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One summer does not a slump make

Thursday | March 22, 2012   open printable version open printable version

Kristin here:

Nor does an entire year. Yet at the end of 2011, the press was trumpeting the fact that the film industry was suffering a slump that might become permanent. After all, “the movies are in a slump!” makes for more catchy copy than “the movies have sunk back to normal” or “the movies are in a downturn from which they will probably recover.” The Hollywood Reporter went for a particularly dramatic approach to year-end coverage of the slump, as evidenced by the title/illustration (see above) of Pamela McClintock’s analysis, appearing in the January 13, 2012 print issue and online.

McClintock cited a number of factors. Young people are no longer going to the movie theaters. The studios are too dependent on big, familiar franchise pictures: “But exhibitors worry that moviegoers are growing impatient with Hollywood’s love affair with the familiar and shortage of original ideas (hello, Avatar!). In 2011, for the first time ever, all of the 10 top-grossing films domestically were franchise titles and spinoffs.” (But wouldn’t that mean that moviegoers are more than ever thrilled with Hollywood’s franchises?) She cites also the rise in admission costs, with ticket prices going up by 5% from 2009 to 2010.

That reason seems the most plausible. People really are tired of ticket prices that have risen faster than inflation. The industry may have pushed the cost up past a point that makes an evening at the movies seem attractive. If, as seems likely, the industry will raise the cost of 2D tickets rather than dropping the cost of 3D ones, we may see a real slump.

 

The 800-pound thanator in the room

Hollywood box office has its ups and downs, which is only to be expected. One year the successful releases cluster together; another year, they spread out or drop off a little. Any decline will be seized upon by many reporters as a slump, a sign that people are souring on the movies and turning to the many other forms of pop-culture entertainment available in the digital age.

Careful commentators have pointed out that naturally 2011 would be lower than 2010. As the AP’s film reporter, David Germain put it at the end of 2011, “An ‘Avatar’ hangover accounted for Hollywood’s dismal showing early this year, when revenues lagged far behind 2010 receipts that had been inflated by the huge success of James Cameron’s sci-fi sensation.”

Just how much did Avatar affect 2010’s box-office total? The film achieved a worldwide total gross of $2,782,275,172. Of that $1,786,146,809 came in during 2010. That’s comparable to, say, two Harry Potter films.

Predictably, Avatar ran for a long time. It was released on December 18, 2009 and ran for 238 days (34 weeks), closing on August 12, 2010. Naturally its most intense box-office period in 2010 would have been in the early months. Alice in Wonderland opened on March 5, on its way to crossing a billion dollars in international gross. This was a highly unusual synchronization of steamroller films. Still, in early 2011, the fact that  the box office was off 20% from 2010 was immediately proclaimed as a signal of doom and gloom to come. Richard Verrier and Ben Fritz suggested that, putting aside some under-performing films, “even hits like Justin Bieber’s ‘Never Say Never,’ ‘The King’s Speech’ and ‘Battle: Los Angeles’ pale in comparison with the early 2010 blockbusters ‘Avatar’ and ‘Alice in Wonderland.’” Given that the first few months of the year are typically the dumping ground for films deemed unlikely to set the box-office on fire, early 2011 was a return to business as usual. Avatar and Alice in Wonderland hardly made for a realistic comparison.

 

The tentpole effect

We’ve seen that Avatar’s 2010 box office was comparable to two major blockbusters. Now consider the fact that two films released in 2010 grossed over a billion dollars each: Toy Story 3 ($1,063,171,189) and Alice in Wonderland ($1,024,299.904). (Here and throughout this entry, the amounts are given in unadjusted dollars.)

That’s the equivalent of having four very high-grossing films in one year. The only other time a similar pattern emerged was in 2002, when four of the top franchises brought forth a film: Spider-Man ($821,708,551), Harry Potter and the Chamber of Secrets ($878,979,634), The Lord of the Rings: The Two Towers ($926,047,111), and Star Wars: Episode II – Attack of the Clones ($649,398,328). It was a perfect storm that has so far not been repeated.

