Studios set to lose $1.9 billion

2006 releases suffer from high production costs

LONDON — The Hollywood studios will make a loss of $1.9 billion on the movies they released in 2006, according to the first report from Global Media Intelligence, a new division of media research firm Screen Digest.

The report, titled “Do Movies Make Money?,” says that production costs for mid- to big-budget movies have risen much faster than revenues over the past few years, leaving the studios’ business model deep in the red.

Analyzing the 132 pics distributed by the U.S. majors in 2006, it estimates a pre-tax operating loss of $1.9 billion after five years of exploitation across all global media. That compares with a profit of $2.2 million for all new studio releases in 2004.

“We believe there is little chance of the negative revenue trend reversing in the coming years,” commented the report’s New York-based author Roger Smith.

“New technology will not deliver anything like the revenue initially predicted, and as DVD sales continue to decline and the cost of making movies increases, the message is simple: the Hollywood studios must begin a serious attempt to rein in costs, like News Corporation’s Fox has done, if they are to survive.”

GMI is dedicated to delivering research for institutional investors in the U.S. Its first report strikes a warning note for the hedge funds and private equity players that have been co-financing studio production slates over the past couple of years.

It suggests that DVD revenues, which rose by 75% between 1999 and 2004, have fallen for the past three years. In the first half of 2007, this decline accelerated further with a 12.5% drop in U.S. DVD sales, mirrored by a similar fall in international sales.

With DVD providing the lion’s share of studio profits, that has punched a hole in the business model for big-budget production, at a time when the cost of “gross participation” deals for actors, directors and producers has risen to $3 billion in 2006, double the level of five years ago.

According to the report, “While the studios are currently in negotiations with writers, actors and directors over fees, these salaries are not the main issue; the current cost of producing, casting and advertising in the present environment simply exceeds the likely returns.”

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