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The Blockbuster Movie Model That Ate Hollywood

Sony retrenchment shows that studios’ blueprints are committed to scale over substance

The cutbacks and other contortions disclosed by Sony a week ago underscored a bigger question no one wants to pose: Are movie studios an anachronism?

The studio of the future, some CEOs predict, will embody a streamlined distribution and marketing mechanism leveraging a limited flow of features through global revenue streams. The conceit of developing scripts and nurturing filmmaking talent will be history; the notion of shooting movies on the “backlot” is already fading.

The signals dropped by Sony chief Michael Lynton last week at an investors’ meeting all seem to hint at that direction: fewer releases … tighter budgets … severe penalties for overages.

Sony says it now wants to build “an innovative entrepreneurial culture.” Does that translate into more “Spider-Man” sequels but no “Social Networks?” Lynton acknowledges it will mean greater resources will be allocated to television and less to film (some $250 million in overhead and other cuts already are being implemented).

Hollywood insiders see an element of irony in the fact that the Lynton-Amy Pascal team would be centerstage in an era of retrenchment. Pascal, quirky and idiosyncratic, is a throwback to the passionate hands-on studio chiefs of former years, and some filmmakers wonder how long she will last under pressures from investors. Lynton, an enormously wealthy man and a major Obama bundler, has been rumored for an ambassadorship.

Despite their solid long-term track records, both execs have taken the heat for a disastrous summer with costly money-losers like “White House Down” and “After Earth.” The studio posted an operating loss of $181 million for the second fiscal quarter. Earlier this year, hedge fund activist Daniel Loeb, one of Sony’s largest shareholders, blasted the studio’s financial performance. Moody’s Investor Service warned it would review Sony’s overall credit rating and possibly downgrade its stock to junk status. (Loeb’s Third Point is a minority stakeholder in Variety Media, along with majority owner Penske Media Corporation.)

The bankers look covetously at the economic model of a Lionsgate, which, with no physical studio to support and a more modest overhead than the majors, can register enormous grosses with a franchise like “Hunger Games.” A modest distribution-production entity like Film District also has attracted attention; with virtually no development and small overhead, Film District released some 16 pictures in its three-year history, registering roughly $600 million in grosses (the company recently was devoured by Universal).

The dilemma, of course, is that investors are looking for bigger blockbusters at the same time they yearn for reduced costs. In her new book, titled “Blockbusters: Hit-making, Risk-taking and the Big Business of Entertainment,” Anita Elberse of the Harvard Business School points out the growing mythology of the “long tail” — that a winner-take-all dynamic has built a dependence on superstars and franchises. The belief that blockbusters alone represent a sound investment strategy is in itself driving up the cost of blockbusters as well as superstars. While business strategists traditionally have argued for diversification, the new mandate is to avoid niche product because the niches are getting narrower.

How do the studios of the future structure themselves in this contradictory environment? Certainly the continued evolution of Sony will drop hints about these accommodations. With all their flaws and excesses, the studios over the generations have provided the backbone of the Hollywood economy and brought forth a viable (and occasionally inspired) flow of product.

As they become anachronistic, both the town and its creative community had better start searching for alternative economic structures.

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