These are exceptional years, so one would expect the box-office to sink afterward. Yet somehow the industry and the world of entertainment journalism see years with such big box-office spikes as forming the new norms against which all other years should be judged. Studio executives seem to think that 2002 or 2010 indicate a realistic goal that they could achieve all the time, if only they could put out the right films. Almost inevitably, articles on declines in box office end with the notion that the films released in that particular year or quarter were just not appealing enough. But of course, there’s no way to deliberately achieve such a combination of blockbusters. Many blockbusters fail, and the big special-effects-laden ones take years to lumber through production.  By sheer coincidence, some blockbusters converge.

The lesson to be learned here is that the really big films make so much money that just a few of them–or one James Cameron epic–can by themselves create the sense of the entire Hollywood output going way up or way down. They average out. If Hollywood attendance is dropping, it’s happening very slowly. Other factors are making up for that gradual attrition, as we’ll see below.

 

2002 was 2002

Journalists in particular have long been using 2002 as a benchmark to measure how badly Hollywood has been doing since. Ben Fritz and Amy Kaufman, in an otherwise good analysis written for the Los Angeles Times, resort to this comparison: “The box-office figure known in the industry as the ‘multiple’—the final box-office take compared to a movie’s opening weekend ticket sales—has dropped 25% since 2002.” The 2002 figure might have been skewed slightly by the fact that the three parts of The Lord of the Rings had an extraordinarily high incidence of repeat viewings and hence were in first run far longer than most films. For The Two Towers, the opening weekend was 18.2% of its total domestic gross (up from 15.1% for the previous part, The Fellowship of the Ring, which was in first run from mid-December, 2001 to August, 2002, half a week longer than Avatar). Spider-Man’s opening was a more typical 28.4% of the total; Attack of the Clones was 26.5%, and Harry Potter and the Chamber of Secrets, 33.7%. A more recent film with above average repeat business, Inception (2010), drew only 21.5% in its opening weekend. With Iron Man 2 (2010), the opening was 41.0% of the total gross. Good word of mouth is another possible explanation for some films’ steady or even growing performances after their opening weekends. By the way, the fact that Fellowship of the Ring was in theaters for seven months in 2002 boosted the total box-office beyond the rise created by the four franchise films that premiered within that calendar year.

It’s not clear that the growth in the proportion of the box-office take represented by the opening weekend is directly related to the drop in attendance, as Fritz and Kaufman suggest. One might instead point to the growth in the number of screens, with new megaplexes opening and existing ones adding screens. In 2002 there were 35,500 US screens, but by 2011 there were over 39,300–an increase of nearly four thousand screens. They provide more exposure to the title on opening weekend.

Further evidence is the expansion of opening weekend releases. It was unheard of in the early 2000s to have even a major blockbuster open on 4000 screens. Now it’s not uncommon. At its widest release, The Two Towers was in 3622 theatres, while Iron Man 2 was in 4390. With that many theaters, the number of people able to get tickets for the opening weekend grows, which means that, unless a film generates significant repeat attendance or excellent word of mouth, the box-office take will fall off more rapidly than it used to. But the fall-off doesn’t necessarily mean that fewer people have bought tickets.

 

Oops! Never mind

The story of the slump suddenly began to look very different as soon as the new year began. At the end of February 2012, Variety reported that domestic box office for the first two months was up 21% over the same months of 2011. It so happens that in the same period of 2011, box office was down 20% against the early months of 2010. And the early months of 2010 saw Avatar going very strongly after its mid-December debut.

The Variety article’s author, Andrew Stewart, pointed out the fact that Avatar had unbalanced the 2010 results. He also pointed out that the fast start out of the 2012 box-office gate resulted from a larger number of films making less on average. But this year’s likeliest high-grossers are yet to come: The Hunger Games, The Dark Knight Rises, and the first part of The Hobbit, with The Bourne Legacy and The Amazing Spider-Man possible mega-hits as well. There are also new films in the Madagascar, Ice Age, and Men in Black franchises coming out. Ann Thompson weighed in a few days after Stewart, pointing out that the increased number of films was not necessarily a problem, since more theaters are being built at a fast clip around the world. More theaters theoretically need more product. (More on that below.)

