The Reckoning: Why the Movie Business Is in Big Trouble

Anyone in the movie business who tells you they’re not scared stiff about the future is probably lying.

There’s ample reason to be fearful. It’s been 128 years since Thomas Edison first helped usher in theatrical exhibition with the creation of the Kinetoscope, an early motion picture viewing device. In the ensuing century, cinema has given audiences Garbo and Rin Tin Tin, introduced “May the force be with you” into the cultural lexicon, and dazzled crowds with man-eating sharks and dinosaurs so massive and menacing they could barely be contained on even the most cavernous of screens. Despite that history, there is mounting anxiety among theater owners, studio executives, filmmakers, and cinephiles that the lights may be starting to flicker.

As consumer tastes and demands change, Hollywood is scrambling to adapt. Instead of surrendering to existential dread, studio chiefs and exhibitors are showing a greater willingness to experiment, particularly when it comes to releasing movies in the home within weeks of their theatrical debut for between $30 and $50 per rental. If that comes to pass, it would represent the biggest distribution and exhibition shakeup since the introduction of the DVD created a home-entertainment windfall in the late 1990s.

Some industry veterans are unconvinced that the business can pull it off. Structurally, these studios and the agencies and exhibitors that orbit them are too sprawling, too slow-moving, and too entangled in a dizzying web of antiquated business practices and associations to respond effectively to the digital era.

“The major studios have not been choreographed or run to be entrepreneurial,” says Amir Malin, managing principal and co-founder of Qualia Capital, and former CEO of Artisan Entertainment. “It’s a system that’s been intoxicated with a ‘cover my ass’ mentality. Simply put, it’s a defective system, and when a business paradigm is defective, very good people start doing things that are counterproductive.”

There are two major problems gripping the industry. Younger audiences are becoming more interested in streamable content that is accessible on their iPhones or tablets. They’ll still turn up at the multiplexes to see the Avengers save the world or watch Han Solo slide behind the wheel of the Millennium Falcon, but despite a few massive blockbusters, the zeitgeist continues to shift from the big to the small screen.

“I think the proof is right in front of us with what’s happening in cable and streaming services,” said Lorenzo di Bonaventura, producer of the Transformers films. “Directors want to go there, because they’re able to tell interesting stories…. That’s where the chances are being taken. That’s where the action is now.”

The other problem is that the financial underpinnings of the business are showing signs of strain. Nowhere is this clearer than the barriers that are springing up between Hollywood and its most reliable sources of capital. The smart money left the business years ago, partly because of Silicon Valley’s promise of fortune, but also because investors were put off by creative studio accounting that turned hits into financial losers.

Now new money — particularly that which has been pouring in from China — appears to be drying up. Chinese authorities are putting tight restrictions on foreign investment, limiting the flow of capital into the entertainment industry. That resulted in a failed $1 billion sale of Dick Clark Productions to Dalian Wanda, and the potential collapse of another $1 billion slate-financing pact between Paramount and two Chinese players, Huahua Media and Shanghai Film Group.

“They think Chinese companies are overpaying for Hollywood and they’re slowing it down,” says entertainment attorney Schuyler Moore, a partner at Stroock who has been involved in arranging slate-financing deals for the likes of DreamWorks and Warner Bros. Moore thinks that Chinese investment may be gone for good, and that other forms of venture capital will transition away from film to emerging forms of popular entertainment such as virtual reality. “The interest is not in the traditional film model,” says Moore. “All investors see there is trouble.”

Optimists maintain that revenues are still growing. The domestic box office hit a record $11 billion in 2016, and the global box office reached a new high-water mark of $38.6 billion. Three months in, 2017 has already fielded such blockbusters as “Beauty and the Beast” and “Logan.” But that growth is being driven by higher ticket prices and inflation. Simply put, fewer people are going to the movies. U.S. and Canadian attendance has failed to match the 1.5 billion admissions the industry hit in 2004.

“You’re spending more money to reach less people and to less effect,” said Adam Goodman, former Paramount president and founder of Dicotomy. “You’re opening movies only to see them burn out at the box office.”

Just-released figures by the Motion Picture Assn. of America reveal that attendance in 2016 remained flat.

