The Hollywood Economist 2.0

by Edward Jay Epstein

  While this is an enormously high-stakes game, even a single successful licensing franchise can put a studio in the black—as Spider-Man did for Sony Pictures. Midas Formula franchises might not win Oscars, but they keep the studios in business.

  MARKET TESTING VILLAINS

  For the past decade, Hollywood has been casting financiers as the demonic villains of society. In the multiplexes, businessmen have even replaced terrorists as villains. In the Warner Bros. political thriller, Syriana, for example, the villain is not al-Qaeda, an enemy state, the mafia, or even a psychotic serial killer. Rather, it’s the big oil companies who manipulate terrorism, wars, and social unrest to drive up oil prices. One doesn’t need to look far to discover that the root-of-evil corporate villain is hardly atypical of post-Cold War Hollywood.

  Consider Paramount’s 2004 remake of the 1962 classic, The Manchurian Candidate. In the original film, directed by John Frankenheimer, the villain-behind-the-villain is the Soviet Union, whose nefarious agents, with the help of the Chinese Communists, abduct an American soldier in Korea and turn him into a sleeper assassin. In the new version, the venue is transposed from Korea in 1950 to Kuwait in 1991, and the defunct Soviet Union is replaced as the resident evil. The new villain is—you guessed it—the Manchurian Global Corporation, an American company loosely modeled on the Halliburton Corporation. As the director, Jonathan Demme, explains in his DVD commentary, he avoided making the Iraqi forces of Saddam Hussein the replacement villain, because he did not want to “negatively stereotype” Muslims. Not only were neither Saddam Hussein nor Iraq mentioned in a film about the Iraq-Kuwait war, but the Manchurian corporation’s technicians rewire the brains of the abducted US soldiers with false memories of al-Qaeda-type jihadists so that they will lay the blame for terrorist acts committed by American businessmen on an innocent Muslim jihadist. So Hollywood depicts greedy corporations deluding the public about terrorism.

  Why don’t the movies have plausible, real world villains anymore? One reason is that a plethora of stereotype-sensitive advocacy groups, representing everyone from hyphenated ethnic minorities and physically handicapped people to Army and CIA veterans, now maintain a liaison in Hollywood to protect their image. The studios themselves often have an “outreach program” in which executives are assigned to review scripts and characters with representatives from these groups, evaluate their complaints, and attempt to avoid potential brouhahas.

  Finding evil villains is not as easy as it was in the days when a director could choose among Nazis, Communists, KGB, and Mafiosos. Still, in a pinch, these old enemies will serve. For example, the 2002 apocalyptic thriller Sum of All Fears, based on the Tom Clancy novel in which Muslim extremists explode a nuclear bomb in Baltimore. Paramount decided, however, to change the villains to Nazi businessmen residing in South Africa to avoid offending Arab-American and Islamic groups. Yet, even if aging Nazis lack any credible “outreach program” in Hollywood, no longer can they be creditably fit into many contemporary movies since they would be in their nineties by now. “The list of non-offensive villains narrows quickly once you get past the tired clichés of Nazis,” a top talent agency executive pointed out to me in an email. “You’d be surprised at how short the list is.”

  Since international markets now provide Hollywood with 70 percent of its revenue for action movies, studios find it increasingly risky to employ villains from potentially valuable markets such as China. Consider, for example, the MGM remake of John Mileus 1984 classic Red Dawn in which Chinese bad guys invade America. In the new version, which MGM plans to release in 2012, the movie has been digitally altered and re-edited to make the primary villains North Koreans. Since North Korea is one of the few countries in the world in which Hollywood does not distribute its movies, it remains on the short list of evil stereotypes.

