Lecture for January 18, 2000.

Major studios are big business, usually part of conglomerates.

Major acquisition/concentration phase began in the late 1960s. The first company to change hands in the postwar business mergers was Paramount, which was sold to Gulf and Western in 1966. Paramount is now owned by Viacom. In 1967, Transamerica, an insurance and financial services company, bought United Arts, which in 1981 it merged with MGM. The largest mergers, however, have involved internationalization of American film business management. In 1985, Australian media conglomerate News Corp (headed by Rupert Murdoch) paid nearly $1 billion for 20th Century Fox. In 1989, Sony bought Columbia Pictures (which had been purchased by Coca Cola in 1980) for more than $4 billion. In the deal, Sony also acquired a library of 2700 films and 2300 TV episodes. In 1990, Matsushita paid $7 billion for MCA/Universal, but sold 80% of its holdings in 1995 to Seagram, the Canadian beverage company.

Power of studios comes primarily from their tremendous control over distribution.

Despite federal intervention (notably, the 1948 Paramount Decree, in which the major studios had to give up their theaters), movie studios are clearly back into the business of exhibition. TriStar (23% of which is owned by Columbia Pictures) bought the Loew’s movie theater chain in 1986, pushing other companies (such as Paramount, Warner and Universal) to buy movie theater chains either directly or through their corporate parents.

Block booking is basically back. Distribution companies, some owned by studios, sold movies to TV in batches, winners being available with clunkers. King World Entertainment, which distributes the immensely popular Wheel of Fortune TV program, has required stations to buy programs they might not have bothered with in order to get Wheel. Some stations do not even bother to air the lesser shows, even though they have to pay for them.

Many people call distribution -- getting the goods to the customer -- as the heart of the movie business. There are many other producers of movies, and numerous ways to exhibit them. But the real power comes from distribution.

The studios have had a real lock on this end of the business for decades. They control distribution because:

1. They are good at it. They’ve been doing it for years.

2. They have a steady production of films: the can provide a steady supply of a lot of films (whereas independent producers or distributors usually just have one film at a time). Consequently, for most exhibitors, the big companies are the surest bet for a steady supply of popular films.

3. They are big businesses with a lot of capital -- and thus can afford distribution costs. Distribution can be very expensive. Good copies of a new film (for theater viewing) can cost $1000 each or more. If you want to show the movie at 3000 theaters, that’s $3 million just for the print of the film.

4. Infrastructure, ties to theaters. A movie going into wide release will go to about 3,000 screens around the country. You need to have a business relationship with all of these exhibitors.

Costs have been steadily rising over the past 30 years.

1999: Average cost for producing a mainstream Hollywood movie: $50m to $60m with another $20m for marketing. $70-$80m.

Rule of thumb on breaking even: if the movie costs $75m, you need to have box office revenues of $150m.

Why? Studios don’t get all of the money from box office.

Of your $7 or $7.50: the studios don’t get it all.

Studios make deals with individual theaters/theater chains about the percentage of the ticket money (box office gross) that the theater gets to keep. The percentage that goes back to the distribution (for the film rental) will vary. On the first weekend of a big movie, the distributor usually gets about 90 percent of the box office gross (this links to issues of opening weekend). After the first weekend, there’s a sliding scale on sharing revenues. On the second weekend, the split might be 70% for the distributor and 30% for the exhibitor, and on until a 50-50 split occurs.

Most movies do not even break even in the United States based solely on box office grosses. They are dependent on overseas sales

Only about 1 in 20 movies make a profit in the United States from box office revenues. 1 in 5 movies is enormously popular -- which means that 4 out of 5 are not. One movie executive has compared making movies to betting at the roulette table: success is just a matter of luck.

Some winners and losers.

Some losers

Postman, with Kevin Costner. Ordinary man in 2013 restores civilization by delivering the mail. Cost $80 million (plus $30 million more for marketing). In its second week, it did not even make the top 10 movies for that week. It was a long movie (3 hours) and many saw the concept impossible (restoring civilization by delivering the mail).