But an important point about the early hits of 2012 is that they were relatively modest films. They could have been expected to earn far less than blockbusters but still perform well in relation to their production and distribution costs. The Vow, the first film of the year to cross $100 million, is a romance; Safe House a Denzel Washington thriller; and Journey 2: The Mysterious Island a mid-budget family adventure film. This is pretty much what a normal, non-Avatar year looks like early on. (In 2008, David wrote about one early-in-the-year release that was a modest hit, Cloverfield.)

Soon thereafter Chronicle, made on an announced $12 million budget, had pulled in about ten times that internationally and proven that young men, contrary to industry fears, were still willing to go to see movies in theaters. Then The Lorax became the first iron-clad blockbuster. Neither of these is part of a franchise. Talk of a 2011 slump has disappeared. I suspect it may resurface a year from now as a benchmark showing how extraordinarily well Hollywood films did at the box office in 2012.

 

The 3D effect

2009 and 2010 were the best years for 3D, with Avatar not only dominating world film screens but also luring producers to imitate its success. But in 2011, the advantage provided by the higher ticket prices that 3D permitted began to fade. Last summer I discussed the decline at some length, here and here. I won’t rehash that here. In 2009, 3D films made on average 71% of their box-office grosses from 3D screens, and in 2010 the figure was 67%. In 2011, 56% of business for 3D films came from 3D screens.

The decline may represent the end of the novelty appeal of 3D, as well as the increasing number of 3D films competing in the market. Anecdotal evidence suggests that moviegoers are tired of paying premium prices. The fact that 3D animated features took in a slim one-third of their grosses from 3D screens in 2011 suggests that the cost of a whole family attending together, especially if the younger children can’t keep the glasses on, has begun to hamper the format.

Thus 3D may have contributed to an artificial, temporary rise in total box-office figures in 2010. This would inevitably be reflected as a decline in 2011, as more people opted for 2D screenings of popular films.

(Figures from Screen Digest, February, 2012, p. 37.)

 

It’s a big, wide, ticket-buying world out there

All the box-office reports and prognostications discussed above are based on domestic box-office grosses, which in practice means the USA and Canada. But in parallel to the reports of a slump in 2011 BO figures, there were reports of impressive growth in foreign film markets.

Take the United Kingdom, traditionally a top consumer of Hollywood films. 2011 saw the total box-office gross surpass £1.5 billion for the third straight year. That total grew by 5% over 2010. Films from Hollywood’s Big Six studios took 74% of the market. Local productions had a particularly good year, with three in the top ten: The King’s Speech, The Inbetweeners Movie, and Arthur Christmas. Even if that success continues, however, Hollywood will have a healthy share of the market.

More generally, Variety announced in mid-January, “It was business as usual at the 2011 international box office. And business is booming.” (“International” refers to all markets apart from the USA and Canada.) The Russian market is growing quickly, with its total gross of $1.16 billion in 2011 representing a rise of 20% from 2010. Russian films make up only 14.7% of the market, with the rest mostly coming from Hollywood.

The Chinese market is huge, passing $2 billion for the first time in 2011, up 29% over the previous year. (See below.) There is a Chinese quota of 20 foreign films per year, but a recent decision to allow more 3D and Imax films in may herald a gradual opening of the market. Certainly the blockbusters that make their way into China are popular. According to Hollywood Reporter, for the first time, China was Paramount’s highest grossing foreign territory, with $303 million at the box office, largely thanks to Transformers: Dark of the Moon. Still, China yields only about 15 cents on the dollar back to the distributor, a situation likely to change only slowly.

Brazil, India, and Eastern Europe have seen healthy expansion as well.

