Hollywood’s day of reckoning is at hand.

In the past year there have been fewer $100 million box office hits in the domestic marketplace, soaring production and marketing costs, brutal corporate shakeups and once prominent companies shuttered or on life support systems. No one has escaped the industry’s reversal of fortune; some have simply weathered it better.

The industry is reeling because:

* Domestic box office and many ancillary revenue streams are flat.

* The number of wide releases has risen 17% but return less income to the studios.

* Average production costs are up 15%, largely due to higher talent compensation.

* Marketing costs are up at least 20%, with network TV ad rates contributing most of that increase.

* Rentals are down about 8%.

* The only revenue areas that demonstrated significant growth in 1995 were foreign theatrical, with about a 10% boost, and domestic video, up at least 7%.

The trouble starts with the box office. Since 1986, the domestic theatrical market has expanded by close to 70% – growing from $3.1 billion to $5.2 billion. With the exception of a 2% dip in 1991, each year has seen at least 5.5% growth. This year, however, will be essentially flat with 1994.

“There’s a sense of complacency that’s set in,” observes an industry exec. “Senior level people can delineate ballooning costs and shrinking returns as if that were the norm. The industry is in a state of denial.”

Slow, steady growth may have run smack into a market that’s at the saturation point. Domestic B.O. for the first 11 months of 1995 was a slim 0.4% ahead of the comparable period of 1994. The uncertain commercial prospects for this year’s holiday films has trackers estimating best-and worst-case scenarios that amount to a 1% increase or decrease overall.

Industry insiders note that the stagnation problem can be self-perpetuating. As studios try to make their product “more commercial,” the movies increasingly fall into a narrow spectrum of tone and content – which, in turn, causes more and more films to compete for the identical sector of t he market.

Box office is about the only element in the picture that appears to be status quo. Most importantly, the majors collectively have taken a quantum leap in the number of wide releases. Last year, there were 130 such films – pictures that played in at least 800 theaters – and this year that’s risen to 153.

Last year’s 130 wide releases accounted for almost $4.9 billion of a $5.2 billion domestic landscape, or 94% of all theatrical revenues. That means the average wide release grossed about $37.6 million. With 153 wide releases this year splitting up virtually the same total B.O., grosses per wide release will fall to about $32 million, squeezing profit margins.

If each of the 153 films had performed at last year’s average, the total box office for wide releases would be $5.75 billion – a huge increase of about $850 million. But theatrical has stayed flat.

Glut will persist

Even more worrisome, the glut of wide releases will continue next year. Fox president Bill Mechanic anticipates an increase of at least 20 films in 1996. Presently, 67 are scheduled to open between Jan. 5 and Memorial Day. That compares with 61 for the same period of 1995.

“The business has to settle down,” Mechanic says. “It is a fool’s errand to make more and more films, gambling that you will defy the odds and produce only hits. There are companies that are going to get seriously burned this year and next.”

There’s little disagreement among industry honchos about the desirability of a less glutted marketplace. But no clearinghouse exists to proffer such a plan. And such an agreement – gentlemanly or otherwise – would be hard to maintain for the full term.

A studio chief characterizes the state of the industry as “dire and headed for catastrophe” on its present course. “If this were the auto industry,” he maintains, “all the major manufacturers would get together in a room and agree to shut down the assembly line for six months. Reducing the number of productions is really what everyone wants.”

In addition to shrinking revenues, profit margins have been squeezed by escalating costs to produce and market mainstream pictures. At ShoWest last March, MPAA president Jack Valenti said the average cost of a release from a major was $50 million – $34 million to produce and $16 million to market. Variety estimates that the figure could easily increase as much as 18% this year to $59 million.

The step-up in releases and in production and marketing costs represents an additional $2.5 billion outlay for the studios. The figure is roughly equivalent to 1994’s total domestic film rentals. One has to wonder where the industry thought the additional money would be found.

Profits? What profits?

“The movie industry per se hasn’t really been profitable in years,” notes one senior studio exec. “But it used to be that you were looking for a way to make up the $5 million (on one film) that you weren’t going to be able to recoup from traditional money streams like movie admissions or TV or cassettes. It might come from a book or soundtrack, merchandise or another type of spinoff. That was no easy task, so you can imagine how much more difficult it is when you need to find an additional $20-$25 million from nontraditional sources.”

The most traditional source – box office rentals – is also underperforming. Because of the glut of product, distributors are forced to give theaters a larger slice of the box office.

“Basically, the terms for pictures haven’t changed appreciably in at least five years, probably longer,” observes MGM/UA distribution president Larry Gleason. “You can do very well on the big pictures, but the majority of your product will ultimately produce aggregates between 45% and 50% of the gross. Right now, because of competition, we’re at the low end of that range.”

TV is costly

Marketing costs for the majors are growing faster than any other expenses; Variety estimates they are up at least 20%. The single biggest factor is network television advertising, which rose 14% for the new season. Additional costs have been incurred from larger print orders and longer campaign periods.

“There have been huge increases in advertising in the past decade as marketing has superseded publicity,” notes a studio marketing exec. “It’s an area where costs are going up at double or triple the rate of inflation. Despite the tremendous expense of national TV ads, they remain the most cost-efficient way to sell your movie. Our costs went way up this year – sometimes as much as 33% – because of the network boosts and the increasing number of national releases. You have to buy more ad time just to be heard and remembered above the clutter of other new pictures you are trying to create.”

The rise in production costs appears to be up a more modest 15%, in part due to lower-budget items from Disney and New Line. Still, talent compensation has had tremendous impact, with salaries and profit participation making budgets of $60 million common for pictures with top stars and state-of-the-art special effects. Production execs decry soaring star salaries while negotiating multiple-picture, eight-figure deals with backend profit participation for a lucky handful.

“Ultimately, paying out $10 million or more (to an actor) is bad business,” insists a senior exec. “I believe that some deserve it – I just would never publicize it. It creates a terrible chain reaction, inflating secondary salaries and causing genuine resentment among the crew. Frankly, I can’t blame the techies for not waiving meal penalties and the like when they read how much some star is going to make from a picture.”

The bright spots

The brightest spots in the revenue equation are foreign theatrical and domestic video growth. In recent years, foreign revenues have been growing twice as fast as the domestic scene. Initial tallies for 1995 indicate the year will top out 9% to 11% ahead of last year. That could mean an additional $250 million back to U.S. majors.

“International markets are the last frontier, until we can find a new money stream on the scale of videocassettes,” observes one studio rep with a foreign portfolio. “They are a genuine growth area. They are also very costly to develop, so you don’t see back nearly the percentage of box office you get domestically. But there’s no earthly way they can expand and compensate for the shortfalls we’re experiencing on the domestic front.”

Domestic video continues to provide the lion’s share of cassette income, largely on the strength of sell-through titles. Several studio execs say that creating an effective sell-through plan in major foreign territories has so far stymied every company.

The solution to Hollywood’s crisis is simple in theory but not in practice. Fewer films of comparable quality to the current crop should keep the box office at its current level, while lowering costs dramatically. I t would mean better terms with theaters and improved profit margins for the majors.

“It just makes sense,” says one studio exec. “But there’s so much ego and competition involved, I doubt it could ever happen voluntarily. Unfortunately, you need something on the order of catastrophe to get anything to change in Hollywood.”

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