Some winners

Stars cost a lot of money, driving up costs and decreasing a studio’s willingness to take chances. Stars generally do well in a movie if the vehicle is right for them (e.g., Clint Eastwood always did well in his Dirty Harry movies in terms of box office revenues, although some of his other movies haven’t done as well. Similarly, Harrison Ford has done well in action/adventure movies, such as the Air Force 1, Hunt for Red October, etc. but not as well in romantic comedies such as "Sabrina.")

Salaries, 1998

$20 million range: Jim Carrey, Mel Gibson, Sylvester Stallone, Harrison Ford, Tom Cruise.

$15-19 million: John Travolta, Bruce Willis, Robin Williams, Kurt Russell.

$10 to 14million: Whoopi Goldberg, Whitney Houston, Sandra Bullock, Julia Roberts, Demi Moore.

$5 to $9 million: Jodie Foster, Michelle Pfeiffer, Meg Ryan, Sharon Stone, Alicia Silverstone.

Studios often feel compelled to have at least one big star in a movie, particularly during the key movie-going seasons (summer, Thanksgiving-Christmas period). Columbia Pictures was desperate for a hit a few years ago and consequently paid a huge amount ($20 million) to get Jim Carrey. Travolta’s career had slid greatly; he got just $150,000 for Pulp Fiction -- which was successful and gave his career a rebirth (and higher salaries, too). Alicia Silverstone got $250,000 for Clueless, which made her a star, and $5 million for Excess Baggage. Sandra Bullock got $600,000 for Speed, $1.2 million for While You Were Sleeping and, based on its success, $6 million for A Time to Kill.

Beginning in 1997, some studios began to try to limit salaries. Universal Studios and Warner Brothers removed two high profile projects (one with Arnold Schwarzenegger and the other with Harrison Ford) from fast track production.

But that cost control effort regarding salaries may have been short lived;there’s little evidence that it has remained a key goal in 1999.

Movement of production to Canada, as a way to control costs.

Why Canada?

• Good exchange rate on the dollar (One Canadian dollar = about $.70 US)
• General financial incentives (rebate offers equal to 22% of a film’s sending on Canadian labor) in Vancouver and Toronto.
• Proximity to U.S. (easy to get back and forth for the stars; some complain but most don’t mind. Toronto near NYC, Vancouver not far from LA).

About 55 per cent of 1997-98 TV season’s made-for-TV movies and mini series were filed outside the US (and mostly in Canada). 10 of the 14 original movies shown on Showtime cable network in 1997-98 were made in Canada. Of 23 films made for USA Network that year, 14 not made in US and most of those made in Canada.

Recent feature films made in Canada include Jumanji, Legends of the Fall, Good Will Hunting, Down in the Delta and Murder at 1600.

Overseas production can save money. Warner Brothers estimated it saved $20 million making The Matrix in Australia -- and for that reason, made Mission Impossible 2 in Australia. The next two Star Wars movies will also be made in Australia.

$7.5 billion in 1999.

up from $7b in 1998.

Has continued to rise each of the past 3 years.

The dollars generated by ticket sales represent a substantial part of the total revenue earned by a particular film. On opening weekends, amid a flurry of marketing, the studio takes about 90 per cent of the net box office receipts (that is, revenues after expenses of operating the theater). Thus a lot of attention is paid in the movie industry to opening weekends. After opening weekend, the studio’s take decreases to the point where it is taking just 50 percent of the box office receipts. (All of this is negotiable, however. The recent Star Wars sequel, Phantom Menace, was such a desired movie that the studio was able to get a more favorable return rate from exhibitors/theater owners).

Some theater chains are happy to give studios/distributors a fair amount of revenue for a blockbuster. A blockbuster will bring in huge crowds. So the goal is: get the film, then get crowds into the theater where they will generate sales at the refreshment center (where profit margins are huge.

