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Film reeling in thin cut

Hollywood bakes the pie, so why doesn’t it cut itself a bigger slice?

The filmed entertainment business — which distributes new productions and licenses its programming libraries — remains the driving engine for a host of other communications industry businesses, including cable and broadcast TV networks, cable systems and television stations.

Yet filmed entertainment is barely in the black. It underperforms nearly every other industry segment in profitability, according to the 1993 Veronis Suhler & Associate Communications Industry Report, made public in early December. The report, which charts 1992, presents a startling comparison of entertainment segment performance.

Film’s profit margin was 8.7%, compared with 21.3% for top-ranking cable-system operators. In second place were cable-network companies at 19%, followed by TV & radio station broadcasters at 17.2%.

Filmed entertainment, for the purposes of the report, comprises 31 publicly traded companies, including the major studios and smaller independents like Republic Pictures, Kushner-Locke and Samuel Goldwyn.

Lackluster standing

It finished a lackluster 11th out of 13 business segments, both in terms of operating income margins (operating income as a percent of revenue) and operating cash flow margins (operating cash flow as a percent of revenue), two of the best measures of profitability. That poor ranking fell well behind Hollywood-dependent segments such as cable networks and broadcast TV networks.

Measured in another fashion, filmmaking concerns’ operating income and cash flow placed dead last in terms of return on assets employed.

“It’s amazing that these distribution businesses — namely broadcasting and cable — reap such a higher return on their assets than filmed entertainment, which is supplying the integral product,” notes John Suhler, president of investment banker Veronis Suhler.

It will come as no surprise to anyone in Hollywood that the movie business remains massively capital-intensive. But what the Veronis Suhler report points out with absolute clarity is that costs are still way out of line.

Studio execs interviewed by Variety agree. “Hollywood continues to get squeezed in the middle,” says one studio topper.”The business is incredibly healthy. But most of that extra profitability is going to the talent. So movie distributors are getting squeezed not only on the talent side, but also by the end-user …”

The situation may be getting worse. While absolute operating margins in the filmed entertainment segment increased 2.1% between 1988 and 1992, measured on a return-on-assets basis, operating income fell 0.7% over the five-year period.

The major studios continue to outperform the independents in the bottom line: Operating income margins at the majors increased 5.2% between 1988 and 1992, while plummeting 10.6% at the other, non-studio companies rounding out the segment.

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