The Hollywood Economist
The Hidden Financial Reality Behind the Movies
by Edward Jay Epstein
Melville, 240 pp., $16.95
In 1929, the year the first Oscars were awarded, 95 million Americans—80 percent of the population—went to the movies each week. Seven hundred feature films were released into the nation’s 23,000 movie theaters, most of which were quite large. New York’s Roxy theater, for instance, held 6,200 people.
Today about 20 million people go to the movies every week, which is just about 6 percent of the population. There are only 7,000 movie theaters. The theaters have multiple screens—there are 38,000 screens nationwide—but much smaller auditoriums, many of them containing fewer than 300 seats. What happened? Well, lots, and Edward Jay Epstein explains much of it in The Hollywood Economist.
Take just one component of the equation: theater size. In the old days, seats in a theater were all on one level, which gradually sloped downward toward the screen in the front of the room. Very few of these seats—only about a third of them—were near the standard for optimal viewing. In 1995 American theater owners began experimenting with a new kind of design, stadium seating, which put rows of seats in vertical tiers. Suddenly two-thirds of the seats in a theater were optimal, which was a boon to moviegoers.
The problem was that this new design ran afoul of the Americans With Disabilities Act, which specified that in auditoriums with more than 299 seats, all rows must have wheelchair access. The Department of Justice sued theater owners for their stadium-seat configurations. It is impossible to give wheelchair access to every row in a stadium-seat theater, so, Epstein reports, the industry responded by scaling back the size of auditoriums to stay below the 299-seat threshold.
Ever wonder why movies don’t have as much nudity as they used to? Epstein explains that, too. The answer is Wal-Mart. In 2007 the six major studios made $17.9 billion in DVD sales, $4 billion of which was from Wal-Mart, the world’s largest retailer. Wal-Mart has a policy which forces any film with sexually related nudity away from high-visibility shelf space and into more obscure “adult” sections of the store. (This is so as not to offend mothers, who are there not to buy low-margin DVDs but high-margin items such as clothes, toys, or electronics, Epstein explains.)
Epstein’s last book about Hollywood economics, The Big Picture, dealt largely with explaining how important those DVD sales are to movie studios. Consider the picture Gone in 60 Seconds. Produced and distributed in 2000 by Disney, Gone cost $103 million to make and took in $242 million at the worldwide box office. Yet it concluded its theatrical run as a $95 million loss. Follow the bouncing ball:
Of the $242 million in ticket sales, theater owners kept $139.8 million, a standard percentage. The studio took home $102.2 million. From this they deducted the cost of distributing the film: $67.4 million for advertising, $13 million for prints, $10.2 million for insurance, and so on. Which left Gone with an adjusted gross of $11.6 million. Various profit participants (stars, producers, etc.) took their percentage from this rump, leaving Gone with that $95 million loss.
Then came the DVD release, where Gone took in another $198 million. Because of the accounting schemes used for DVD sales, Disney kept $158.4 million of this; only $39.6 million was credited to the movie production itself. This sleight-of-hand persists down the line, with the studio keeping larger and larger percentages of income from ancillary sources—cable, pay TV, toys, and whatnot. Even though Gone in 60 Seconds the movie generated nearly $500 million in revenues for various parties, by 2008, Gone in 60 Seconds the production was actually sinking further and further underwater, its losses climbing to $155 million as residual cuts and interest payments kept piling up.
So if the theatrical release is a loss-leader, why do the studios bother with it? Because they need it to generate interest in the ancillary markets. Epstein’s major insight in The Hollywood Economist is how studios manage their theatrical releases. It’s hard to believe, but back in 1929, when 80 percent of America went to the movies every week, the studios didn’t bother to advertise. There was a movie audience every week, no matter what the movie was. Television changed everything. When TV arrived in the 1950s, it began eating into the number of tickets being sold. Over time the “weekly movie audience”—people who went to the movies every week, regardless of what was playing—all but disappeared.
“The studio, realizing that they could no longer count on habitual moviegoers to fill theaters, devised a new strategy: creating audiences de novo for each movie via paid advertising,” explains Epstein. This was an expensive proposition. The author reports that in 2007, studios spent an average of $35.9 million per film in advertising. The logic of this decision has heavily influenced the kind of movies Hollywood makes. In the old days, studios created movies to satisfy an existing audience; today they design movies to create an audience of people who will, on a single given weekend, come to see that film. Those are very different businesses, and they produce very different products.
It is often lamented that Hollywood only makes movies aimed at 14-year-old boys. The lament is not entirely untrue. It’s also not unreasonable. As Epstein notes, “The studios zero in on teens not because they necessarily like them, or even because teens buy buckets of popcorn, but because they are the only demographic group that can be easily motivated to leave their home.” Not only that, but teens are relatively easy to reach via advertising because they tend to cluster around the same, predictable TV programs. Even better, these programs are often on cable, where advertising costs are lower than on broadcast television. And better still, teens buy videogames and fast food, two common movie merchandising offshoots. Which is why the same industry that once churned out movies such as Notorious and The Philadelphia Story by the truckload now produces disposable products such as Tomb Raider and Pirates of the Caribbean: Dead Man’s Chest.
The most dispiriting thing about The Hollywood Economist isn’t a revelation that the Hollywood system has somehow failed. It’s that the system is working exactly as it’s supposed to work.
Jonathan V. Last is a senior writer at The Weekly Standard.