There’s a huge emphasis on opening weekends for movies. How a movie does on its opening weekend can be absolutely crucial to its reputation and thus to its earnings. Good word of mouth can lead to more film goers; bad word of mouth can destroy a movie quickly. This type of reputation also influences foreign film goers, too; they like American culture but don’t want our rejects.

How are movies released?

• wide release: 1600-3000 screens around the country. When a movie is in wide release, the marketing effort is huge, beginning on Wednesday and Thursday of the day the movie opens -- most will open on a Friday. National marketing includes ads on network news shows, interviews on the morning news/talk shows, and on the prime time entertainment shows (such as Entertainment Tonight, which bills itself as "the most watched news and entertainment show in the world!")
• Platforming. Release a movie in a few cities, with 200 or fewer screens. The goal here is to build good word of mouth for a movie that might be more artistic or harder to sell than some mainstream movies. "Snow Falling on Cedars" opened in limited release before the New Year (so it would qualify for Academy Award nominations) and went into wide release a few weeks later.

Most in wide screen, with a huge marketing push. Attendance on Friday is measured and used to predict how the movie is doing -- which may influence attendance on Saturday and Sunday.

Hollywood bets almost everything on opening weekends. As costs of films rise, they thus have less and less time to find an audience. There has been an increase in the number of movies being released (210 in 1980, up to nearly 500 in 1998), with more screens (15,000 in 1980, 33,000 today), with costs rising both for production and marketing and box office revenues rising (but rising slowly).

Ed Zwick, director of Glory, Legends of the Fall, Courage Under Fire, has talked about the pressure to open big. He worries that this commercial pressure will hurt movies . He argues that a big opening doesn’t necessarily mean the movie is a good one, and that a modest opening doesn’t mean that a movie isn’t a great movie. He notes that as a director, he’s played the game frequently: "Doing well guarantees doing more, and like every film maker all I really want to do is keep making them."

But he notes that the emphasis on success on the opening weekend puts an emphasis on several things: getting a big star, having a best selling movie - which means you have to have a simple story that is upbeat and happy.

Zwick also notes: "When each film is a $50 million start up business that can fail in a single weekend, it’s not what you make that matters; it’s how much."

Some studios are no longer issuing estimates on what they expect a movie to earn in its opening weekend -- because such estimates can harm a movie if it doesn’t quite make them. Fox estimated that Fight Club would open at $13-16 million; instead, it opened at $11 million -- which was not bad but not great. But the opening, based on expectations, thus seemed to be a failure.

Universal’s The Story of Us (Bruce Willis, Michelle Pfeiffer) had estimates of an opening at $16 to $20; it came it at $9.7 and was quickly (probably much too quickly) judged a disappointment. Attendance dropped off fast.

Weekend movie data. The New York Times carries these reports each Monday (in its business section). Check the web, if you want to see these.

December 24-26, 1999

More recent weekend data

January 7-9, 2000

Word of mouth on opening weekend can hurt or help a movie.

Word of mouth

Some opening weekend successes:

• Waterboy (with Adam Sandler) opened at $39 million. (After 4 weeks, the movie had earned $122 million.
• Pokemon: The First Movie. $20.1 opening, $32.8m second (WB acquired rights for the movie for $5m and spent another $18 to adapt it).
• Mummy. $44.7m, $13,600 per screen.
• Star Wars, Episode One: Phantom Menace. $61.8m
• Saving Private Ryan: $30m

A few movies did extraordinarily well in 1999. 17 movies (topped by the latest Star Wars installment) topped the $100 million market in 1999, compared with 11 in 1998.