Gone are the days when studio chiefs were true moguls, ruling over the lots like sultans. Today, studios are a small piece of sprawling media and technology empires. Most of the movies are made far away from Los Angeles, in cities like Atlanta or New Orleans where tax credits are the most generous. All of the studio executives who make greenlighting decisions have bosses higher up the corporate ladder, and the films they produce are becoming less and less integral to the bottom line. The Comcasts and Disneys of the world make more money from their cable or consumer product lines than from movie ticket sales.

Source: MPAA

Perhaps it’s the mounting fear that an iceberg is approaching, but studios and exhibitors do seem closer to signing that grand bargain which would enable films to get early home entertainment releases for a higher price. As an enticement, distributors are willing to cut theaters in on a percentage of their digital sales. Six of the seven biggest studios — a group that includes Fox, Paramount, Lionsgate, Sony, Warner Bros., and Universal — are having unilateral discussions with major theater chains like Regal and AMC.

Currently, big theatrical releases are supposed to wait roughly 90 days before they’re available to be sold or rented.

But studios argue that’s too long, and they want to shrink the window in which theaters have exclusive access to their films. With the DVD market fading fast, they need to find a way to prop up home-entertainment revenue. There is a belief, accepted as dogma in some studio boardrooms, that streaming services like Netflix have conditioned consumers to access content whenever and wherever they would like it.

“It’s just such an obvious thing that has to happen,” says Jessica Reif Cohen, an entertainment and media analyst with Bank of America, adding that she thinks offering films earlier in the home may be attractive for people with young children.

“It may be an impulse buy, or they don’t have a babysitter, or have other reasons for why somebody doesn’t go,” she says.

Source: MPAA

At the very least the two sides are talking. In the past, exhibitors have been hostile when studios have tinkered with release windows. They’ve long believed that if movies are made available to rent or buy within weeks of their release, then customers might steer clear of multiplexes. Not wishing to become handmaidens to their own destruction, theater operators have warned of cannibalistic consequences, ready to man the barricades at any incursion.

A plan by Universal to release 2011’s “Tower Heist” two weeks after it premiered in theaters, for instance, was kiboshed after theater owners threatened to boycott the comedy. Paramount waded into the issue again in 2015, this time convincing AMC and others to allow them to release “Paranormal Activity: The Ghost Dimension” and “Scout’s Guide to the Zombie Apocalypse” as soon as they stopped being shown on a certain number of screens. Chains like Regal refused to show the film.

“A lot of the problem has to do with the unknown factor of consumer behavior,” says Eric Wold, an analyst at B. Riley & Co. “Will the consumer want to see a movie opening weekend regardless of knowing it’s only coming out on-demand a few weeks later? It’s going to be tough to come to something everyone agrees on.”

The talks have proven to be unusually complex. Because of antitrust laws, each studio must negotiate with every exhibition chain on an independent basis, making it difficult to establish an industry-wide model.

Both sides have invested millions of dollars researching at what price and after how many weeks a film is released in the home will consumers begin abandoning the cinema for the pleasures of the couch. Among the entertainment companies, Universal and its filmed entertainment group chairman Jeff Shell and Warner Bros. and its CEO Kevin Tsujihara are seen by exhibitors as being the most aggressive in pushing for a deal. Shell and Universal believe that $50 is too high a price for rentals, and are backing a lower-cost model. The studio would like all of the films it makes to come out on premium video-on-demand at a set time, likely in the range of between 20 to 30 days. Warner Bros. has been more willing to have a window of between 30 to 45 days, although it, too, would like to see the price come in at around $30 a rental. The Time Warner-owned studio thinks that some movies, particularly the bigger franchise films, might not be right for an early release.

Source: MPAA

There are corporate reasons that these two media companies are showing the stiffest spines around the negotiating table. Shell was sent to Hollywood by Universal’s corporate parent Comcast with the express purpose of finding a more efficient way to distribute movies. Comcast’s main business is cable TV, providing systems in the home to consumers, and creating content to flow through its cords via its NBC division. Similarly, Time Warner, Warner Bros.’ parent company, is poised to be acquired by AT&T, a telecom giant that wants to push films and shows to its network of smartphone users. They interface directly with customers in a way that studios don’t, and they make the bulk of their profits from subscriptions and transmission fees, not from the box office.

Many of the studios that are more dependent on ticket sales seem more flexible. They may be willing to agree to a model where films could reach on-demand platforms as soon as they fall below a certain screen count. The thinking is that if a film is no longer attracting crowds in theaters, there’s no reason it can’t be offered in the home.

