobs of negativity.

In 20 years of doing this, I have had maybe four or five years total in which I didn’t hear “It’s worse than it’s ever been!” Hollywood is always shutting down. It’s always over for theatrical. The Next Big Thing is forever running this town.

Then it shifts.

So on this sunny mid-July morning, let’s look at some numbers… really, really simplified, stupidly simplified numbers. And then, you can make up your mind.

Worldwide Theatrical for US studio-based movies
$30 billion.
Returns on those grosses to the distributor
$15 billion.

Post-Theatrical Revenues for US studio-based movies (no licensing)
$14 billion
Returns on those grosses to the distributor
$9 billion

So… for all the effort of releasing movies into the world, US studios are looking at a big pot of about $24 billion a year.

$8.5 billion into production
$7.5 billion into marketing

Again, super broad-figures, but that leaves $9 billion for overhead and profit.

Netflix is a most excellent company and has been a boon to the studios, even after they stopped spending on licensing already-released theatrical films for streaming.

How much is Netflix spending each year on what they categorize as films? About $500 million.

And Amazon, which does theatricals? About $350 million.

Absolutely no disrespect to either streamer… but they are the tail, not the dog. They are not close to the size of any major, in terms of output. They are close to – and Amazon is often in business with – Lionsgate… but without the library value Lionsgate has.

But media is again caught up in the charming fantasy of change. There is no denying that Netflix, in particular, has been a pioneer and change-maker. They have shifted – first with DVD rentals, then with streaming – the preferences of the end user. Streaming, which was inevitable, is happening at least a decade before slow-moving studios were ready to make the switch. That is Netflix’s first mover advantage.

The idea, however, that the entire film industry needs to change what it is doing to accommodate Netflix throwing $275 million at Scorsese, Pitt, and Will Smith is, simply, insane.

The question of how to expand revenues again after DVD crashed – in part because of Netflix and streaming, but in part because of greed and short-sightedness in the management of the format – is completely legitimate. But studios have to remember where their money is. Most of it is tied up in theatrical and the too-expensive marketing push to break new product into the market.

Perhaps a good moment to bring up China. Huge new market. Could become as big as the U. S. and Canada for the majors. But right now, it’s worth about 14% of the domestic market. Roughly $2.7 billion a year in grosses for U.S. movies, but with half the return (or worse) as other international markets.

Yet, in the last few years, we have all seen a gold rush attitude toward China, as well as the massively expanded international market overall. And that has changed the way films are chosen and made.

Look back at 2006. There were 100 films that grossed $50 million or more worldwide. 49.7% of the gross was international. Last year, 102 films grossed $50 million or more worldwide. 59.5% of the gross was international. That 10% change, in a low-margin business, changes everything. If we were still seeing the DVD revenues of that mid-2000s moment, you would be seeing star salaries in the $40m range for at least 10 actors and $400 million production budgets. And we’d have the same complaints, but there would be so much cash, everyone would be dumb & (metaphorically) fat.

Ten years further back… 1996. Pre-DVD. Only 38 films grossed $50 million or more worldwide that year. And 53.7% of the grosses were coming from international.

Netflix is not an unimportant factor. China is not an unimportant factor. But the industry, settling in to the horror of having lost the Home Entertainment business as it was, is endlessly searching for the Next Big Thing.

Bob Iger, after two previous attempts at resetting the Disney business, found gold in Big IP. Twenty years from now, we will no doubt be discussing how Disney fell apart under the weight of that Big IP machine. But for now, it is the platinum standard. It has worked because of the IP itself, no half-hearted buys. And it has worked because o fLasseter and Feige and Kathleen Kennedy. And it has worked at least in part by the rise of CG as an expensive, yet reliable storytelling tool.

1978, You will believe a man can fly. 2002, You will believe a teen can swing through the streets of New York. 2006, You will believe that you are seeing an actor acting with his face covered by a digital squid. 2011, You will believe a Transformer can act.

Now… here is the big problem. The future of post-theatrical is not going to get richer. It will grow incrementally over time. And there will be breakthroughs in countries like China, in which the massive population will pay $2 US a month for channels like Netflix and even though it is frustratingly cheap, it could mean a $4 billion a year (or $2 billion or $8 billion) bump for those companies who intend to make that happen.

But aside from the obvious, and the long future hopes… the post-theatrical market is static. Since studios are not building their own Netflixes effectively, not only are they losing a lot of short-window revenue, but their libraries – even fairly recent ones – are relatively fallow.

“Doing Disney” is just not an option for anyone else. Universal has done, by far, the best job of finding middle ground, even with the disastrous Mummy launch this summer. They build on what they have. They try to make thoughtful additions (Amblin, DreamWorks Animation), but they aren’t breaking the bank to chase the IP monster. Universal is minding their knitting on lower-budget and mid-budget movies that deliver for them.

And the truth of the future is, again, that it can become stable… but it is unlikely to provide significant growth. A hundred million households in the US will only grow in number incrementally and the $90 or so the average household spends on having entertainment piped into the house can only grow incrementally.

ESPN is the current big victim of the new reality. When cable/satellite became the norm, ESPN was a must-carry. In 2017, the idea of must-carry is at death’s door. A couple years ago, in a system built across two decades, ESPN was in more than 100 million households and had gross revenue from that alone of $6.9 billion. Fastforward to the coming future. say 20 million households “need” ESPN. Say they charge $15 a month and get it. That’s $3.6 billion. And that would be a massive (unrealistic) success in the coming future.