  For sci-fi and horror movies, there are always invaders from alien universes and zombies from another dimension, but even here it doesn’t hurt if they are in the greed business. In the 2009 movie Avatar, a greedy mining corporation is behind the use of avatars to destroy the environment, culture, and natives on the planet Pandora. This proved a lucrative decision since the movie earned a large share of it revenue in foreign countries concerned about corporate exploitation of their resources and environment. But for reality-based politico-thrillers the safest remaining characters are lily-white, impeccably dressed American corporate executives. They are especially useful as evildoers in foreign-based thrillers since their demonization does not run the risk of gratuitously offending officials in countries either hosting the filming or supplying tax or production subsidies. Mission Impossible 2 thus replaced the Russian and Chinese heavies that populated the TV series with a Wall Street-type financier who controlled a pharmaceutical company that aimed to make a fortune by unleashing a horrific virus on the world. How? It owned the antidote. Here, as in other movies in this genre, businessmen’s killings are not just figurative. Unlike other stereotype-challenged groups, CEOs and financiers, lacking a connection with the studios’ outreach programs, have become an essential part of Hollywood’s casting. They are the new all-purpose money demons.

  WHY SERIOUS FARE WENT SMALL SCREEN

  Once upon a time, the television set was commonly called the “boob tube,” and elites looked down on it as a purveyor of mind-numbing entertainment. Movie theaters, on the other hand, were considered a venue for, if not art, more sophisticated dramas and comedies. Not any more. The multiplexes are now primarily a venue for dumbed down comic-book inspired action and fantasy movies, whereas television, especially the pay and cable channels, is increasingly becoming a venue for character-driven adult programs, such as The Wire, Mad Men, and Boardwalk Empire. This role reversal, rather than a momentary fluke, proceeds directly from the new economic realities of the entertainment business.

  When HBO was initially signing up monthly subscribers in the 1970s, it provided the only way home viewers could see movies uninterrupted by commercials, and it (and its Cinemax unit) eventually signed up 40 million subscribers through local cable systems. HBO gets a fixed fee—about $4.50 per month—for each subscriber, no matter how little or often they watch HBO. To continue to harvest this immense bounty, HBO has to perform a single feat: stop subscribers from ending their subscription. But since nowadays its subscribers can get movies cheaper and faster from other sources, such as Netflix, retail stores, and the Internet, HBO needs a more exclusive inducement to keep them. And so, beginning in the 1990s, it began putting more and more resources into creating its own original programming that would appeal to the head of the house. Not restricted by the need to maximize the audience (it has no advertising), ratings boards (it has no censorship), or non-English speaking markets, it was able to create edgy character-driven series such as Sex and the City, which not only succeeded in retaining their subscribers but achieved surprising acclaim in the media. Other pay-channels followed suit. So did other networks so as not lose market share. The result is the elevation of television, or at least some tiers of it, to a medium of entertainment for the elite.

  Meanwhile, Hollywood, conforming to its new economic landscape, has had a gradual downgrade. Unlike in the era of the studio system in which studios opened their movies in select first-run theaters, the big six Hollywood studios nowadays open their major movies nationally on 3,500 or more screens owned by a handful of multiplex chains. The deal-breaking issue for the strategists is not the intrinsic merits of the film but whether it contains the necessary elements to attract a target audience of tweens and teens who also are the group most likely to consume popcorn, candy, and soda. With this targeted audience in its sights, the marketing executives tend to only approve movies that contain elements that, when encapsulated in ads, will activate these young people to go to the movies, such as visually-stunning action. Even so, since anything original is chancy, marketing executives lean towards formulas that have been successfully used before; hence, the profusion of action movie sequels.

  In additio
n, studios need to consider another part of the new economic landscape: the growing importance of non-English speaking markets. Nowadays major Hollywood releases earn most of their revenue abroad, and large scale action films, such as Avatar, Spider-Man 3, and Mission Impossible 3 earn more than 70 percent of their revenue in overseas markets. Since many of these foreign territories depend on dubbing, especially in Asia and Latin America, studios have found that the formula for successful bookings is, as a top Fox executive put it, “Short on dialogue, long on action.” Happily for the studios, this formula fits with the requisites for marketing to its target audience in America. Add to this equation the multiplexes’ appetite for supersized 3D movies (which lets them jack up ticket prices), and it is hardly surprising that Hollywood is moving more and more towards comic-book sequels and other action-bumped fantasy fare. Meanwhile television, which must to adopt to a new Internet world in which its audience can cherry-pick what it wants to see, anytime and anywhere, via ubiquitous DVRs, tablets, and computers, is now providing the sophisticated niche entertainment that movies once provided.