Through December 19, 1999, the top movies for 1999 (and their domestic box office):

1. Star Wars, Episode I: Phantom Menace. $429m

2. Sixth Sense. $275m

3. Austin Powers: The Spy who Shagged me. $205m

4. Toy Story 2: $202m

5. Matrix: $171m

6. Tarzan: $170m

7. Big Daddy: $163m

8. The Mummy: $155m

9. Runaway Bride: $151m

10. Blair Witch Project: $140m

The emphasis on opening weekend has also led to improvements in theaters: improvements in seating, the arrival of "love seats" which allow a couple to sit together, better sound systems, more food -- including personal pizzas -- nicer lobbies and premium seats (for $15 or more) that include valet parking, separate entrances, better chairs and waiters.

Not all movies have to open big to do well. Sometimes word of mouth can make a movie -- or help propel it. The Blair Witch Project started in only 27 theaters, but it drew about $58,000 per screen in its first three days. In Seattle, the Neptune set a house record (topping the opening of the Star Wars Prequel, Phantom Menace, in May 1999 at that theater). Blair Witch earned nearly $70,000 at the Neptune in its first three days.

In 1975, most U.S. films earned revenue primarily in the United States. Since then, the foreign market for U.S. films has grown enormously. In 1996, it was $2.6 billion; in 1998, it was $3.3 billion. U.S. movies used to premiere in the US and only go into foreign markets after 4 to 6 months; now simultaneous (or nearly simultaneous) release is common.

Foreign box office revenues can exceed U.S. box office revenues in some instances. Independence Day, for example, earned about $222 million in the United States and a bit over $300 million overseas.

In 1990: The seven largest film studios earned 43 per cent of their total box office revenues overseas, notably in Japan, Canada and Western Europe.

Geraldine Fabricant in the New York Times, 1991: "Before going ahead with a project, studios are increasingly considering how movie scripts and the actors they envision for the main roles will play not only in Peoria but also in Pisa, Perth and now, Prague." One example of this: Armageddon. In order to increase the foreign box office, short segments were inserted in the movie showing monitoring stations around the world (monitoring the efforts of the rescue team to stop the impending disaster).

Some kinds of movies do far better overseas than in the United States. Action movies and disaster movies "travel" well. Comedies (where language barriers create more problems) don’t travel as well. Action actors (such as Schwarzenegger, Stallone or Gibson) doe well overseas; actors such as Tom Hanks or Woody Allen don’t do well.

DreamWorks’ action movie Peacemaker (with George Clooney and Nicole Kidman -- saving New York City) cost $45 million and drew only a disappointing $42 million at the U.S. box office. But overseas, it pulled in over $100 million.

Lethal Weapon 4 did not break even in U.S. box office but did extraordinarily well overseas. Rambo III earned twice as much overseas as in the U.S.

$4.5 billion in sales 1998, $14 billion in rentals.

About six months after a movie is released in theaters, the second revenue window is opened: films on videocassette (or, now, DVD). The six month delay is standard but not universal. (Some films are expected to fail at the box office, and thus go immediately to videocassette where the audience is expected to be less discriminating and the cost is $3 or so rather than $7 or $7.50).

Revenue from cassette sales is quite important to film makers/studios. VCR penetration reached 80 per cent (of U.S. homes) by the early 1990s.

Some producers will employ Video Advisers who work on the set with the director. Showing a film on video is different than showing a film in a theater: the video adviser will remind the director about lighting (a dark scene may show up fine in a darkened auditorium but will disappear in a lighted living room when the film is shown on a home TV set). Video advisers also remind directors to keep the action in the center of the screen (Theater screens are rectangular. TV screens usually are square. Action on the edges of the frame, perceivable on a theater screen, can disappear on a TV screen.) Letterbox Format. [Some directors resist this, insisting that their films be released on video in the letterbox format, which retains the full rectangular picture by using black borders along the bottom and top of the picture.]