Even Hollywood comedies, notoriously hard to sell abroad, are becoming more popular. In 2011, Bad Teacher, Just Go With It, and Friends With Benefits all made around $100 million outside North America. Very unusually for comedies, they also grossed more money abroad than domestically.

The major studios’ box-office grosses abroad were: Paramount, $3.19 billion; Warner Bros., $2.86 billion; Disney, $2.2 billion; Fox, $2.15 billion; Sony, $1.83 billion; and Universal, $1.3. (These figures represent the total amount paid for tickets; only a portion returns to the studio.) I take this information from Hollywood Reporter, which notes that the big studios are increasingly buying local, foreign-language films to distribute within those domestic or regional markets.

 

There’s more to Hollywood than tickets

One might conclude from all the stories about the box-office slump of 2011 that the big studios’ profits would be down, at least a little. Actually, a studio had to work hard not to see profits rise last year. That’s partly because they make things other than movies and partly because movies make a lot of money that has no direct connection with theatrical distribution.

The February 24, 2012 issue of The Hollywood Reporter published a helpful summary, “2011 Profitability: Studio vs. Studio.” (The online version is behind a paywall.) As the authors point out, the studios calculated their profitability on different criteria, so direct comparisons among them are difficult. Nevertheless, the article shows that most studios were profitable and suggests why.

Time Warner’s filmed entertainment wing had a 15% rise in profits from 2010 to 2011. That resulted in part from the release of the final Harry Potter film. Beyond that, however, there was the fact that WB now manufactures video games and shipped 6 million copies of Batman: Arkham City. (That game wouldn’t exist without the film series, so we see synergy at work here.) It also produces over 30 TV programs, including The Big Bang Theory and Two and a Half Men.

News Corps.’s film studio, Twentieth Century Fox, saw profits rise 9%. Rise of the Planet of the Apes boosted the bottom line, but so did strong home-entertainment sales. The TV wing produced Glee and Modern Family. “Films licensed to pay TV and free TV helped, as did digital content-licensing deals. The TV licenses are estimated to have been worth about $200 million in the second half of the year.” Thus quite apart from their box-office takings, films made a lot of money for the studio.

The profit from Sony’s film unit jumped an impressive 95%. $278 million of that was a one-time sale of merchandising rights for the new Spider-Man movie. The Smurfs was the studio’s top earner at the box-office, and according to The Hollywood Reporter, “The division also benefited from stronger-than-expected DVD sales of The Green Hornet and Battle: Los Angeles.”

Disney was the only studio to face a decline in profitability. Its profits slipped 20.5%, though they were hardly meager at $656 million. The disappointments of Mars Needs Moms and Cars 2 are largely to blame. Disney’s current attempt to create a new blockbuster franchise in John Carter clearly won’t reverse the trend.

Paramount’s profits were the lowest but improved the most in 2011: 128%. The growth seems due largely to the Transformers franchise and high income from a 2010 deal between Epix (Paramount’s 51%-owned VOD channel) and Netflix.

The Hollywood Reporter was unable to obtain figures for Universal.

This overview hints at the underlying factors that make assessing the health of the film industry through box-office figures alone a shaky process. Ideally we would have figures on DVD and Blu-ray sales, as well as on licensing deals for streaming and other digital distribution systems. But this information isn’t made public by the studios.

 

The uncertainties and appeal of post-theatrical markets

This is a pity, since the real crisis facing the film industry today is not fluctuations in box-office income. It’s how to deal with the rapidly changing post-theatrical revenue stream: the sudden proliferation of other ways to sell or rent films for viewing on the tablets, game consoles, cell phones, computers, and other devices now driving the death of tape- or disc-based home entertainment. Studios see new ways to make money and are at war with exhibitors about how short a window there would be between theatrical release and the various forms of video release.

