Film, Radio and TV - 9

The Film

Business Today

Today, ticket sales are a long way from their 1946 box office peak.

The number of screens dropped dramatically in the 1950s, largely due to the impact of television.  (The term "screens" is used rather than "theaters," since theaters can have a dozen or more screens showing different films.)

However, after this major slump and after some target audience and content adjustments by Hollywood the number of screens started to steadily increase. In 1970, the number was about 10,000; in 2001 it was about 25,000. Most of the new theaters (multiplexes) are in suburban shopping areas.

But, for the major theater owners there's a problem.

Film Profits Drop

Even though both the number of screens and the revenues have increased steadily over the past five years, because of the debt incurred from building additional megaplexes, overall revenues for all four of the biggest theater chains has been dropping.

The green area represents the average decrease for the four major theater chains in the past four years. For AMC Entertainment, the drop was $55.2 million in 1999; for Carmine Cinemas, $19.9 million, For Lowes Cineplex Entertainment, $51.4 million and for Regal Cinemas $88.6 million. Several major theater chains even declared bankruptcy in 1999 and 2000.

Three recent years showed a drop in box office attendance -- 2003, 2004 and 2005. However, 2006 showed a 1.4% increase in attendance. More than 600 films were released that year -- more than in any year in history. In 1980, for example, only 161 films were released. The average ticket price in 2006 was $6.58.

High-Definition DVDs

In 2006 we began to see "home theaters" centered around 5.1 sound from HDTV videodisks (and even 7.1 sound, with an option for two more speakers).

With images that rival or exceed those in theaters, many people — at least those who can afford home theaters — now find little reason leave their homes to see a movie.

At the end of 2007, there were two major competing and incompatible standards for DVDs in the high-definition. There was the HD-DVD format led by Toshiba consortium and Blu-ray backed by a Sony-led consortium.

Having been burned in the VHS versus Betamax VCR war a couple decades earlier (when Betamax was phased out leaving only VHS) many people were hesitant to invest in either technology before a "winner" was decided. 

By early 2008, after several major motion picture studios backed away from HD-DVD, Toshiba conceded that Blu-ray (and Sony) had won the HD format competition. The public had also become aware of the picture quality advantage of Blu-ray, as shown in side-by-side comparisons of the various video formats.

Although many people abandoned movie theaters in favor of viewing films at home, theaters tried to compete by offering new incentives, including a broader choice of food at the concession stand and even baby-sitting and childcare services.

Even so, it didn't help that the cost of movie tickets had risen to over $10 in major cities.

In fact, the cost of movie tickets continues to increase at a faster rate than box office revenues. This is largely due to the cost of labor and special effects. Union regulations have dictated ever-increasing benefits for the scores of workers involved, although successful films are often made with a fraction of the "manpower" commonly deemed necessary for the typical Hollywood film.)

Labor issues represent one of the reasons that so many U.S. films are now being done outside of Southern California  —  so called runaway productions. Florida and Texas are popular "runaway" destinations.

By 2006, California had partly reversed the exodus by providing various incentives to keep the highly-lucrative production projects in California. By this time even CSI New York was being shot in California.

Even so, labor costs can be saved by shooting in foreign locations  —  even when a foreign locale isn't dictated by the story line.  England, Canada, and Australia have been popular with producers. War stories have been shot in Ireland and the Philippines.  Even so, as of 2007, the majority of feature films were still being shot in Southern California.

In the past, elaborate settings would have been built in studio lots around Hollywood to represent many of these foreign settings. The Casablanca-era films are good examples. Labor costs have skyrocketed since then and today, even when the added costs for transportation and out-of-state or out-of-the-country accommodations are figured in, runaway productions can translate into cost savings.

Then there is the cost of another type of "labor." The salaries of stars (and a few producers and directors) that can exceed $20 million a picture. Even so, producers feel that paying a star like Julia Roberts $20 million for doing a film can translate into more than $20 million in profits  —  or at least they hope it will.

Often, producers have to make creative decisions based on financial tradeoffs. They might ask the question, "Should we drop some of the special effects we want in favor of having a top star, or will the special effects do more for the picture?"

Then here is the delicate balance between movie attendance and the cost of tickets.  

If the price goes up at the same rate as production costs, fewer people will be able to afford to attend films  —  thus, reducing revenue. In particular, the younger audience will be affected.

Have you ever wondered why the price of popcorn, hot dogs, candy and soft drinks is so high at theaters? Theaters depend on the high profit in these sales to pay for a significant part of their operating expenses.

Tickets Don't Pay For the Movies

This is another way of saying that "the tickets don't pay for the movies"  —  even if they do represent a key indicator of their popularity.

So, what does pay the costs of producing movies?

Most of the revenue comes from ancillary rights (revenues from non-box office sources). Today, these profits come from 10 areas.
 

• network TV rights
• foreign distribution
• sales to independent TV stations
• pay and pay-per-view TV rights
• airline rights for in-flight movies
• college rights for campus screenings
• music sales for film soundtracks
• film-related merchandise (toys, etc.)
• book publishing rights (when a book follows the movie)
• and product placement (money received for clearly showing certain products in scenes.)

Without these ancillary profits the film industry couldn't exist  —  nor could producers expect to fund new projects.

The exception to the heavy emphasis on ancillary profits is represented in independent films, which, as we've noted, are generally made for a fraction of the cost of studio-backed films.  These are typically financed either by a few individuals who don't mind the high risk involved or by some of the production personnel involved with the project.

At the same time few theaters show independent films. (Sometimes a mainstream theater will consider an independent film when one of their scheduled films ends up doing poorly.) Plus, the chances of an "indie" film garnering revenue from any of the 10 ancillary areas are limited.

The Future of the Film Business

Does all this mean that things look bleak for the film business?

Not at all, at least if you don't put the emphasis on box office revenue.

The film business should remain at least stable  —  and will probably even expand  —  for five main reasons.

There is an increasing number of pay cable and satellite TV services that schedule films.   

• Internet sites are now featuring full-length films, a trend that has just started to develop.
   
• With film production moving to high-definition video (digital cinema or e-cinema) and desktop computer-based postproduction, production costs should shrink.  Moving to high-definition video for productions is increasing the profit margin for many "films."
   
• Foreign distribution of films is expected to continue to expand.

• With the availability of relative inexpensive, high-quality digital video equipment along with sophisticated desktop computer editing systems and high-quality video-to-film transfers, many more people  —  but probably not canines  —  will be able to produce "films."  

•  With theaters expected to move to e-cinema, film distribution costs will shrink and film duplication costs will be virtually eliminated.

World-wide, the pirating (illegal copying and selling) of films represents billions of dollars of lost revenue each year. This graph shows the six countries most associated with pirating.

The Harry Potter movie released in late 2001, for example, was available on DVD in Asia for about one dollar a copy  —  only two days after the film debuted in U.S. theaters. 

According to Jack Valenti, former President of the Motion Picture Association of America, "Piracy saps $3.5 billion from the motion picture industry and discourages studios from releasing more digital content."

It may come as a surprise to some that at least one country produces far more films each year than the United States.  We'll cover the international dimension of film in the next module.

The next matching quiz will be after Module 10.