Studios and exhibitors are hitting the negotiating table armed with data they argue shows that, at a certain point and for a specific price, premium on-demand either becomes additive or it cannibalizes the exhibition business. Then there are questions about how the films will be distributed. Will it be through iTunes and other popular rental services, or via some other third party armed with antipiracy technology? Because of their size, studios have largely limited their discussions to the country’s biggest chains, but if they reach a domestic agreement, that will likely change terms for foreign exhibitors.

Executives who have been involved in the talks say the issues are thorny, and the parts that intersect and must be addressed are myriad. But they seem willing to engage as never before.

“From my perspective, the people that fund movies should have a loud and strong and important voice in how they recoup their investment,” says Tim League, founder of Alamo Drafthouse, an independent theater chain. “I don’t think theaters are grandfathered in to having a long, exclusive window. … I just hope that however we decide to experiment with windows, it’s based on data and made rationally with all the players invited to the table.”

The uncertainty surrounding the film business and the direction it needs to take in order to survive is also being manifested in the corporate suites. Sony Pictures is struggling to find a replacement for outgoing CEO Michael Lynton, having cycled through likely candidates such as former Disney COO Tom Staggs, while considering more offbeat options like former Hulu head Jason Kilar.

Then there’s Paramount, in desperate need of a turnaround, which appears to be close to hiring former Fox film chief Jim Gianopulos. “I don’t remember a transition like this, with two studios without studio heads,” says producer Beau Flynn. “I think people are concerned about taking those jobs because there’s a little bit of a reboot going on. What does a major, global motion picture studio look like in 2017? There are real questions about how your studio fits into this new world.”

Even as the names at the top change, filmmakers are trying to figure out a way to keep pace with rapidly evolving tastes. Projects can take at least two to three years to develop and put into production. They require an enormous outlay of capital and an appetite for risk.

“The big question you lose sleep over every night is, with everything that can change in 12 to 18 months, is a great story with great characters unique enough to still attract an audience?” says “Arrival” producer Glen Basner, CEO of FilmNation.

When studios have faced competition in the past, they’ve adhered strictly to a formula of size matters. In the 1950s and ’60s, for instance, the growing influence of television prompted studios to invest in elaborate biblical epics and, later, musical extravaganzas as a way of differentiating the big screen experience. This impulse toward gargantuanism continues. To beat back against the YouTube tide, studios are flooding theaters with superhero adventures, reboots, and animated fare.

No one can top Disney in this realm. With an arsenal that includes LucasFilm, Pixar, and Marvel, the studio has sucked up the rights to everything from “Star Wars” to “The Avengers.” The company earned 61% of total industry profits in 2016, according to research by Cowen & Co.’s Doug Creutz, at a time when the movie business’s earnings shrunk 19%. That’s left the non-Disney pack with blockbuster envy.

In this climate, studios are steering away from mid-budget dramas, seeing them as too dicey a proposition with a limited upside. That’s led to fears of comic-book fatigue, as studios dive deeper into sprawling graphic-novel universes. For now, the strategy is working — four of the top 10 highest grossing films last year were based on Marvel or DC Comics characters. But there are fears that these movies lack the spark of freshness that inspired past generations, and that, ultimately, they’ll lead to diminishing returns.

“I do worry that we’ll get to a point where today’s tentpoles grow so homogenized that movie-going will radically drop off,” says producer Mike De Luca. “But before that happens, I hope more studios learn to chew gum and walk at same time — that they produce not only tentpoles, but invest in original, diverse storytelling as well.”

The irony is that it’s easier to make movies today than ever before. Digital cameras have made it cheap to shoot, and editing software is readily available to average consumers. Aspiring directors can literally make a movie on their iPhone, as director Sean Baker did with 2015’s “Tangerine.”

At the same time, Netflix and Amazon have entered the movie scene looking for content, and Apple is supposedly weighing the idea of buying films to distribute exclusively. Even off-beat companies are looking into the film business. PepsiCo was at last year’s Sundance looking to snap up projects that could connect with a younger, music-loving crowd, while companies from Best Buy to BMW are wading into original programming to sell televisions and luxury cars. There are more buyers than ever before for films, and more ways to get them in front of audiences.

“It’s the Wild West in terms of content,” said De Luca. “All the old traditions and formats are up for grabs.”

James Rainey contributed to this story.

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