Early in this proliferation of online-based distribution, studios continued to concentrate on selling DVDs and later Blu-rays. They licensed the rights to rent films on DVD or via streaming to Netflix and other companies. Now they’re beginning to realize that they don’t need the middleman, but they haven’t found models for handling all forms of post-theatrical distribution themselves. In the meantime, Redbox kiosks rent DVDs for a pittance and make the home-video experience seem like something that barely needs to be paid for–and certainly isn’t an Event.

The decisions the studios make about post-theatrical are crucial to the health of the film industry. Movie City News publisher David Poland recently summed up the situation, pointing out that the theatrical release is still far and away the biggest single generator of income per viewer for the industry. His essay is worth reading in full, but here is the gist in terms of how home-entertainment revenues relate to theatrical income:

1. Post-theatrical is already a blur for consumers and it will only get more so. People will expect access at all times on any device for a low, low price… either in a subscription model or a per-use price point of $2 or less.
2. Theatrical will soon be the ONLY revenue opportunity that stands apart from that post-theatrical blur. No other revenue stream will ever again generate as much as $10 a person… or even $5.50 per person.
3. Consumers adjust to whatever window you offer. But history tells us, the shorter the theatrical-to-post-theatrical window for wide-release movies, the more cannibalism of the theatrical.
4. Just as the DVD bubble could not be pumped back up after it was deflated by pricing aggression, theatrical will not survive a significantly shorter window to post-theatrical as we now know it… and once it is broken, it will not be able to be fixed. And that revenue stream will NOT be replaced by what is now post-theatrical. It is simply money that will be lost, never to be recovered.

Theatrical will never be The Drink again. You’re looking at a 2 month window for most studio films vs decades of post-theatrical revenue opportunities. It’s not an even fight. But take a deep breath and look at the obvious… for theatrical to still be as much as 40% of the revenue of a studio film is bloody amazing. It’s not the past. It’s not ’39 or ’69 or even ’89. But it’s a LOT of money. And it is insane to take it for granted or to dismiss it, because there is no proof out there that I have ever heard that suggests that theatrical revenues gets in the way of post-theatrical revenues… only the other way around. Why? Because theatrical is the unique proposition. It’s post-theatrical that really has to compete with EVERYTHING the world has to offer.

(David’s post came in response to one by Mike Fleming on Deadline.)

If the studios start selling their films in various digital forms for a dollar or two, and do so in ways that cannibalize the theatrical market, there will come a point where many people stop going to theaters and stay home to do their movie viewing. So there will need to be many more purchasers of that film than there currently are to make up the difference between that cheap sale and the price of a movie ticket. Without a boost in consumers, post-theatrical income would fall, and the studios wouldn’t be able to afford to make the sorts of films that currently generate the most money.

Whether David’s analysis is too pessimistic remains to be seen. But he points to a far bigger problem than a largely illusory drop in box-office figures.

 

Jumping to conclusions

The notion that 2011 saw a serious slump results from comparisons that make for catchy headlines. But sometimes a situation can prove misleading. Consider the title of a Variety article from February 23 of this year: “Imax profit plunges to $6.3 million.” Can this be the end of Imax? Yet read on:

Imax profit fell last quarter to $6.3 million from $54 million, mostly on a major tax benefit the year before. Revenue eased by $2 million to $67 million.

Without the tax and other items, income fell to $9 million from $14 million, in line with expectations given a soft box office.

The company said 2011 was a year of record signings and installations, with 497 Imax theaters installed in commercial multiplexes, up 33%, led by China, Russia and North America. CEO Rich Gelfond said the company will add focus on South America, including four new theaters in Brazil, Western Europe and India, where a recent deal will bring Bollywood titles to Imax. It will expand local film production from China into Russia and France.

(Note: The title of this story was subsequently changed to “Imax, Dish, Liberty stocks rise” when it was revised to add the fact that Imax’s stock rose 4.5% on the above news.)

The moral is, the obvious interpretation is not always the correct one. The implication of box-office fluctuations needs analysis beyond a simple comparison of ups and downs from one year to the next.

 

Moviegoers at the Super Cinema World in the Metro City shopping mall, Shanghai, China

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