The video market has been changing in the last 5 or 6 years:

• Small video dealers are being pressed heavily by big video chains such as Blockbuster (owned by Viacom/Paramount) and West Coast Video.
• Newsweek reported in 1992 that video rental chains controlled about 77 per cent of the total market. That has risen since then, probably closer to 85% now.
• There were 25,000 video deals in 1990, dropping to 18,000 in 1996. Who’s disappearing? The mom and pop stores that are at a distinct disadvantage at buying and renting videos when confronted by competition from a chain store which may stock 80 or 90 copies of a popular film and stock several thousand movies as opposed to a few hundred.
• The film industry is squeezing video retailers, too, trying to get them to buy larger numbers of popular new releases (so that customers who want to see the film can find a copy). Pressure is applied by discounting multiple copy sales, selling cassettes in two packs -- a deal must buy two copies to get one -- and by TV blitz advertising which will drive customers to the video store to look for new films. This again helps the large chains and can hurt the small independents.

Two independent rental stores in Seattle are Reckless Video (in the Maple Leaf neighborhood) and Scarecrow Video (on Roosevelt Way N.E., near 50th).

The advent of video has helped studios enormously by giving them another chance (beyond box office) of making money from films. When Steven Spielberg’s The Color Purple was released on videocassette, for example, it had already made about $10 million at the box office. It sold more than 275,000 videocassettes at $89 each to video rental outlets, providing an additional $25 million in revenue.

What’s ahead? Look for vending machines that dispense videocassettes for rent. Video Corporation of America is considering Vidirobots for placement in apartment building lobbies, convenience stories and workplaces. The machines will hold up to 100 tapes and when the proper amount of money is inserted, will dispense a video to the viewer.

Video trivia. Some people have been concerned about the sex scenes/drawing scenes in Titanic. The owners of Sunrise Family Video (American Fork, Utah) will edit out sex scenes and nude drawing from the film for $5.

Video also provides a nice second chance for some movies. Shawshank Redemption, which opened in 1994, didn’t do very well at the box office -- making just $18million. It was quickly pulled. It then got 7 Academy Award nominations, so was re-released and made another $10 million. But not big box office. On Video rentals, though, it has consistently been one of the top rental choices every year since 1995. About a dozen web sites have cropped up solely devoted to it. All of this has lifted the movie to break even status. (It is also just a very good movie).

Why the concern over this?

• Really: advertising in movies
• Advertisers concerned with how their product will appear, and thus with the overall message of the movie.
• Therefore: need to pitch the entire movie to advertisers
• Only movies amenable to advertising will have product placement
• Growth of product development deals. (Tommy Hilfiger, "The Faculty", Brown and Williamson Tobacco Co., on Bond, Rocky and Superman).

When the movie Jerry Maguire was shown on Showtime in January 1998 (a year after its theater release), it was 47 seconds longer than the version people saw in movie theaters in late 1997 or early 1998. The ending of the movie, as shown on Showtime, included a fictional Reebok commercial. Reebok had a production deal with the movie studio (Sony Tri Star Pictures) for Reebok products. The movie included Reebok brand clothes (jackets, shoes), real athletes (in the football scenes, to train the actors). The deal also included a payment of $200,000 for a fictional commercial in which Rod Tidwell (played by Cuba Gooding Jr.) would finally get a product endorsement ad. Director/writer Cameron Crowe edited the commercial out of the film because it did poorly in test screenings. Reebok sued, and the commercial went back in later (for Showtime).

American Eagle has a product placement deal with Dawson’s Creek (the WB TV show). WB has promised to include plugs for the retailer in pseudo news features that the WB network will produce to promote Dawson’s Creek. The promotional segments are intended to air during local newscasts on WB affiliated stations. American Eagle will also outfit Dawson and his crew, and feature all of them in its catalogs. This is part of a soft sell; perception that younger consumers don’t like hard sell. Wall Street Journal, June 22, 1999: "The Dawson’s Creek deal illustrates how TV is quickly shaping up as a battleground for retailers vying for the attention and spending of fickle teenagers. These consumers, who walk around with a surprising amount of disposable income in their pockets, are a particularly important target audience for apparel retailers. Teen oriented TV shows make especially attractive advertising vehicles."