  PART VI

  INDIE FILM

  THE OSCAR DECEPTION

  Each year a global audience, second in size only to the Super Bowl, watches television’s most lucrative infomercial: the Annual Academy Awards. For some three and a half hours, interspersed with clips from currently-available movies, Hollywood’s most publicized stars will ecstatically award the winners 13-inch-high gold-dipped statuettes known the world over as the Oscars.

  The initial purpose of this gala event, which the studios created along with the Academy of Motion Picture Arts and Sciences in 1927, was, in the words of its main architect Louis B. Mayer, “to establish the industry in the public’s mind as a respectable institution.” But it was also designed to market and create “stars.” Mayer was co-founder of Metro-Goldwyn-Mayer, one of Hollywood’s most successful studios during its Golden Age (1930s–1950s), and is known as the father of Hollywood’s “star system” of marketing.

  The stars come out for Oscar night, but to further enhance its global audience in 2010, the Academy doubled the number of Best Picture nominees. Even with this expansion, attention remained focused on two polar-opposite films: Kathryn Bigelow’s The Hurt Locker, and James Cameron’s Avatar, both of which garnered eight other Oscar nominations.

  The Hurt Locker is a reality-based film about a squad of courageous American soldiers who defuse bombs under horrendous conditions in Iraq. By Hollywood standards, it is a very small movie, costing only $15 million to produce and another $15 million to publicize and distribute. And although critically acclaimed, it sold only $18.5 million in tickets worldwide. With theaters keeping roughly half of these box-office sales and the distributor deducting its expenses off the top, it is deeply in the red. Nevertheless, for many among the Academy’s nearly 6,000 voting members, it represents the kind of intelligent realism that Hollywood is capable of making for an adult audience.

  Avatar, on the other hand, is a fantasy-based movie about alien life forms who need to be rescued from neocolonialist corporate exploitation on a planet called Pandora. The film, enhanced by brilliant visual effects, may be the most expensive ever made. According to a top executive at Fox, it cost over $225 million to produce and another $150 million to publicize and distribute—a number that has been hyped to as much as a half-billion dollars.

  Whatever the cost, Avatar has been an immense success, selling a record-breaking $750 million of tickets in the US, where it is shown in 3D as well as the traditional 2D format, and more than twice that amount overseas, where it’s shown mainly in 2D. For Rupert Murdoch’s 20th Century Fox, which gets its distribution fee off the top (as well Dune Entertainment and Ingenious Partners, the private equity funds that provided 60% of the financing, and James Cameron’s production company, Lightstorm Entertainment) it is a gold mine.

  The film’s success at the box office has also excited hopes that its 3D visual effects will restore the Golden Age of movie attendance, a time before television when two-thirds of Americans went to the movies in an average week.

  The overall box-office numbers, however, provide little grounds for such optimism. Avatar no doubt has enriched many theaters charging a premium for the 3D experience, but it did so largely at the expense of theaters showing other movies. In the eight weeks that Avatar dominated US box-office receipts, total movie attendance increased by about 6 percent.

  But even if the audience resurgence is no more than a pipe dream, Avatar represents for many in the Academy the idea that Hollywood’s ultimate salvation lies not in superior story-telling and acting but in eye-popping visual effects, stunning animation and state-of-the-art 3D projection that immerse the audience in the illusion.

  Regardless of box office receipts, Hollywood’s major studios have a sure-fire engine for making money from viewers who don’t regularly go to the movies. It’s what the studio calls its “library,” which contains the rights to all the movies and television series that it has ever produced or acquired. By relentlessly licensing and selling the rights to these titles, studios harvest money from home audiences decades after a film plays in theaters.