Disney, as a unit, can, I believe, get 98% household saturation in the future. But not for a single arm of Disney. For all of Disney’s post-first-release product, including ESPN, ABC, etc., that’s only $18 billion a year. And there will be room only for seven or so such $15-a-month entities.

We are really early in this process. But I believe it to be inevitable. Digital walls are too thin. They must be rebuilt into the next standard, which can then survive the next 50 years

That is why theatrical release — the one true one-ticket-per-customer opportunity for film moving forward — will become the dominant focus for growth. Not because I love the church of cinema (and I do), but because of money… greed… human nature.

If studios can’t go back, and they won’t invest deeply in going forward, what choice do they have? You could try to prune and increase the yield. Thus, the suicidal idea of day-n-date, for which Premium VOD is a Trojan horse.

If reading all this makes your head hurt, go back to the big, oversimplified numbers at the top of the piece. If the concept of the scale of the industry vs the endlessly hyped “agents of change” concept, the one that the media is forever in love with, but refuses to do the math on, is the only fact you take away, it was worth the effort.

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8 Responses to “Really Simple Perspective On The Film Business (Summer 2017)”

  1. Glamourboy says:

    Simple being the key word here.

  2. jspartisan says:

    Here are my two solutions, to two of the problems in this post.

    1) Alphabet, cannot figure out what to do with Youtube. Creators drive that fucking thing, but they love screwing the creators at every turn because of their inability to monetize the platform. What Alphabet should do, is fucking turn Youtube Red into the GREATEST MOVIE STREAMING PLATFORM ON EARTH! Not fucking TV shows. Not creator long form videos. NO! They should lease the extensive rights to all the libraries they can, and become the go to MOVIE WATCHING SOURCE ON THE NET, MOBILE, OR HOME DEVICE!

    Seriously. No one wants Youtube TV, and they aren’t even using the awesomeness that is Youtube Red. What do people want? They want to go to a site, find any movie they want, and watch. People constantly complain about all the movies, that Netflix has lost in the last ten years. If Alphabet did this. They would change youtube, give people the one destination they deserve, and the revenue could leave creators to create.

    2) ESPN needs to become an over the air network. There you go. Have a good night!

  3. Bob Burns says:

    Remarkable how much good content Netflix and Amazon produce at a fraction of the cost of the studios’ franchise/tentpole production.

    Used to be a prestige drama cost a studio $30 – $60M. Now a good drama can be made for a tenth of that cost. It won’t be long before CGI spectacles will be produced for pennies on the dollar…. the Netflix’s and the Amazon will be able to produce spectacles as cheaply as their comedies and dramas….. kids will be making their own and putting them on U-tube.

    I’m old enough to remember when there was one TV station in town, and it was that or one of our four radio stations. Now good content is as plentiful as stacks of remaindered books…. all the good stuff piles up in the corner waiting for us to get around to it.

  4. hcat says:

    “Remarkable how much good content Netflix and Amazon produce at a fraction of the cost of the studios’ franchise/tentpole production”

    Curious about this Bob, which projects are you referring to? Yes Amazon has produced and acquired strong films but they are on an indie scale and get them by outbidding searchlight, focus and others. Netflix’s Sandler deal which is neither good content or a fraction of the tentpole cost is more of an indicator of Netflix’s strategy which is burn money and attract peoples eyeballs to the flames.

    I agree with JS that there needs to be a full on movie site that has tons of old content. The number of actual films streaming on Netflix at any one time has gotten sorrowfully low. I want a goddamn movie site where I don’t have to sift through tv movies or Straight to video or comedians or hard hitting original series etc. etc. I have about an hour a night to watch something I cant stand sifting through the chafe to find something that played in a theater. It is frustrating when you will watch nearly anything but can find nothing.

  5. Bob Burns says:

    hcat…. and how many films distributed by the bigs are actually studio productions? Putting aside the tentpole franchise wanna-be’s, seems to me that, when they have a good film it’s usually something they picked up somewhere. Just sayin, if we discount the streaming services because they buy up indies, we should apply the same standard to studio releases.

    I have to admit that I’ve become a lot more interested in binge-watching a streaming series than watching two hour films. I feel the acting is better because they have all the time they need. I loved Manchester by the Sea, but felt BBC’s Broadchurch covered the same ground better, because so many characters in the Broadchurch ensemble got as much attention as Casey Affleck’s character in Manchester

    Films have started to feel like short stories. The very idea of Dunkirk told as a short story feels silly, for example.

  6. hcat says:

    It was this specifically ” It won’t be long before CGI spectacles will be produced for pennies on the dollar…. the Netflix’s and the Amazon will be able to produce spectacles as cheaply as their comedies and dramas” that I was wondering about. Why do you think that Streamers will be able to make spectacles cheaper than Studios when if you look at what Netflix spent on their Will Smith, Brad Pitt and Adam Sandler movies it seems they actually spend a little more? Yes Netflix could poach a production company like Imagine or Spyglass from the majors like they did Happy Madison but I don’t think that would shrink their budgets in any way.

    And from what I can tell you might be surprised by Dunkirk, I am intrigued by its efficient running time, hopefully this means it was trimmed for the greatest impact.

    And I am in the opposite camp as far as binge watching, give me a movie anytime. Even something as good as Breaking Bad takes too much of a time commitment. If Michael Corleone could fall from Grace in under three hours why do I have to commit 100 to watch Walter White do the same.

  7. Doug R says:

    On that Dunkirk running time-I notice a lot of the trailers have that ticking clock motif-maybe Nolan is trying the time is running out tension-kind of like High Noon?

  8. Ray Pride says:

    There’s a trick with time on Dunkirk that some Twitterers have already let out of the bag.

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