CBS began to feature a particular bracelet on its "Guiding Light" soap opera in 1999, and then sold replicas of it for $29.95.

According to CBS executives, this is a pilot program that will grow if it succeeds. Other products could include clothes (such as the blazers worn by Don Johnson on Nash Bridges, or uniforms such as those worn on JAG). CBS has done some merchandising before -- with a "Touched by an Angel" CD and cassettes of the Joan of Arc mini series.

Other networks are following suit. Check web pages for various networks to see merchandise offers.

Michael Jacobson, co-founder for the Center for the Study of Commercialism: "Companies are discovering that people are getting tired of traditional advertising. So they’re sticking their advertising in places where people don’t think there’s advertising. Audiences aren’t being told they’re being advertised to. They assume, naively, that Budweiser Beer or a Nikon camera is in a movie because Burt Reynolds likes the product."

1997: $603 million.

Usually about 2-3 weeks after a film goes into video release, it is made available for showing on pay-per-view TV systems, where customers pay a specific fee to see the telecast of a recent movie. Pay per view revenues are small but growing.

A year, or so, after theatrical release, and six months after video store release, films begin to appear on premium cable TV channels (such as HBO, Showtime, Cinemax and the Movie Channel). The networks pay the film producers a flat fee for the right to show the film a certain number of times. Frequently, the films are bought in packages; the cable channels buy the rights to popular films and also get some not-as-popular movies as well (block booking).

The sale of movies to over-the-air television was once a lucrative market for the film industry. Before a movie gets to over-the-air TV, however, most people who want to see it have already seen it in a theater, on video or on premium cable. Blockbuster movies no longer draw vast audiences on network TV; made for TV movies usually do better -- and cost much less, too.

Titanic, Saving Pvt. Ryan, Mask of Zorro, Polish Wedding, Avengers, How Stella Got Back Her Groove, World is Not Enough, Dance With Me, There’s Something....About Mary, Dead Man on Campus, etc.

Direct merchandising: Toys, plastic figures (at fast food restaurants);

Indirect: not something from the movie itself; instead, logos on sheets, drinking glasses, jackets, etc. There’s about a five year window on merchandising; it can bring in as much money as box office revenues. Toy Story had a 4 year run on selling merchandise before the advent of Toy Story 2.

Star Wars, with its debut in 1985, earned over $2 billion in merchandise revenues over a 7 year period: dolls, R2D2 posters, Star Wars bed sheets, pillow cases, toys, playing cards, books (25 in all), comics, Christmas ornaments,etc.

The first of the recent Batman movies (in 1989) rang in $500 million in merchandise revenue in 1989 (within six months of the movie’s release).

Movies with merchandise tie ins include Star Wars, Batman, Dick Tracy (with nearly 600 different products, including Tracy hats, towels, jackets, coffee mugs, pins and key chains. Disney engineered a major tie in with McDonald’s featuring a game with $40 million in prizes. About half of the McDonald ads during the period of top marketing for the movie promoted not only burgers and fries but also the Tracy movie.) and most of the Disney animated movies aimed at kids (101 Dalmatians, Lion King, etc.).Consequently, some parents report "toy fatigue" from all of the merchandise offers.

A Bug’s Life (Disney) relied heavily on a promotional tie in with McDonald’s. The movie also came out at Thanksgiving (again to generate demand for merchandise for Christmas). McDonald’s offered digital clips on watches to older kids and adults with purchases of combination meals.

Children’s movies, many of which open around Thanksgiving, are geared toward creating a Christmas-related market for toys. Toy Story and Toy Story II both opened on or near Thanksgiving weekend -- thus generating a huge demand for Toy Story merchandise for Christmas.

Content impact? You need a "feel good" product.

Some of the major studios have their own chain of stores: Disney (with 713) is the biggest; Warner Brothers has 180. Revenues have dropped lately at the stores, perhaps due to customer fatigue, too much merchandise, etc.