  Consider, for example, the Time Warner library. It has more than 45,000 hours of feature movies, cartoons and TV episodes, dubbed or subtitled in more than 40 languages, that it licenses to pay-TV, cable TV, satellite telecasters and television stations in more than 175 countries. These titles are often bundled in take-it-or-leave-it packages (a practice that is prohibited by US anti-trust laws in distributing movies to theaters), which helps optimize profits. In 2009, just the television distribution part of this operation brought in more than $2 billion, according to one source at Warner Brothers. A revenue stream this lucrative, even after paying residuals to guilds, labor and other participants, would be enough to pay for most, if not all, the costs of Warner Brothers’s new movies.

  Libraries, of course, also pull in huge revenues from the global sale and rental of DVDs. (Technically, newly released titles are not included in the library for two years.) Even though DVD sales of movie titles and TV series are now waning, on the horizon is another promising revenue stream: digital rights for Internet delivery. While at present these rights provide little more than pocket change for studios, future revenues are due to explode with the proliferation of smart phones, netbooks, tablets, game consoles and other such gadgets. In any case, as one Viacom executive recently told me, “No studio could stay solvent for long without a library.”

  If the studios’ libraries, the reality-based money machines that boost the bottom line, do not receive accolades or even a mention at Sunday’s Academy Awards, it isn’t that their value is unappreciated. It’s because Hollywood’s real genius is understanding that its audience prefers illusion to reality. The stars shine brightest on Oscar night. And that’s show business.

  CAN INDIE MOVIES SURVIVE?

  If you are a producer of indie movies, the great sucking sound you may be hearing is Avatar draining money from your future projects. While this brilliant Pocahantas-meets-Jurassic Park mashup may be a bonanza for Rupert Murdoch’s 20th Century Fox studio, which gets a distribution fee on every dollar it brings in from theaters, video stores, and TV, and its producer-director James Cameron, who gets a cut of the gross after it reached its Hollywood-defined $500 million cash break even point, it will further convince the heads of the major studios that their salvation lies in putting their money in “high value” movies laden with mesmerizing visual effects that can be simultaneously opened on more than 5,000 screens around the world and lend themselves to sequels, merchandise tie-ins, toy licensing, and theme park rides.

  To be sure, even before the phenomenal success of Avatar, the Big Six studios were shying away from smaller movies despite their potential profits. Consider, for example, the sad story told to me by one of the most successful indie producers in New York. In 2009, he brought a major studio a $20 million project packaged with a hot director and two stars. Afte
r running the numbers, the studio estimated that its potential box-office in America at $100 million, which would yield it, just from its 30 percent distribution fee and a locked-in output deal with HBO, a 100 percent profit on its investment. But it turned down the project. One of the studio’s top executives told the producer, “We don’t do films that do not have a projected box-office of at least $150 million.”

  The reason for this rule is that a studio has only a limited number of slots for its releases at multiplexes and it has to fill them with projects, whether profitable or not, that generate maximum revenue, since the slice it takes off the top in the form of distribution fee pays the studio’s overhead (which includes the executive’s six-figure paycheck). This means worldwide grosses—almost 75 percent of Avatar ticket sales is from foreign audience—and indie films even if they are profitable, cannot be counted on to do that job.

  Unlike a studio producer, an indie producer rarely, if ever, has a U.S. distribution deal in advance of shooting. To raise the money to shoot a film, he or she must either find an outside investor, an equity partner, or get a bank loan. What made loans possible, at least up until recently, were the availability of pre-sales agreements. These odd devices, which had been the backbone of indie financing since Dino de Laurentiis invented them in the 1970s, worked as follows: an indie produced would sell the distribution rights in foreign territories and then use the contracts as collateral to borrow from banks. Foreign buyers were willing to sign pre-sales deals because they assumed the film would get U.S. distribution since up until 2008 there was no shortage of smaller distributors specializing in indie films, including Miramax, Fox Searchlight, Fox Atomic Films, Paramount Vantage, Warner Independent Pictures, Picturehouse, New Line, Fine Line Features, Focus Features, Sony Pictures Classics, Lionsgate, the Weinstein Company, and Summit Entertainment.